to credit on reasonable terms, or otherwise be in the public interest
and for the protection of investors.\192\ As noted above, all of the
ABS underlying a resecuritization that would be exempted under proposed
Sec.  --.21(a)(5) would already have been issued in a securitization
transaction in which the sponsor has retained credit risk in accordance
with the rule, or for which an exemption from the rule was available.
Accordingly, the resecuritization of a single-class pass-through would
neither increase nor reallocate the credit risk inherent in that
underlying 15G-compliant ABS. Furthermore, because this type of
resecuritization may be used to combine 15G-compliant ABS backed by
smaller asset pools, the exemption for this type of resecuritization
could improve the access of consumers and businesses to credit on
reasonable terms by allowing for the creation of an additional
investment vehicle for these smaller pools. The exemption would allow
the creation of ABS that may be backed by more geographically diverse
pools than those that can be achieved by the pooling of individual
assets as part of the issuance of the underlying 15G-compliant ABS,
which could also improve access to credit on reasonable terms.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78o-11(e)(1).
---------------------------------------------------------------------------

    Under the proposed rules, sponsors of resecuritizations that are
not structured purely as single-class pass-through transactions would
be required to meet the credit risk retention requirements with respect
to such resecuritizations unless another exemption for the
resecuritization is available, regardless of whether the sponsor of the
initial securitization transaction retained credit risk under the rule
or whether an exemption applied to the initial securitization
transaction. Thus, resecuritizations that re-tranche the credit risk of
the underlying ABS would be subject to separate risk retention
requirements under the proposed rules.\193\ Similarly, under the
proposed rules, resecuritizations that re-tranche the prepayment risk
of the underlying ABS, or that are structured to achieve a sequential
paydown of tranches, would not be exempted. In these resecuritizations,
although losses on the underlying ABS would be allocated to holders in
the resecuritization on a pro rata basis, holders of longer duration
classes in the resecuritization could be

exposed to a higher level of credit risk than holders of shorter
duration classes.
---------------------------------------------------------------------------

    \193\ For example, under the proposed rules, the sponsor of a
collateralized debt obligation (CDO) would not meet the proposed
conditions of the exemption and therefore would be required to
retain risk in accordance with the rule with respect to the CDO,
regardless of whether the underlying ABS have been drawn exclusively
from 15G-compliant ABS. See 15 U.S.C. 78o-11(c)(1)(F). In a typical
CDO transaction, a securitizer pools interests in the mezzanine
tranches from many existing ABS and uses that pool to collateralize
the CDO. Repayments of principal on the underlying ABS interests are
allocated so as to create a senior tranche, as well as supporting
mezzanine and equity tranches of increasing credit risk.
Specifically, as periodic principal payments on the underlying ABS
are received, they are distributed first to the senior tranche of
the CDO and then to the mezzanine and equity tranches in order of
increasing credit risk, with any shortfalls being borne by the most
subordinate tranche then outstanding.
---------------------------------------------------------------------------

    Section 15G does not apply to ABS issued before the effective date
of the Agencies' final rules.\194\ As a practical matter, private-label
ABS issued before the effective date of the final rules will typically
not be 15G-compliant ABS, because such ABS will not have been
structured to meet the rule's risk retention requirements. ABS issued
before the effective date that meets the terms of an exemption of the
type proposed under ----.21 (General exemptions) or ----.11 (Fannie Mae
and Freddie Mac ABS) could serve as 15G-compliant ABS.
---------------------------------------------------------------------------

    \194\ See 15 U.S.C. 78o-11(i) (regulations become effective with
respect to residential mortgage-backed ABS 1 year after publication
of the final rules in the Federal Register, and 2 years for all
other ABS).
---------------------------------------------------------------------------

Request for Comment
    168(a). Are there other types of resecuritization transactions
backed solely by 15G-compliant ABS that should be exempt from the risk
retention requirements? 168(b). If so, what principles and factors
should the Agencies use in considering whether other types of
resecuritizations backed by 15G-compliant ABS should be exempted from
the risk retention requirements of section 15G? 168(c). Should the
Agencies consider granting an exemption only if it is clear that the
resecuritization transaction does not expose investors in the
resecuritization to different levels or types of credit risk in the
securitized assets than the underlying 15G-compliant ABS?
    169(a). Should the rule provide an exemption for a sequential-pay
resecuritization that is collateralized only by 15G-compliant ABS? In
this type of resecuritization, the rights to principal repayment of the
holders of the different classes differ solely with respect to the
timing of such repayments. Longer duration classes receive no payments
of principal until shorter duration classes have been paid off in full
and principal shortfalls are allocated on a pro-rata basis based upon
the unpaid principal balance of each class. As the shorter duration
classes are paid off, the unpaid principal balances of the longer
duration classes begin to represent a larger portion of the total
unpaid principal balances of the underlying ABS and, therefore, the
longer duration classes are allocated an ever-increasing percentage of
credit losses as the ABS matures. 169(b). If an exemption for
sequential-pay resecuritizations backed by 15G-compliant ABS is
appropriate, how could such an exemption be written to ensure the
exemption is limited to this particular structure?
    170(a). Should the Agencies provide an exemption for prepayment-
tranched resecuritizations that are backed solely by 15G-compliant ABS?
This form of resecuritization involves the sponsor of the
resecuritization creating tranches based on the prepayments of the
underlying ABS (i.e., prepayments received by the ABS in the first-
level ABS securitization). One type of prepayment-tranched
resecuritization is a planned amortization class (PAC)
resecuritization. PAC bonds receive principal payments based on the
level of prepayments and will have their expected duration if the
actual speed of prepayments on the underlying ABS falls within a
designated range. In order to create a PAC bond with greater certainty
of cash flow than the underlying ABS, one or more support (SUP) classes
that are highly sensitive to varying levels of prepayment are created
as part of the same transaction. If the rate of prepayments is faster
than that assumed in the creation of the PAC, the SUPs receive more
principal in order to prevent an overpayment of principal on the PAC.
If the rate of prepayment is slower, principal is redirected from the
SUPs in order to achieve the specified repayment schedule on the PAC.
In either case, credit losses are allocated on a pro rata basis based
on the unpaid principal balance attributable to each class.
Accordingly, the effect of faster-than-expected rates of prepayment
will tend to expose holders of the PAC bonds to relatively greater
losses than the holders of the SUPs, while slower-than-expected rates
of prepayment will tend to have the opposite effect. Moreover, in
transactions where more than one PAC bond is created, the distribution
of principal repayments to the PACs are based on priority and,
therefore, the holders of the PACs are exposed to levels of credit risk
that differ from that of the underlying ABS. 170(b). If an exemption of
prepayment-tranched resecuritizations or certain types of such
resecuritizations (such as PAC structures) is appropriate, how could an
exemption be written to ensure that the exemption does not extend to
other resecuritizations?
    171. As noted above, the proposed exemptions require the underlying
ABS be 15G-compliant ABS. In practice, initially this may mean that
only resecuritizations based on ABS guaranteed by Fannie Mae and
Freddie Mac will qualify for this exemption. Does this raise any
competitive or other issues and if so, how can they be mitigated
without eliminating the requirement there be risk retention on the
underlying ABS?
    172(a). Is the proposed language for this exemption appropriate?
172(b). Does any portion of the exemption cause an ambiguity that
should be addressed?

D. Additional Exemptions

    Consistent with section15G of the Exchange Act, Sec.  --.23(b) of
the proposed rules provides that the Federal banking agencies and the
Commission, in consultation with FHFA and HUD, may jointly adopt or
issue additional exemptions, exceptions or adjustments to the credit
risk retention requirements, including exemptions, exceptions or
adjustments for classes of institutions or assets in accordance with
section 15G(e).\195\ In addition, Sec.  --.23(a) of the proposed rules
recognizes that the Agencies with rulewriting authority under section
15G(b) \196\ with respect to the type of assets involved may jointly
provide a total or partial exemption of any individual securitization
transaction, as such Agencies determine may be appropriate in the
public interest and for the protection of investors, as permitted by
section 15G(c)(1)(G)(i).\197\ The Agencies expect to coordinate with
each other to facilitate the processing, review and action on requests
for such written interpretations or guidance, or additional exemptions,
exceptions or adjustments.
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78o-11(e).
    \196\ 15 U.S.C. 78o-11(b).
    \197\ 15 U.S.C. 78o-11(c)(1)(G)(i).
---------------------------------------------------------------------------

Request for Comments
    173(a). Are there securitization transactions that would not be
covered by the exemptions in the proposed rules that should be exempted
from risk retention requirements pursuant to section 15G(e)(3) of the
Exchange Act? 173(b). If so, what are the features and characteristics
of such securitization transactions that would properly exempt them
from risk retention requirements pursuant to section 15G(e)(3)?

E. Safe Harbor for Certain Foreign-Related Transactions

    The proposed rules include a safe harbor provision for certain
predominantly foreign transactions based on the limited nature of the
transactions' connections with the United States and U.S. investors.
The proposed safe harbor is intended solely to provide clarity that the
Agencies would not apply the requirements of the proposed rules to
transactions that meet

all of the conditions of the safe harbor. The proposed safe harbor
should not be interpreted as reflecting the views of any Agency as to
the potential scope of transactions or persons subject to section 15G
or the proposed rules.
    As set forth in section --.23 of the proposed rules, the safe
harbor provides that the rule's risk retention requirements would not
apply to a securitization transaction if certain conditions are met,
including: (i) The securitization transaction is not required to be and
is not registered under the Securities Act; (ii) no more than 10
percent of the dollar value by proceeds (or equivalent if sold in a
foreign currency) of all classes of ABS interests sold in the
securitization transaction are sold to U.S. persons or for the account
or benefit of U.S. persons; \198\ (iii) neither the sponsor of the
securitization transaction nor the issuing entity is (A) chartered,
incorporated, or organized under the laws of the U.S., or a U.S. State
or Territory or (B) the unincorporated branch or office located in the
U.S. of an entity not chartered, incorporated, or organized under the
laws of the U.S., or a U.S. State or Territory (collectively, a U.S.-
located entity); (iv) no more than 25 percent of the assets
collateralizing the ABS sold in the securitization transaction were
acquired by the sponsor, directly or indirectly, from a consolidated
affiliate of the sponsor or issuing entity that is a U.S.-located
entity.\199\
---------------------------------------------------------------------------

    \198\ The proposed rules include a definition of ``U.S. person''
that is substantially the same as the definition of ``U.S. person''
in the Commission's Regulation S, although Regulation S relates
solely to the application of section 5 of the Securities Act (12
U.S.C. 77e). See proposed rules at Sec.  --.23 and 17 CFR
203.902(k). Additionally, the 10 percent threshold is consistent
with other Commission exemptive rules relating to cross-border
offerings under which the Commission has provided accommodations for
not applying its rules even though there is a limited offering of
securities in the United States. See Securities Act Rules 801 and
802 (17 CFR 230.801 and 802).
    \199\ See proposed rules at Sec.  --.23.
---------------------------------------------------------------------------

    The safe harbor is intended to exclude from the proposed risk
retention requirements transactions in which the effects on U.S.
interests are sufficiently remote so as not to significantly impact
underwriting standards and risk management practices in the United
States or the interests of U.S. investors. Accordingly, the conditions
for use of the safe harbor limit involvement by persons in the U.S.
with respect to both assets being securitized in a transaction and the
ABS sold in connection with the transaction. The safe harbor would not
be available for any transaction or series of transactions that,
although in technical compliance with the conditions of the safe
harbor, is part of a plan or scheme to evade the requirements of
section 15G and the proposed rules.
Request for Comment
    174(a). Are there any extra or special considerations relating to
these circumstances that we should take into account? 174(b). Should
the more than 10 percent proceeds trigger be higher or lower (e.g., 0
percent, 5 percent, 15 percent, or 20 percent)?

Appendix A to the Supplementary Information

    The tables below show the estimated effects of the proposed QRM
standards based on data for all residential mortgage loans purchased or
securitized by the Enterprises between 1997 and 2009. The first set of
results shows rates of serious delinquency (SDQ), that is, loans that
are 90 days or more delinquent, or are in the process of foreclosure.
The second set of results shows volume, in dollars of unpaid principal
balance (UPB).
    Because the data that FHFA routinely receives from the Enterprises
does not include all the factors needed to identify QRM eligible loans,
the universe of loans within the data set that would qualify as a QRM
under the proposed standards was estimated based on four of the most
significant QRM elements: (i) Product type (i.e. excluding non-owner
occupied loans, low or no documentation loans, interest-only or
negative amortization loans, loans with balloon payments, and ARM loans
that permit payment shocks in excess of the range permitted by the
proposed QRM standards); (ii) front-end and back-end DTI ratios; (iii)
LTV ratios; and (iv) credit history.
    Because of data limitations, proxies were used for certain of these
QRM standards. FHFA does not have individual credit items in the data
set used for analysis, such as previous bankruptcies or foreclosures
involving the borrower, or current or recent borrower delinquencies on
other debt obligations. However, borrowers with such credit issues
would tend to have much lower credit scores than other borrowers (all
else being equal). To proxy the credit history restrictions in the
proposed QRM definition, borrowers with FICO scores below 690 were
deemed to not satisfy the proposed QRM credit history standards for
purposes of the analysis.
    In addition, the analysis uses first-lien LTV ratios as a proxy for
combined LTV when relevant. The Agencies do not believe that this proxy
would produce a large discrepancy for analysis of loans originated
before 2002 or after 2007, but it may understate the proposed QRM
definition's effects, both on volume and on rates of SDQ, for
originations from 2002 to 2007, as second liens were increasingly used
during this period. (That is, the proposed QRM definition would likely
cause a greater decrease in SDQ rates and loan volumes than estimated
through the use of this proxy.)
    Other proposed QRM factors may differ somewhat for this analysis.
The QRM proposal is based on current FHA definitions of income, and
standards for full documentation of income and full appraisals. The
data used in this analysis for purposes of estimating whether a loan
would meet the DTI and LTV ratios in the proposed QRM standards,
however, is based on Enterprise definitions of income, and Enterprise
documentation and appraisal requirements that prevailed at the time the
loans were originated. While there may be some circumstances in which
the different standards and definitions would have led to a different
QRM eligibility estimate, the Agencies do not believe that these
differences would have a material impact on the analysis. For example,
the Enterprises did not always require an interior appraisal in cases
where the default risk was judged to be low and the down payment was
substantial. While loans originated to these standards would not be QRM
eligible under this proposal, it is likely that the QRM standard would
induce originators to require full appraisals going forward, and thus
cause these loans to be QRM eligible.
    For the first set of results concerning SDQ rates, the first column
shows the ``QRM qualifying'' population. This is the SDQ rate for all
loans that are estimated as meeting the proposed QRM standards. The
last column in the first set of results shows the SDQ rate for all
loans purchased or securitized by the Enterprises in that year. Thus,
the difference between the first and last column show the cumulative
estimated effect of the set of proposed QRM standards on SDQ for that
cohort of loans. The intermediate columns show the SDQ rate for the
population of loans in the relevant year that are estimated to meet
every QRM standard other than the standard(s) indicated at the top of
the column. For example, the second column, headed Product Type, shows
the estimated effect of allowing low or no documentation loans,
interest-only or negative amortization loans, loans with balloon
payments, or ARM loans that permit payment shocks in excess of the
range permitted by the proposed QRM standards, while still prohibiting
loans with credit history (as proxied

through the use of credit scores), an LTV ratio, or debt-to-income
ratios that would disqualify them for QRM status. These columns show
the differences between the base QRM SDQ rate and the higher risk
population within each column. The analysis is shown separately for all
loans, for purchases, for rate and term refinances, and for cash out
refinances.
    The second set of results shows the volume of Enterprise mortgages
purchased or securitized that are estimated to have met the proposed
QRM standards. The last column shows total dollar originations
purchased or securitized by the Enterprises for each year. The first
column shows the percent of that volume estimated to be QRM eligible.
The intermediate columns show the estimated effect on that volume for
the population of loans that are estimated to meet the proposed QRM
standards other than the one identified at the top of the column. For
example, the second column, headed Product Type, shows the estimated
effect on the percentage of Enterprise volume that would be QRM
eligible by allowing loans that do not conform to the Product Type
standards for QRMs,\200\ while still prohibiting loans with a credit
history (as proxied by credit scores), an LTV ratio, or debt-to-income
ratios that would disqualify the loan for QRM status. These columns
show the differences between the base QRM qualifying percentage and the
higher risk population.
---------------------------------------------------------------------------

    \200\ That is, low or no documentation loans, interest-only or
negative amortization loans, loans with a balloon payment, or ARM
loans that permit payment shocks in excess of the range permitted by
the proposed QRM standards.

                                                                        All Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.42%          +0.05%          +0.39%          +0.61%          +3.08%                 +2.30%
1998.............................................           0.39%          +0.10%          +0.31%          +0.52%          +2.34%                 +1.68%
1999.............................................           0.44%          +0.13%          +0.34%          +0.78%          +3.12%                 +2.31%
2000.............................................           0.32%          +0.43%          +0.20%          +0.83%          +2.94%                 +2.77%
2001.............................................           0.31%          +0.35%          +0.27%          +0.59%          +2.52%                 +2.27%
2002.............................................           0.33%          +0.41%          +0.32%          +0.73%          +2.34%                 +2.09%
2003.............................................           0.55%          +0.64%          +0.66%          +1.06%          +2.95%                 +2.40%
2004.............................................           0.95%          +1.72%          +1.16%          +1.58%          +4.27%                 +4.33%
2005.............................................           1.86%          +5.30%          +2.36%          +2.31%          +6.46%                 +8.13%
2006.............................................           2.72%          +7.49%          +3.35%          +3.73%          +7.90%                +13.93%
2007.............................................           2.37%          +6.34%          +3.59%          +4.39%          +8.66%                +17.12%
2008.............................................           0.68%          +1.48%          +1.64%          +1.68%          +5.15%                 +5.94%
2009.............................................           0.04%          +0.06%          +0.11%          +0.09%          +0.50%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.69%          +2.99%          +1.38%          +0.99%          +3.73%                 +5.27%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          20.44%          +3.75%         +13.04%         +13.74%          +5.81%       $286,497,878,371
1998.............................................          23.29%          +2.17%         +13.30%         +17.10%          +6.24%        691,033,994,509
1999.............................................          19.48%          +3.16%         +14.83%         +12.95%          +5.37%        481,450,519,442
2000.............................................          16.44%          +3.70%         +17.00%          +8.40%          +4.53%        356,779,731,420
2001.............................................          19.37%          +3.01%         +14.33%         +13.11%          +4.62%      1,039,412,013,403
2002.............................................          22.37%          +4.28%         +15.35%         +10.72%          +4.62%      1,385,056,256,240
2003.............................................          24.57%          +4.55%         +16.68%         +10.02%          +4.98%      1,924,265,340,603
2004.............................................          17.03%          +6.35%         +17.68%          +6.25%          +4.34%        937,643,914,289
2005.............................................          14.41%          +6.74%         +18.78%          +5.45%          +3.36%        939,069,358,457
2006.............................................          11.52%          +7.11%         +17.59%          +3.91%          +2.73%        887,443,942,464
2007.............................................          10.72%          +5.44%         +16.14%          +4.95%          +2.24%      1,027,460,511,244
2008.............................................          17.39%          +4.64%         +22.01%          +9.22%          +2.12%        793,136,249,487
2009.............................................          30.52%          +3.38%         +24.47%         +15.26%          +1.74%      1,176,445,135,548
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          19.79%          +4.62%         +17.36%          +9.86%          +3.91%     11,925,694,845,477
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                     Purchase Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.42%          +0.03%          +0.36%          +0.80%          +3.13%                 +2.44%
1998.............................................           0.46%          +0.04%          +0.30%          +0.90%          +2.70%                 +2.13%
1999.............................................           0.40%          +0.12%          +0.30%          +0.98%          +3.05%                 +2.23%
2000.............................................           0.29%          +0.38%          +0.17%          +0.83%          +2.51%                 +2.29%
2001.............................................           0.38%          +0.35%          +0.28%          +0.97%          +2.72%                 +2.59%
2002.............................................           0.48%          +0.50%          +0.32%          +1.28%          +2.61%                 +2.70%
2003.............................................           0.93%          +0.72%          +0.78%          +1.84%          +3.29%                 +3.50%
2004.............................................           1.16%          +1.97%          +1.24%          +2.53%          +3.93%                 +4.71%
2005.............................................           2.13%          +6.18%          +2.49%          +2.87%          +5.94%                 +8.61%

2006.............................................           2.76%          +8.69%          +3.28%          +3.29%          +6.78%                +13.63%
2007.............................................           2.33%          +6.76%          +3.31%          +4.33%          +6.79%                +16.51%
2008.............................................           0.64%          +1.36%          +1.42%          +2.10%          +4.73%                 +5.62%
2009.............................................           0.07%          +0.09%          +0.09%          +0.07%          +0.63%                 +0.23%
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total........................................           1.01%          +3.84%          +1.56%          +1.28%          +3.69%                 +6.39%
                                                  ------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          20.74%          +4.40%         +14.02%         +12.11%          +5.55%       $171,316,168,314
1998.............................................          22.08%          +2.99%         +15.33%         +13.09%          +6.23%        243,827,154,269
1999.............................................          19.86%          +4.02%         +17.29%         +10.39%          +4.93%        252,736,885,540
2000.............................................          18.17%          +4.21%         +19.37%          +7.56%          +4.45%        259,462,348,244
2001.............................................          19.57%          +4.20%         +18.76%          +7.94%          +4.92%        334,671,388,428
2002.............................................          18.43%          +5.80%         +18.86%          +6.12%          +4.51%        378,648,800,742
2003.............................................          18.03%          +6.81%         +19.38%          +5.32%          +4.42%        428,404,858,343
2004.............................................          16.71%          +9.21%         +20.88%          +3.25%          +3.78%        397,943,548,815
2005.............................................          15.67%         +10.22%         +22.25%          +2.51%          +2.92%        433,917,427,310
2006.............................................          13.57%          +9.37%         +21.75%          +2.02%          +2.48%        459,040,004,449
2007.............................................          12.39%          +6.88%         +19.94%          +3.27%          +1.95%        504,879,485,500
2008.............................................          17.33%          +6.08%         +26.06%          +6.40%          +1.86%        321,485,446,505
2009.............................................          27.06%          +7.02%         +33.83%          +8.18%          +1.89%        225,983,942,704
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          17.57%          +6.69%         +20.69%          +5.89%          +3.63%      4,412,317,459,162
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                No Cash-Out Refinancings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.37%          +0.06%          +0.43%          +0.32%          +2.94%                 +2.00%
1998.............................................           0.33%          +0.11%          +0.27%          +0.36%          +2.15%                 +1.41%
1999.............................................           0.46%          +0.17%          +0.43%          +0.66%          +3.26%                 +2.47%
2000.............................................           0.40%          +0.66%          +0.31%          +0.70%          +3.69%                 +4.11%
2001.............................................           0.27%          +0.32%          +0.24%          +0.50%          +2.21%                 +1.97%
2002.............................................           0.28%          +0.27%          +0.28%          +0.65%          +2.01%                 +1.63%
2003.............................................           0.46%          +0.42%          +0.54%          +0.88%          +2.69%                 +1.71%
2004.............................................           0.77%          +1.01%          +0.97%          +1.25%          +4.09%                 +3.36%
2005.............................................           1.43%          +3.09%          +1.92%          +1.96%          +6.46%                 +6.54%
2006.............................................           2.74%          +6.44%          +3.70%          +3.72%          +8.57%                +13.99%
2007.............................................           2.86%          +7.94%          +5.20%          +5.39%         +10.27%                +19.45%
2008.............................................           0.70%          +1.80%          +1.94%          +1.55%          +5.25%                 +5.78%
2009.............................................           0.04%          +0.03%          +0.11%          +0.10%          +0.48%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.44%          +1.65%          +0.90%          +0.82%          +3.11%                 +3.47%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          21.04%          +3.12%         +11.92%         +15.76%          +6.12%        $72,883,400,278
1998.............................................          25.24%          +1.92%         +12.34%         +18.72%          +6.40%        302,723,323,315
1999.............................................          20.34%          +2.44%         +12.42%         +14.98%          +6.23%        140,480,199,806
2000.............................................          13.66%          +2.31%         +11.72%         +10.37%          +5.06%         48,878,241,470
2001.............................................          22.56%          +2.89%         +13.21%         +15.14%          +4.72%        390,566,245,690
2002.............................................          28.69%          +4.46%         +15.27%         +11.65%          +4.90%        584,998,514,202
2003.............................................          31.06%          +4.48%         +16.76%         +11.22%          +5.22%        920,098,549,172
2004.............................................          22.37%          +5.15%         +16.81%          +8.76%          +5.07%        269,562,391,201
2005.............................................          16.42%          +4.93%         +16.06%          +8.46%          +3.82%        169,162,254,192
2006.............................................          10.24%          +6.22%         +13.03%          +6.20%          +2.73%        131,792,837,483
2007.............................................           9.41%          +5.15%         +12.27%          +6.36%          +2.16%        196,852,210,903
2008.............................................          20.16%          +4.61%         +20.18%         +10.87%          +2.06%        231,714,054,542
2009.............................................          32.80%          +3.01%         +22.10%         +16.44%          +1.63%        637,544,819,174
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          25.50%          +3.95%         +16.25%         +12.53%          +4.23%      4,097,257,041,427
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                  Cash-Out Refinancings
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                              QRM        Product type       PTI/DTI           LTV            FICO             All loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Ever-to-Date Serious Delinquency Rates for QRMs and the Difference in Rates for Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................           0.51%          +0.18%          +0.48%          +0.54%          +3.12%                 +2.20%
1998.............................................           0.39%          +0.20%          +0.37%          +0.42%          +2.09%                 +1.44%
1999.............................................           0.52%          +0.23%          +0.42%          +0.56%          +3.05%                 +2.27%
2000.............................................           0.51%          +0.70%          +0.41%          +0.81%          +4.26%                 +3.88%
2001.............................................           0.31%          +0.33%          +0.23%          +0.52%          +2.67%                 +2.30%
2002.............................................           0.31%          +0.40%          +0.28%          +0.61%          +2.57%                 +2.15%
2003.............................................           0.51%          +0.64%          +0.60%          +1.12%          +3.11%                 +2.57%
2004.............................................           0.89%          +1.29%          +1.08%          +1.51%          +4.92%                 +4.71%
2005.............................................           1.70%          +2.71%          +2.22%          +2.55%          +7.11%                 +8.34%
2006.............................................           2.61%          +3.77%          +3.34%          +4.05%          +9.06%                +14.42%
2007.............................................           2.14%          +3.46%          +3.37%          +3.84%          +9.99%                +16.66%
2008.............................................           0.72%          +1.39%          +1.73%          +1.44%          +5.47%                 +6.52%
2009.............................................           0.03%          +0.05%          +0.10%          +0.07%          +0.44%                 +0.24%
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................           0.70%          +2.01%          +1.40%          +1.12%          +4.50%                 +5.85%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      Percent of Total Dollar Volume for QRMs and Mortgages That Do Not Meet One of the Qualification Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997.............................................          18.17%          +2.23%         +10.98%         +16.86%          +6.32%        $42,298,309,778
1998.............................................          21.25%          +1.30%         +11.88%         +20.45%          +5.91%        144,483,516,925
1999.............................................          17.05%          +1.84%         +11.63%         +17.04%          +5.28%         88,233,434,096
2000.............................................          10.03%          +2.40%          +9.66%         +10.90%          +4.46%         48,439,141,706
2001.............................................          15.19%          +1.90%         +11.01%         +16.10%          +4.18%        314,174,379,286
2002.............................................          17.13%          +2.67%         +12.30%         +13.58%          +4.33%        421,408,941,296
2003.............................................          19.05%          +2.99%         +14.53%         +11.60%          +5.00%        575,761,933,088
2004.............................................          12.16%          +3.34%         +13.83%          +8.15%          +4.43%        270,137,974,274
2005.............................................          11.77%          +3.14%         +15.67%          +7.74%          +3.71%        335,989,676,955
2006.............................................           8.93%          +4.00%         +13.17%          +5.81%          +3.12%        296,611,100,532
2007.............................................           8.93%          +3.39%         +12.61%          +6.70%          +2.75%        325,728,814,842
2008.............................................          14.78%          +2.75%         +18.34%         +11.41%          +2.52%        239,936,748,440
2009.............................................          28.36%          +1.52%         +22.56%         +17.99%          +1.87%        312,916,373,670
                                                  ------------------------------------------------------------------------------------------------------
    Total........................................          15.81%          +2.75%         +14.39%         +11.78%          +3.89%      3,416,120,344,887
--------------------------------------------------------------------------------------------------------------------------------------------------------

VII. Solicitation of Comments on Use of Plain Language

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

VIII. Administrative Law Matters

A. Regulatory Flexibility Act

    OCC: The Regulatory Flexibility Act (RFA) generally requires that,
in connection with a notice of proposed rulemaking, an agency prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities.\201\ However, the regulatory flexibility analysis otherwise
required under the RFA is not required if an agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities (defined in regulations promulgated by the
Small Business Administration to include banking organizations with
total assets of less than or equal to $175 million) and publishes its
certification and a short, explanatory statement in the Federal
Register together with the rule.
---------------------------------------------------------------------------

    \201\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As of September 30, 2010, there were approximately 590 small
national banks. For the reasons provided below, the OCC certifies that
the proposed rule, if adopted in final form, would not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required.
    As discussed in the ``Supplementary Information'' above, section
941 of the Dodd-Frank Act \202\ generally requires the Federal banking
agencies and the Commission, and, in the case of the securitization of
any residential mortgage asset, together with HUD and FHFA, to jointly
prescribe regulations, that (i) require a securitizer to retain not
less than 5 percent of the credit risk of any asset that the
securitizer, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party; and (ii) prohibit a
securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G. Although the proposed rule would apply directly only
to securitizers,

subject to certain considerations, section 15G authorizes the Agencies
to permit securitizers to allocate at least a portion of the risk
retention requirement to the originator(s) of the securitized assets.
---------------------------------------------------------------------------

    \202\ Codified at section 15G of the Exchange Act, 17 U.S.C.
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention
requirements for securitizers of certain securitization transactions,
such as an ABS issuance collateralized exclusively by ``qualified
residential mortgage'' (QRM) loans, and further authorizes the Agencies
to establish a lower risk retention requirement for securitizers of ABS
issuances collateralized by other asset types, such as commercial,
commercial real estate (CRE), and automobile loans, which satisfy
underwriting standards established by the Federal banking agencies.
    The risk retention requirements of section 15G apply generally to a
``securitizer'' of ABS, where securitizer is defined to mean (i) an
issuer of an ABS; or (ii) a person who organizes and initiates an
asset-backed transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate, to the issuer.
Section 15G also defines an ``originator'' as a person who (i) through
the extension of credit or otherwise, creates a financial asset that
collateralizes an asset-backed security; and (ii) sells an asset
directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements
of section 15G. Section 15G requires the Agencies to establish risk
retention requirements for ``securitizers''. The proposal would, as a
general matter, require that a ``sponsor'' of a securitization
transaction retain the credit risk of the securitized assets in the
form and amount required by the proposed rule. The Agencies believe
that imposing the risk retention requirement on the sponsor of the
ABS--as permitted by section 15G--is appropriate in light of the active
and direct role that a sponsor typically has in arranging a
securitization transaction and selecting the assets to be securitized.
The OCC is aware of only six small banking organizations that currently
sponsor securitizations (one of which is a national bank, two are state
member banks, and three are state nonmember banks based on September
30, 2010 information) and, therefore, the risk retention requirements
of the proposed rule, as generally applicable to sponsors, would not
have a significant economic impact on a substantial number of small
national banks.
    Under the proposed rule a sponsor may offset the risk retention
requirement by the amount of any vertical risk retention ABS interests
or eligible horizontal residual interest acquired by an originator of
one or more securitized assets if certain requirements are satisfied,
including, the originator must originate at least 20 percent of the
securitized assets, as measured by the aggregate unpaid principal
balance of the asset pool. In determining whether the allocation
provisions of the proposal would have a significant economic impact on
a substantial number of small banking organizations, the Federal
banking agencies reviewed September 30, 2010 Call Report data to
evaluate the securitization activity and approximate the number of
small banking organizations that potentially could retain credit risk
under allocation provisions of the proposal.\203\
---------------------------------------------------------------------------

    \203\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net securitization income,
(2) the outstanding principal balance of assets sold and securitized
by the reporting entity with servicing retained or with recourse or
other seller-provided credit enhancements, and (3) assets sold with
recourse or other seller-provided credit enhancements and not
securitized by the reporting bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 329 small banking
organizations, 54 of which are national banks, originate loans for
securitization, namely ABS issuances collateralized by one-to-four
family residential mortgages. The majority of these originators sell
their loans either to Fannie Mae or Freddie Mac, which retain credit
risk through agency guarantees and would not be able to allocate credit
risk to originators under this proposed rule. Additionally, based on
publicly-available market data, it appears that most residential
mortgage-backed securities offerings are collateralized by a pool of
mortgages with an unpaid aggregate principal balance of at least $500
million.\204\ Accordingly, under the proposed rule a sponsor could
potentially allocate a portion of the risk retention requirement to a
small banking organization only if such organization originated at
least 20 percent ($100 million) of the securitized mortgages. As of
September 30, 2010, only one small banking organization reported an
outstanding principal balance of assets sold and securitized of $100
million or more.\205\
---------------------------------------------------------------------------

    \204\ Based on the data provided in Table 1, page 29 of the
Board's ``Report to the Congress on Risk Retention'', it appears
that the average MBS issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for prime MBS
issuances) or approximately $690 million in mortgage loans (for
subprime MBS issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500 million to account for
reductions in mortgage securitization activity following 2007, and
to add an element of conservatism to the analysis.
    \205\ The OCC notes that this finding assumes that no portion of
the assets originated by small banking organizations were sold to
securitizations that qualify for an exemption from the risk
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    The OCC seeks comments on whether the proposed rule, if adopted in
final form, would impose undue burdens, or have unintended consequences
for, small national banks and whether there are ways such potential
burdens or consequences could be minimized in a manner consistent with
section 15G of the Exchange Act.
    Board: The Regulatory Flexibility Act (5 U.S.C. 603(b)) generally
requires that, in connection with a notice of proposed rulemaking, an
agency prepare and make available for public comment an initial
regulatory flexibility analysis that describes the impact of a proposed
rule on small entities.\206\ Under regulations promulgated by the Small
Business Administration, a small entity includes a commercial bank or
bank holding company with assets of $175 million or less (each, a small
banking organization).\207\ The Board has considered the potential
impact of the proposed rules on small banking organizations supervised
by the Board in accordance with the Regulatory Flexibility Act.
---------------------------------------------------------------------------

    \206\ See 5 U.S.C. 601 et seq.
    \207\ 13 CFR 121.201.
---------------------------------------------------------------------------

    For the reasons discussed in Part II of this Supplementary
Information, the proposed rules define a securitizer as a ``sponsor''
in a manner consistent with the definition of that term in the
Commission's Regulation AB and provide that the sponsor of a
securitization transaction is generally responsible for complying with
the risk retention requirements established under section 15G. The
Board is unaware of any small banking organization under the
supervision of the Board that has acted as a sponsor of an ABS
transaction \208\ (based on September 30, 2010 data).\209\ As of
September 30, 2010, there were approximately 2861 small banking
organizations supervised by the Board, which includes 2412 bank holding
companies, 398 state member banks, 9 Edge and agreement corporations
and 42

U.S. offices of foreign banking organizations.
---------------------------------------------------------------------------

    \208\ For purposes of the proposed rules, this would include a
small bank holding company; state member bank; Edge corporation;
agreement corporation; foreign banking organization; and any
subsidiary of the foregoing.
    \209\ Call Report Schedule RC-S; Data based on the Reporting
Form FR 2866b; Structure Data for the U.S. Offices of Foreign
Banking Organizations; and Aggregate Data on Assets and Liabilities
of U.S. Branches and Agencies of Foreign Banks based on the
quarterly form FFIEC 002.
---------------------------------------------------------------------------

    The proposed rules permit, but do not require, a sponsor to
allocate a portion of its risk retention requirement to one or more
originators of the securitized assets, subject to certain conditions
being met. In particular, a sponsor may offset the risk retention
requirement by the amount of any vertical risk retention ABS interests
or eligible horizontal residual interest acquired by an originator of
one or more securitized assets if certain requirements are satisfied,
including, the originator must originate at least 20 percent of the
securitized assets, as measured by the aggregate unpaid principal
balance of the asset pool. A sponsor using this risk retention option
remains responsible for ensuring that the originator has satisfied the
risk retention requirements. In light of this option, the Board has
considered the impact of the proposed rules on originators that are
small banking organizations.
    The September 30, 2010 regulatory report data \210\ indicates that
approximately 329 small banking organizations, 37 of which are small
banking organizations that are supervised by the Board, originate loans
for securitization, namely ABS issuances collateralized by one-to-four
family residential mortgages. The majority of these originators sell
their loans either to Fannie Mae or Freddie Mac, which retain credit
risk through agency guarantees and would not be able to allocate credit
risk to originators under this proposed rule. Additionally, based on
publicly-available market data, it appears that most residential
mortgage-backed securities offerings are collateralized by a pool of
mortgages with an unpaid aggregate principal balance of at least $500
million.\211\ Accordingly, under the proposed rule a sponsor could
potentially allocate a portion of the risk retention requirement to a
small banking organization only if such organization originated at
least 20 percent ($100 million) of the securitized mortgages. As of
September 30, 2010, only one small banking organization supervised by
the Board reported an outstanding principal balance of assets sold and
securitized of $100 million or more.\212\
---------------------------------------------------------------------------

    \210\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net securitization income,
(2) the outstanding principal balance of assets sold and securitized
by the reporting entity with servicing retained or with recourse or
other seller-provided credit enhancements, and (3) assets sold with
recourse or other seller-provided credit enhancements and not
securitized by the reporting bank.
    \211\ Based on the data provided in Table 1, page 29 of the
Board's ``Report to the Congress on Risk Retention'', it appears
that the average MBS issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for prime MBS
issuances) or approximately $690 million in mortgage loans (for
subprime MBS issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500 million to account for
reductions in mortgage securitization activity following 2007, and
to add an element of conservatism to the analysis.
    \212\ The FDIC notes that this finding assumes that no portion
of the assets originated by small banking organizations were sold to
securitizations that qualify for an exemption from the risk
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    In light of the foregoing, the proposed rules would not appear to
have a significant economic impact on sponsors or originators
supervised by the Board. The Board seeks comment on whether the
proposed rules would impose undue burdens on, or have unintended
consequences for, small banking organizations, and whether there are
ways such potential burdens or consequences could be minimized in a
manner consistent with section 15G of the Exchange Act.
    FDIC: The Regulatory Flexibility Act (RFA) generally requires that,
in connection with a notice of proposed rulemaking, an agency prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities.\213\ However, a regulatory flexibility analysis is not
required if the agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
(defined in regulations promulgated by the Small Business
Administration to include banking organizations with total assets of
less than or equal to $175 million) and publishes its certification and
a short, explanatory statement in the Federal Register together with
the rule.
---------------------------------------------------------------------------

    \213\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    As of September 30, 2010, there were approximately 2,768 small
FDIC-supervised institutions, which includes 2,639 state nonmember
banks and 129 state chartered savings banks. For the reasons provided
below, the FDIC certifies that the proposed rule, if adopted in final
form, would not have a significant economic impact on a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis is not required.
    As discussed in the SUPPLEMENTARY INFORMATION above, section 941 of
the Dodd-Frank Act \214\ generally requires the Federal banking
agencies and the Commission, and, in the case of the securitization of
any residential mortgage asset, together with HUD and FHFA, to jointly
prescribe regulations, that (i) require a securitizer to retain not
less than 5 percent of the credit risk of any asset that the
securitizer, through the issuance of an asset-backed security (ABS),
transfers, sells, or conveys to a third party; and (ii) prohibit a
securitizer from directly or indirectly hedging or otherwise
transferring the credit risk that the securitizer is required to retain
under section 15G. Although the proposed rule would apply directly only
to securitizers, subject to certain considerations, section 15G
authorizes the Agencies to permit securitizers to allocate at least a
portion of the risk retention requirement to the originator(s) of the
securitized assets.
---------------------------------------------------------------------------

    \214\ Codified at section 15G of the Exchange Act, 17 U.S.C.
78o-11.
---------------------------------------------------------------------------

    Section 15G provides a total exemption from the risk retention
requirements for securitizers of certain securitization transactions,
such as an ABS issuance collateralized exclusively by ``qualified
residential mortgage'' (QRM) loans, and further authorizes the Agencies
to establish a lower risk retention requirement for securitizers of ABS
issuances collateralized by other asset types, such as commercial,
commercial real estate (CRE), and automobile loans, which satisfy
underwriting standards established by the Federal banking agencies.
    The risk retention requirements of section 15G apply generally to a
``securitizer'' of ABS, where securitizer is defined to mean (i) an
issuer of an ABS; or (ii) a person who organizes and initiates an
asset-backed transaction by selling or transferring assets, either
directly or indirectly, including through an affiliate, to the issuer.
Section 15G also defines an ``originator'' as a person who (i) through
the extension of credit or otherwise, creates a financial asset that
collateralizes an asset-backed security; and (ii) sells an asset
directly or indirectly to a securitizer.
    The proposed rule implements the credit risk retention requirements
of section 15G. The proposal would, as a general matter, require that a
``sponsor'' of a securitization transaction retain the credit risk of
the securitized assets in the form and amount required by the proposed
rule. The Agencies believe that imposing the risk retention requirement
on the sponsor of the ABS--as permitted by section 15G--is appropriate
in view of the active and direct role that a sponsor typically has in
arranging a securitization transaction and selecting the assets to be
securitized. The FDIC is aware of only six small banking organizations
that currently sponsor securitizations (one of which is a national
bank, two are state

member banks, and three are state nonmember banks based on September
30, 2010 information) and, therefore, the risk retention requirements
of the proposed rule, as generally applicable to sponsors, would not
have a significant economic impact on a substantial number of small
state nonmember banks.
    Under the proposed rule a sponsor may offset the risk retention
requirement by the amount of any vertical risk retention ABS interests
or eligible horizontal residual interest acquired by an originator of
one or more securitized assets if certain requirements are satisfied,
including, the originator must originate at least 20 percent of the
securitized assets, as measured by the aggregate unpaid principal
balance of the asset pool. In determining whether the allocation
provisions of the proposal would have a significant economic impact on
a substantial number of small banking organizations, the Federal
banking agencies reviewed September 30, 2010 Call Report data to
evaluate the securitization activity and approximate the number of
small banking organizations that potentially could retain credit risk
under allocation provisions of the proposal.\215\
---------------------------------------------------------------------------

    \215\ Call Report Schedule RC-S provides information on the
servicing, securitization, and asset sale activities of banking
organizations. For purposes of the RFA analysis, the Agencies
gathered and evaluated data regarding (1) net securitization income,
(2) the outstanding principal balance of assets sold and securitized
by the reporting entity with servicing retained or with recourse or
other seller-provided credit enhancements, and (3) assets sold with
recourse or other seller-provided credit enhancements and not
securitized by the reporting bank.
---------------------------------------------------------------------------

    The Call Report data indicates that approximately 329 small banking
organizations, 241 of which are state nonmember banks, originate loans
for securitization, namely ABS issuances collateralized by one-to-four
family residential mortgages. The majority of these originators sell
their loans either to Fannie Mae or Freddie Mac, which retain credit
risk through agency guarantees, and therefore would not be allocated
credit risk under the proposed rule. Additionally, based on publicly-
available market data, it appears that most residential mortgage-backed
securities offerings are collateralized by a pool of mortgages with an
unpaid aggregate principal balance of at least $500 million.\216\
Accordingly, under the proposed rule a sponsor could potentially
allocate a portion of the risk retention requirement to a small banking
organization only if such organization originated at least 20 percent
($100 million) of the securitized mortgages. As of September 30, 2010,
only one small banking organization reported an outstanding principal
balance of assets sold and securitized of $100 million or more.\217\
---------------------------------------------------------------------------

    \216\ Based on the data provided in Table 1, page 29 of the
Board's ``Report to the Congress on Risk Retention'', it appears
that the average MBS issuance is collateralized by a pool of
approximately $620 million in mortgage loans (for prime MBS
issuances) or approximately $690 million in mortgage loans (for
subprime MBS issuances). For purposes of the RFA analysis, the
agencies used an average asset pool size $500 million to account for
reductions in mortgage securitization activity following 2007, and
to add an element of conservatism to the analysis.
    \217\ The FDIC notes that this finding assumes that no portion
of the assets originated by small banking organizations were sold to
securitizations that qualify for an exemption from the risk
retention requirements under the proposed rule.
---------------------------------------------------------------------------

    The FDIC seeks comment on whether the proposed rule, if adopted in
final form, would impose undue burdens, or have unintended consequences
for, small state nonmember banks and whether there are ways such
potential burdens or consequences could be minimized in a manner
consistent with section 15G of the Exchange Act.
    SEC: The Commission hereby certifies, pursuant to 5 U.S.C. 605(b),
that the proposed rule, if adopted, would not have a significant
economic impact on a substantial number of small entities. The proposed
rule implements the risk retention requirements of section 15G of the
Exchange Act, which, in general, requires the securitizer of a asset-
backed securities (ABS) to retain not less than five percent of the
credit risk of the assets collateralizing the ABS.\218\ Under the
proposed rule, the risk retention requirements would apply to
``sponsors'', as defined in the proposed rule. Based on our data, we
found only one sponsor that would meet the definition of a small
broker-dealer for purposes of the Regulatory Flexibility Act.\219\
Accordingly, the Commission does not believe that the proposed rule, if
adopted, would have a significant economic impact on a substantial
number of small entities.
---------------------------------------------------------------------------

    \218\ See 17 U.S.C. 78o-11.
    \219\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    FHFA: Pursuant to section 605(b) of the Regulatory Flexibility Act,
FHFA hereby certifies that the proposed rule will not have a
significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

1. Request for Comment on Proposed Information Collection
    Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501-3521. In accordance
with the requirements of the PRA, the Agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The information collection
requirements contained in this joint notice of proposed rulemaking have
been submitted by the FDIC, OCC, and the Commission to OMB for approval
under section 3506 of the PRA and section 1320.11 of OMB's implementing
regulations (5 CFR part 1320). The Board reviewed the proposed rule
under the authority delegated to the Board by OMB.
    Comments are invited on:
    (a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
    (c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
    (d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Commenters may
submit comments on aspects of this notice that may affect disclosure
requirements and burden estimates at the addresses listed in the
ADDRESSES section of this Supplementary Information. A copy of the
comments may also be submitted to the OMB desk officer for the
agencies: By mail to U.S. Office of Management and Budget, 725 17th
Street, NW., 10235, Washington, DC 20503 or by facsimile to
202-395-6974, Attention, Commission and Federal Banking Agency Desk
Officer.
2. Proposed Information Collection
    Title of Information Collection: Credit Risk Retention.
    Frequency of response: Event generated.
    Affected Public: \220\

    \220\ The affected public of the FDIC, OCC, and Board is
assigned generally in accordance with the entities covered by the
scope and authority section of their respective proposed rule. The
affected public of the Commission is based on those entities not
already accounted for by the FDIC, OCC, and Board.

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    FDIC: Insured state non-member banks, insured state branches of
foreign banks, and certain subsidiaries of these entities.
    OCC: National banks, Federal savings associations, Federal branches
or agencies of foreign banks, or any operating subsidiary thereof.
    Board: FDIC-insured state member banks. For Sec.  --.15(d)(13) the
Board's respondents also include bank holding companies, foreign
banking organizations, Edge or agreement corporations, any nonbank
financial company (as defined in Sec.  --.1(c)(5)), savings and loan
holding companies, (as defined in 12 U.S.C. 1467a, on and after the
transfer date established under section 311 of the Dodd-Frank Act (12
U.S.C. 5411)), or any subsidiary of the foregoing.
    SEC: All entities other than those assigned to the FDIC, OCC, or
Board.
    Abstract: The notice sets forth permissible forms of risk retention
for securitizations that involve issuance of asset-backed securities.
The information requirements in joint regulations proposed by the three
Federal banking agencies and the Commission are found in Sec. Sec.
--.4, --.5, --.6, --.7, --.8, --.9, --.10, --.12, --.13, --.15, --.18,
--.19, and --.20. The Agencies believe that the disclosure and
recordkeeping requirements associated with the various forms of risk
retention will enhance market discipline, help ensure the quality of
the assets underlying a securitization transaction, and assist
investors in evaluating transactions. Compliance with the information
collections would be mandatory. Responses to the information
collections would not be kept confidential and, except as provided
below, there would be no mandatory retention period for proposed
collections of information.

Section-by-Section Analysis

    Section --.4 sets forth the conditions that must be met by sponsors
electing to use the vertical risk retention option. Section --.4(b)(1)
requires disclosure of the amount of each class of ABS interests
retained and required to be retained by the sponsor and Sec.
--.4(b)(2) requires disclosure of material assumptions used to
determine the aggregate dollar amount of ABS interests issued in the
transaction.
    Section --.5 specifies the conditions that must be met by sponsors
using the horizontal risk retention option, including disclosure of the
amount of the eligible horizontal residual interest retained by the
sponsor and the amount required to be retained (Sec.  --.5(c)(1)(i));
disclosure of the material terms of the eligible horizontal residual
interest (Sec.  --.5(c)(1)(ii)); disclosure of the dollar amount to be
placed in a cash reserve account and the amount required to be placed
in the account (Sec.  --.5(c)(2)(i)), if applicable; disclosure of the
material terms governing the cash reserve account (Sec.
--.5(c)(2)(ii)), if applicable; and disclosure of material assumptions
and methodology used in determining the aggregate dollar amount of ABS
interests issued in the transaction (Sec.  --.5(c)(3)).
    Section --.6 identifies the requirements for sponsors opting to use
the hybrid L-shaped risk retention method, including disclosures in
compliance with those set forth for the vertical and horizontal risk
retention methods (Sec.  --.6(b)).
    Section --.7 requires sponsors using a revolving master trust
structure for securitizations to disclose the amount of seller's
interest retained by the sponsor and the amount the sponsor is required
to retain (Sec.  --.7(b)(1)); the material terms of the seller's
interest retained by the sponsor (Sec.  --.7(b)(2)); and the material
assumptions and methodology used in determining the aggregate dollar
amount of ABS issued in the transaction (Sec.  --.7(b)(3)).
    Section --.8 discusses the representative sample method of risk
retention and requires that the sponsor adopt and adhere to policies
and procedures to, among other things, document the material
characteristics used to identify the designated pool and randomly
select assets using a process that does not take account of any asset
characteristic other than the unpaid balance (Sec.  --.8(c));
maintaining, until all ABS interests are paid in full, documentation
that clearly identifies the assets included in the representative
sample (Sec.  --.8(c)); obtaining an agreed upon procedures report from
an independent public accounting firm (Sec.  --.8(d)(1)); disclose the
amount of assets included in the representative sample and retained by
the sponsor and the amount of assets required to be retained by the
sponsor (Sec.  --.8(g)(1)(i)); disclose prior to sale a description of
the material characteristics of the designated pool (Sec.
--.8(g)(1)(ii)); disclose prior to sale a description of the policies
and procedures used by the sponsor to ensure compliance with random
selection and equivalent risk determination requirements (Sec.
--.8(g)(1)(iii)); confirm prior to sale that the required agreed upon
procedures report was obtained (Sec.  --.8(g)(1)(iv)); disclose the
material assumptions and methodology used in determining the aggregate
dollar amount of ABS interests issued in the transaction (Sec.
--.8(g)(1)(v)); and disclose after sale the performance of the pool of
assets in the securitization transaction as compared to performance of
assets in the representative sample (Sec.  --.8(g)(2)); and disclose to
holders of the asset-backed securities information concerning the
assets in the representative sample (Sec.  --.8(g)(3)).
    Section --.9 addresses the requirements for sponsors utilizing the
ABCP conduit risk retention approach. The requirements for the ABCP
conduit risk retention approach include disclosure of each originator-
seller with a retained eligible horizontal residual interest and the
form, amount, and nature of the interest (Sec.  --.9(b)(1)); disclosure
of each regulated liquidity provider providing liquidity support to the
ABCP conduit and the form, amount, and nature of the support (Sec.
--.9(b)(2)); maintenance of policies and procedures that are reasonably
designed to monitor regulatory compliance by each originator-seller of
the eligible ABCP conduit (Sec.  --.9(c)(2)(i)); and notice to holders
of the ABS interests issued in the transaction in the event of
originator-seller regulatory non-compliance (Sec.  --.9(c)(2)(ii)).
    Section --.10 sets forth the requirements for sponsors utilizing
the commercial mortgage-backed securities risk retention option, and
includes disclosures of the name and form of organization of the third-
party purchaser (Sec.  --.10(a)(5)(i)), the third-party purchaser's
experience (Sec.  --.10(a)(5)(ii)), other material information (Sec.
--.10(a)(5)(iii)), the amount and purchase price of eligible horizontal
residual interest retained by the third-party purchaser and the amount
that the sponsor would have been required to retain (Sec.
--.10(a)(5)(iv) and (v)), a description of the material terms of the
eligible residual horizontal interest retained by the third-party
purchaser (Sec.  --.10(a)(5)(vi)), the material assumptions and
methodology used to determine the aggregate amount of ABS interests
issued by the issuing entity (Sec.  --.10(a)(5)(vii)), representations
and warranties concerning the securitized assets and factors used to
determine the assets should be included in the pool (Sec.
--.10(a)(5)(viii)); sponsor maintenance of policies and procedures to
monitor third-party compliance with regulatory requirements (Sec.
--.10(b)(2)(A)); and sponsor notice to holders of ABS interests in the
event of third-party non-compliance with

regulatory requirements (Sec.  --.10(b)(2)(B)).
    Section --.12 requires the establishment of a premium cash reserve
account, in addition to the sponsor's base risk retention requirement,
in instances where the sponsor structures a securitization to monetize
excess spread on the underlying assets. The premium cash reserve
account would be used to ``capture'' the premium received on sale of
such tranches for purposes of covering losses on the underlying assets
and would require the sponsor to make disclosures regarding the dollar
amount required by regulation to be placed in the account and any other
amounts placed in the account by the sponsor (Sec.  --.12(d)(1)) and
the material assumptions and methodology used in determining fair value
of any ABS interest that does not have a par value and that was used in
calculating the amount required for the premium capture cash reserve
account (Sec.  --.12(d)(2)).
    Section --.13 sets forth the conditions that apply when the sponsor
of a securitization allocates to originators of securitized assets a
portion of the credit risk it is required to retain, including
disclosure of the name and form of organization of any originator with
an acquired and retained interest (Sec.  --.13(a)(2)); maintenance of
policies and procedures that are reasonably designed to monitor
originator compliance with retention amount and hedging, transferring
and pledging requirements (Sec.  --.13(b)(2)(A)); and notice to holders
of ABS interests in the transaction in the event of originator non-
compliance with regulatory requirements (Sec.  --.13(b)(2)(B)).
    Section --.15 provides an exemption from the risk retention
requirements for qualified residential mortgages that meet certain
specified criteria including certification by the depositor of the
asset-backed security that it has evaluated the effectiveness of its
internal supervisory controls and concluded that the controls are
effective (Sec.  --.15(b)(4)(i)), and sponsor disclosure prior to sale
of asset-backed securities in the issuing entity of a copy of the
certification to potential investors (Sec.  --.15(b)(4)(iii)). In
addition Sec.  --.15(e)(3) provides that a sponsor that has relied upon
the exemption shall not lose the exemption if it complies with certain
specified requirements, including prompt notice to the holders of the
asset-backed securities of any loan repurchased by the sponsor. Section
--.15 also contains additional information collection requirements on
the mortgage originator to include terms in the mortgage transaction
documents under which the creditor commits to having servicing policies
and procedures (Sec.  --.15(d)(13)(i)) and to provide disclosure of the
foregoing default mitigation commitments to the borrower at or prior to
the closing of the mortgage transaction (Sec.  --.15(d)(13)(ii)).
    Sections --.18, --.19, and --.20 provide exemptions from the risk
retention requirements for qualifying commercial real estate loans,
commercial mortgages, and auto loans that meet specified criteria. Each
section requires that the depositor of the asset-backed security
certify that it has evaluated the effectiveness of its internal
supervisory controls and concluded that its controls are effective
(Sec. Sec.  --.18(b)(7)(i), --.19(b)(10)(i), and --.20(b)(9)(i)); that
the sponsor provide a copy of the certification to potential investors
prior to the sale of asset-backed securities (Sec. Sec.
--.18(b)(7)(iii), --.19(b)(10)(iii), and --.20(b)(9)(iii)); and that
the sponsor promptly notify the holders of the securities of any loan
included in the transaction that is required to be repurchased by the
sponsor (Sec. Sec.  --.18(c)(3), --.19(c)(3), and --.20(c)(3)).

Estimated Paperwork Burden

    Estimated Burden per Response:
Sec.  --.4--Vertical risk retention: disclosures--2 hours.
Sec.  --.5--Horizontal risk retention: disclosures--2.5 hours.
Sec.  --.6--L-Shaped risk retention: disclosures--3 hours.
Sec.  --.7--Revolving master trusts: disclosures--2.5 hours.
Sec.  --.8--Representative sample: recordkeeping--120 hours;
disclosures--23.25 hours.
Sec.  --.9--Eligible ABCP conduits: recordkeeping--20 hours;
disclosures--3 hours.
Sec.  --.10--Commercial mortgage-backed securities: recordkeeping--20
hours; disclosures--19.75 hours.
Sec.  --.12--Premium capture cash reserve account: disclosures--1.75
hours.
Sec.  --.13--Allocation of risk retention: recordkeeping--20 hours;
disclosures--2.5 hours.
Sec.  --.15--Exemption for qualified residential mortgages:
recordkeeping--40 hours; disclosures--9.25 hours.
Sec.  --.18--Exemption for qualifying CRE loans: recordkeeping--40
hours; disclosures--1.25 hours.
Sec.  --.19--Exemption for qualifying commercial mortgages:
recordkeeping--40 hours; disclosures--1.25 hours.
Sec.  --.20--Exemption for qualifying auto loans: recordkeeping--40
hours; disclosures--1.25 hours.

FDIC

    Number of Respondents: 90 sponsors and 4,715 creditors.
    Total Estimated Annual Burden: 59,463 hours.

OCC

    Number of Respondents: 30 sponsors and 1,650 creditors.
    Total Estimated Annual Burden: 20,483 hours.

Board

    Number of Respondents: 20 sponsors and 7,636 creditors.
    Total Estimated Annual Burden: 70,430 hours.

Commission

    Number of Respondents: 104 sponsors and 1,500 creditors.
    Total Estimated Annual Burden: 37,166 hours.
    Commission's explanation of the calculation:
    To determine the total paperwork burden for the requirements
contained in this proposed rule the Agencies first estimated the
universe of sponsors that would be required to comply with the proposed
disclosure and recordkeeping requirements. The Agencies estimate that
approximately 243 unique sponsors conduct ABS offerings per year. This
estimate was based on 2010 data reported on the commercial bank Call
Report (FFIEC 031 and 041) and from the ABS database AB Alert. Of the
243 sponsors, the Agencies have assigned 8 percent of these sponsors to
the Board, 12 percent to the OCC, 37 percent to the FDIC, and 43
percent to the Commission.
    Next, the Agencies estimated the burden per response that would be
associated with each disclosure and recordkeeping requirement. In some
cases, the proposed rule is estimated to incur only an incremental
burden on respondents. For example, in the representative sample
option, the proposed rule requires that the sponsor cause to be
disclosed information regarding the securitized assets, but the
Agencies believe similar information regarding the securitized assets
are already being made to investors, and therefore the proposed rule
would only incur an incremental burden on sponsors.
    Next, the Agencies estimated how frequent the entities would make
the required disclosure by estimating the proportionate amount of
offerings per year for each agency. In making this determination, the
estimate was based on the average number of ABS offerings from 2004
through 2009, and therefore, we estimate the total number of annual

offerings per year to be 1,700.\221\ We also made the following
additional estimates:
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    \221\ We use the ABS issuance data from Asset-Backed Alert on
the initial terms of offerings, and we supplement that data with
information from Securities Data Corporation (SDC). This estimate
includes registered offerings and offerings made under Securities
Act Rule 144A. We also note that this estimate is for offerings that
are not exempted under Sec. Sec.  --.21 and --.22 of the proposed
rule.
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     12 offerings per year will be subject to disclosure and
recordkeeping requirements under sections Sec.  --.12 and Sec.  --.13,
which are divided equally among the four agencies (i.e., 3 offering per
year per agency);
     100 offerings per year will be subject to disclosure and
recordkeeping requirements under section Sec.  --.15, which are divided
proportionately among the agencies based on the entity percentages
described above (i.e., 8 offerings per year subject to Sec.  --.15 for
the Board; 12 offerings per year subject to Sec.  --.15 for the OCC; 37
offerings per year subject to Sec.  --.15 for the FDIC; and 43
offerings per year subject to Sec.  --.15 for the Commission); and
     40 offerings per year will be subject to disclosure and
recordkeeping requirements under Sec.  --.18, Sec.  --.19, and Sec.
--.20, respectively, which are divided proportionately among the
agencies based on the entity percentages described above (i.e., 3
offerings per year subject to each section for the Board, 5 offerings
per year subject to each section for the OCC; 15 offerings per year
subject to each section for the FDIC, and 17 offerings per year subject
to each section for the Commission).
    To obtain the estimated number of responses (equal to the number of
offerings) for each option in Part B of the proposed rule, the Agencies
multiplied the number of offerings estimated to be subject to the base
risk retention requirements (i.e., 1,480) \222\ by the sponsor
percentages described above. The result was the number of base risk
retention offerings per year per agency. For the Commission, this was
calculated by multiplying 1,480 offerings per year by 43 percent, which
equals 636 offerings per year. This number was then divided by the
number of base risk retention options (7) to arrive at the estimate of
the number of offerings per year per agency per base risk retention
option. For the Commission, this was calculated by dividing 636
offerings per year by 7 options, resulting in 91 offerings per year per
base risk retention option.
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    \222\ Estimate of 1,700 offerings per year minus the estimate of
the number of offerings qualifying for an exemption under Sec.
--.15, Sec.  --.18, Sec.  --.19, and Sec.  --.20 (220 total).
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    The total estimated annual burden for each Agency was then
calculated by multiplying the number of offerings per year per section
for such Agency (except with respect to the recordkeeping burden hours
under Sec.  --.8 and Sec.  --.15(d)(13) as described below) by the
number of burden hours estimated for the respective section, then
adding these subtotals together. For example, under Sec.  --.4, the
Commission multiplied the estimated number of offerings per year per
Sec.  --.4 (i.e., 91 offerings per year) by the disclosure burden hour
estimate for Sec.  --.4 of 2.0 hours. Thus, the estimated annual burden
hours for respondents to which the Commission accounts for the burden
hours under Sec.  --.4 is 182 hours (91 * 2.0 hours = 182 hours). For
the recordkeeping burden estimate under Sec. Sec.  --.8(c)
and--.8(d)(2), instead of using the number of offerings per year per
base risk retention option, the Agencies multiplied the number of
recordkeeping burden hours by the number of unique sponsors assigned to
such Agency per year (i.e., 104 in the case of the Commission).\223\
The reason for this is that the Agencies considered it possible that
sponsors may establish these policies and procedures during the year
independent on whether an offering was conducted, with a corresponding
agreed upon procedures report obtained from a public accounting firm
each time such policies and procedures are established.
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    \223\ 243 * 43% = 104.
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    To obtain an estimate for the number of burden hours required by
Sec.  --.15(d)(13), the Agencies multiplied the estimate of the number
of creditors assigned to such Agency for purposes of this risk
retention rule by an estimate of the number of hours that it will take
creditors to perform a one-time update to their systems to account for
the requirements of this section, which we estimate to be 8 hours.\224\
This estimate was added to the other disclosure and recordkeeping
burden estimates as described above to achieve a total estimated annual
burden for respondents assigned to the Commission.
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    \224\ 1,500 creditors * 8 hours = 12,000 hours
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    For disclosures made at the time of the securitization
transaction,\225\ the Commission allocates 25 percent of these hours
(1,009 hours) to internal burden for all sponsors. For the remaining 75
percent of these hours, (3,028 hours), the Commission uses an estimate
of $400 per hour for external costs for retaining outside professionals
totaling $1,211,200. For disclosures made after the time of sale in a
securitization transaction,\226\ the Commission allocated 75 percent of
the total estimated burden hours (892 hours) to internal burden for all
sponsors. For the remaining 25 percent of these hours (297 hours), the
Commission uses an estimate of $400 per hour for external costs for
retaining outside professionals totaling $118,800. With respect to the
agreed upon procedures report by an independent public accounting firm
under the representative sample option, the Commission allocated 100
percent of the total estimated burden hours (4,160 hours \227\) to
retaining outside professionals at an estimate of $400 per hour, for a
total cost of $1,664,000.
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    \225\ These are the disclosures required by Sec. Sec.
--.4(b)(1)-(2); --.5(c)(1)(i)-(ii), (2)(i)-(ii), and (3); --.6(b);
--.7(b)(1)-(3); --.8(g)(1)(i)-(iv) and (g)(3); --.9(b)(1)-(2);
--.10(a)(5)(i)-(viii); --.12(d)(1)-(3); --.13(a)(2);
--.15(b)(4)(iii); --.18(b)(7)(iii); --.19(b)(10)(iii); and
--.20(b)(9)(iii).
    \226\ These are the disclosures required by Sec. Sec.
--.8(g)(2); --.9(c)(2)(ii); --.10(b)(2)(B); --.13(b)(2)(B); --
15(e)(3); --.18(c)(3); --19(c)(3); and --.20(c)(3).
    \227\ 40 * 104 = 4,160 hours.
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    FHFA: The proposed regulation does not contain any FHFA information
collection requirement that requires the approval of OMB under the
Paperwork Reduction Act.
    HUD: The proposed regulation does not contain any HUD information
collection requirement that requires the approval of OMB under the
Paperwork Reduction Act.

C. Commission Economic Analysis

1. Introduction
    As discussed above, Section 15G of the Exchange Act, as added by
section 941(b) of the Dodd-Frank Act, generally requires the Agencies
to jointly prescribe regulations, that (i) require a sponsor to retain
not less than five percent of the credit risk of any asset that the
sponsor, through the issuance of an ABS, transfers, sells, or conveys
to a third party, and (ii) prohibit a sponsor from directly or
indirectly hedging or otherwise transferring the credit risk that the
sponsor is required to retain under section 15G and the Agencies'
implementing rules.\228\
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    \228\ See 15 U.S.C. 78o-11(b), (c)(1)(A) and (c)(1)(B)(ii).
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    Section 15G of the Exchange Act exempts certain types of
securitization transactions from these risk retention requirements and
authorizes the Agencies to exempt or establish a lower risk retention
requirement for other types of securitization transactions. For
example, section 15G specifically provides that a sponsor shall not be
required to retain any part of the credit risk for an asset that is
transferred, sold, or conveyed through the issuance of

ABS by the sponsor, if all of the assets that collateralize the ABS are
qualified residential mortgages (QRMs), as that term is jointly defined
by the Agencies.\229\ In addition, section 15G states that the Agencies
must permit a sponsor to retain less than five percent of the credit
risk of commercial mortgages, commercial loans, and automobile loans
that are transferred, sold, or conveyed through the issuance of ABS by
the sponsor if the loans meet underwriting standards established by the
Federal banking agencies.\230\
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    \229\ See 15 U.S.C. 78o-11(c)(1)(C)(iii), (4)(A) and (B).
    \230\ See id. at Sec.  78o-11(c)(1)(B)(ii) and (2).
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    Section 15G requires the Agencies to prescribe risk retention
requirements for ``securitizers,'' which the Agencies interpret are
depositors or sponsors of ABS. The proposal would require that a
``sponsor'' of a securitization transaction to retain the credit risk
of the securitized assets in the form and amount required by the
proposed rule. The Agencies believe that imposing the risk retention
requirement on the sponsor of the ABS is appropriate in light of the
active and direct role that a sponsor typically has in arranging a
securitization transaction and selecting the assets to be securitized.
    In developing the proposed rules, the Agencies have taken into
account the diversity of assets that are securitized, the structures
historically used in securitizations, and the manner in which sponsors
may have retained exposure to the credit risk of the assets they
securitize. The proposed rules provide several options sponsors may
choose from in meeting the risk retention requirements of section 15G,
including, but not limited to, retention of a five percent ``vertical''
slice of each class of interests issued in the securitization or
retention of a five percent ``horizontal'' first-loss interest in the
securitization, as well as other risk retention options that take into
account the manners in which risk retention often has occurred in
credit card receivable and automobile loan and lease securitizations
and in connection with the issuance of asset-backed commercial paper.
The proposed rules also include a special ``premium capture'' mechanism
designed to prevent a sponsor from structuring an ABS transaction in a
manner that would allow the sponsor to effectively negate or reduce its
retained economic exposure to the securitized assets by immediately
monetizing the excess spread created by the securitization transaction.
In designing these options and the proposed rules in general, the
Agencies have sought to ensure that the amount of credit risk retained
is meaningful--consistent with the purposes of section 15G--while
reducing the potential for the proposed rules to negatively affect the
availability and costs of credit to consumers and businesses.
    As required by section 15G, the proposed rules provide a complete
exemption from the risk retention requirements for ABS that is
collateralized solely by QRMs and establish the terms and conditions
under which a residential mortgage would qualify as a QRM. In
developing the proposed definition of a QRM, the Agencies carefully
considered the terms and purposes of section 15G, public input, and the
potential impact of a broad or narrow definition of QRMs on the housing
and housing finance markets.
    As discussed in greater detail in Part IV of this Supplementary
Information, the proposed rule would generally prohibit QRMs from
having product features that contributed significantly to the high
levels of delinquencies and foreclosures since 2007--such as terms
permitting negative amortization, interest-only payments, or
significant interest rate increases--and also would establish
underwriting standards designed to ensure that QRMs are of very high
credit quality consistent with their exemption from risk retention
requirements. These underwriting standards include, among other things,
maximum front-end and back-end debt-to-income ratios of 28 percent and
36 percent, respectively; a maximum loan-to-value ratio of 80 percent
in the case of a purchase transaction (with a lesser combined LTV
permitted for refinance transactions); a 20 percent down payment
requirement in the case of a purchase transaction; and credit history
restrictions.
    The proposed rules also would not require a sponsor to retain any
portion of the credit risk associated with a securitization transaction
if the ABS issued are exclusively collateralized by qualified assets
(QAs)--commercial loans, commercial mortgages, or automobile loans that
meet underwriting standards included in the proposed rule for the
individual asset class.
    The Commission is sensitive to the costs and benefits imposed by
its rules. The discussion below focuses on the costs and benefits of
the decisions made by the Commission, together with the other Agencies,
to fulfill the mandates of the Dodd-Frank Act within its permitted
discretion, rather than the costs and benefits of the mandates of the
Dodd-Frank Act itself. For instance, the analysis below assumes as a
baseline that a standard for QRM is in place, since such a standard is
mandated by statute. Rather than assessing the economic costs and
benefits of implementing such a standard, the analysis below focuses on
the relative costs and benefits of alternative QRM standards.
Similarly, the analysis assumes the following: A risk retention
requirement of at least 5 percent for non-qualified mortgages and non-
qualified assets, 0% for QRMs and less than 5 percent for qualified
assets. Thus, our analysis below examines the costs and benefits of
alternative implementations of a risk retention requirement meeting the
mandates of the Dodd-Frank Act, rather than the existence of a risk
retention requirement. Although our intent is to limit the economic
analysis of this rule to decisions made by the Commission, to the
extent that the Commission's discretion is exercised to further the
benefits intended by the Dodd-Frank Act, the two types of benefits
might not be entirely separable.
    Section 23(a)(2) of the Exchange Act requires the Commission, when
making rules under the Exchange Act, to consider the impact on
competition that the rules would have, and prohibits the Commission
from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the Exchange Act.\231\
Further, Section 2(b) of the Securities Act of 1933\81\ and Section
3(f) of the Exchange Act requires the Commission,\232\ when engaging in
rulemaking where we are required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition and capital formation. The Commission
has considered and discussed below the effects of the proposed rules on
efficiency, competition, and capital formation, as well as the benefits
and costs associated with the Commission's decisions in the proposed
rulemaking.
---------------------------------------------------------------------------

    \231\ 15 U.S.C. 78w(a).
    \232\ 17 U.S.C. 78c(f).
---------------------------------------------------------------------------

2. Risk Retention Methods for Non-QRMs and Non-Qualifying Assets
(``QAs'')
    The proposed rules require not less than 5 percent risk retention
for all non-QRMs and non-QAs. The form of the retention is to be chosen
from a menu of options, which should provide flexibility to sponsors in
meeting the

risk retention requirement mandated by Section 15G, as added by the
Dodd-Frank Act. Section 15G directs the Agencies to set appropriate
risk retention rules, which will require the retention of no less than
5 percent of the credit risk in the securitized assets for all ABS
classes not exempt from the requirement. Section 15G provides for a
risk retention exemption for sponsors of ABS backed solely by QRMs and
for certain other sponsors or ABS asset classes as discussed below and
a less than five percent risk retention requirement for QAs.
    Empirical evidence points to a significant heterogeneity of
securitization structures, practices and risk characteristics across
ABS asset classes.\233\ Accordingly, allowing sponsors to choose a form
of risk retention from a menu of options provides them with the
flexibility of choosing the form that best suits their operational and
financing preferences. By including most of the risk retention forms
currently observed in the marketplace, the Agencies' proposal benefits
sponsors, originators, and investors alike by limiting disruption to
current securitization practices to the extent possible. Historically,
most sponsors have been exposed to some level of credit risk by
retaining an economic interest in the pools they securitize in the form
of first-loss or pro-rata positions.\234\ Thus, the proposed rule
allows sponsors that have existing risk retention programs to minimize
their compliance costs resultant from the statute's mandate. Without
the flexibility allowed by a broad menu-of-options approach, there
likely would be an increase in borrowing costs to sponsors and to the
borrowers whose loans are in the securitized pools. In some cases, this
increase could be large enough to make certain types of securitizations
economically unfeasible.
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    \233\ See Board of Governors of the Federal Reserve System,
Report to the Congress on Risk Retention, October 2010 available at
http://federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf.
    \234\ For example, Chen, Liu, and Ryan (2008) show that banks
retain more risk when loans have higher or less externally
verifiable credit risk. See Characteristics of Securitizations that
Determine Issuers' Retention of the Risks of the Securitized, Weitzu
Chen, Chi-Chun Liu, and Stephen Ryan (2008), The Accounting Review,
2<IP_ADDRESS>1.
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    It is possible that the flexibility allowed by the proposed
approach to implementing the risk retention mandate of Section 15G
might result in some sponsors choosing risk retention methods that do
not align fully their incentives with those of investors. In such
cases, underwriting standards and pool selection procedures may not
improve. If investors are reluctant to invest in ABS where a sponsor
has selected such a suboptimal risk retention method, risk retention
might not have the effect of facilitating capital formation. To the
extent that such reluctance on part of investors provides sponsors with
the incentive to choose risk retention methods that investors demand,
this effect on capital formation is mitigated.
    An integral part of the proposed rules are new risk retention
disclosure requirements specifically tailored to each of the
permissible forms of risk retention. The required disclosure would
provide investors with information on the sponsor's retained interest
in an ABS transaction, such as the amount and form of the interest
retained and the assumptions used in determining the aggregate value of
ABS to be issued. This information would benefit investors by providing
them with an efficient mechanism to monitor compliance with the
proposed rules and make informed investment decisions. However,
compliance costs to sponsors would increase, since sponsors would now
have to prepare and provide these disclosures to investors.
    Therefore, the Commission believes that the proposed menu-of-
options approach and the accompanying disclosures will have no
competitive effects, and will implement the mandates of Section 15G
without causing economic inefficiencies or hindering capital
formation.\235\
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    \235\ As discussed in the introduction, this statement refers to
the choice made by the Commission and other agencies by having
proposed a menu of options rather than the statutory mandate to
require risk retention.
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    Vertical Risk Retention Method
    By requiring the retention of five percent of each interest backed
by the securitized asset pool, regardless of whether the interest is
certificated or not, the vertical risk retention method is the most
straightforward method to implement. The transparency and ease of
verification of this method will likely benefit investors to the extent
that they view their ability to discern a sponsor's risk retention
important. This provides the sponsor an interest in the entire
structure of the securitization transaction. However, the vertical risk
retention method requires a sponsor to bear only a small fraction of
the losses incurred by the pool, thus possibly failing to align
sufficiently originators' and sponsors' interests with those of
investors when it comes to the origination and underwriting of riskier
asset classes. Since 5 percent is a lower bound on the risk required to
be retained, it is possible some sponsors may hold more if it were
economically optimal.
Horizontal Risk Retention Method
    This method exposes a sponsor to the first 5 percent of all pool-
asset losses and thus results in the sponsor retaining substantially
more than five percent of the credit risk in a securitization. That is,
a sponsor will be exposed to 100 percent of all losses as long as those
losses are up to 5 percent. Therefore, this method imposes a
significant disincentive on sponsors of poorly underwritten assets. As
a result, the horizontal method of risk retention should benefit
investors by aligning their incentives with those of originators and
sponsors when originating and underwriting riskier asset classes.
    Since the retention of a horizontal first-loss position in
securitizations leaves the sponsor holding a significant amount of
risk, it is possible that for less risky asset classes a 5 percent risk
retention might be unnecessarily high. For such asset classes, a
sponsor might be constrained to raising external financing for only 95
percent of the asset pool, while the market might have allowed for a
smaller equity interest. As a result, the sponsor might have to incur
additional financing costs which would have the effect of impeding
capital formation.
    The retention of a first-loss position has been a common market
practice for many asset classes, so this method should not be
unnecessarily disruptive and should therefore impose limited additional
costs on sponsors. The effect would be that of no decrease in
efficiency and no new impediment to capital formation.
Premium Capture Cash Reserve Account
    Securitization transactions often contain pools of assets that are
expected to earn substantially higher returns compared to the financing
rates on the ABS issued in the securitization. This is generally
referred to as excess spread. In situations where there is substantial
excess spread, the sponsor can obtain significant economic income by
selling an interest based on the excess spread. If the sponsor is able
to recover more than 5 percent of the balance of the pool in a short
period of time, then the sponsor would be left with limited economic
interest in the securitization. This is particularly true if defaults
occur later in the life of pool assets. For this reason, the proposed
rules prohibit the cash flows from the excess spread (or cash proceeds
from selling it) to be distributed to the sponsor. This benefits
investors by helping to ensure that the incentive-alignment objectives
of the

proposed rules are achieved. However, this may reduce the flexibility
of sponsors in structuring their deals, thus imposing a cost.
L-Shaped Method
    Another risk retention option in the proposed rules would allow a
sponsor, subject to certain conditions, to use an equal combination of
a vertical risk retention and horizontal risk retention as a means of
retaining the required five percent exposure to the credit risk of the
securitized assets. This form of risk retention is referred to as an
``L-Shaped'' form of risk retention because it combines both vertical
and horizontal forms. Overall, this has the benefits and costs
associated with the two approaches as described above. Also, the
proposed requirement that the sponsor retain 50 percent vertical and 50
percent horizontal facilitates the monitoring of the risk retention
compliance by investors, Agencies and other market participants.
Representative Sample Method
    The representative sample method requires risk retention of a
randomly selected loan pool that is ``similar'' in risk attributes to
the securitized loans prior to a securitization. Since it may be costly
to ensure the true ``randomness'' of the selection or
``representativeness'' of the sample, and since sponsors' prior
knowledge of the sample selection bias might alter their incentives to
put well-underwritten assets into the pool, this method may not fulfill
its incentive-alignment benefits without mechanisms in place to ensure
there is no selection bias. Thus, the proposed rules require that
sponsors have plans and procedures in place, maintain documentation,
and have the sampling procedures agreed upon by an independent auditing
firm. In addition, the proposed rules would require ongoing disclosures
about the performance of the assets in the representative sample in the
same form, level, and manner as is provided concerning the securitized
assets. Although this will increase sponsors' compliance costs, the
Commission believes that it will also further the incentive-alignment
benefits contemplated in Section 15G of the Exchange Act.
    For some asset classes, such as automobile loans, retaining a
portion of the loans that would ordinarily be securitized has been used
as a method of risk retention. Therefore, permitting a representative
sample risk retention option with the appropriate safeguards will
likely benefit sponsors of such asset classes, whose compliance costs--
other than reporting costs--will not increase as a result of the
proposed rules. Furthermore, the borrowers whose loans back such
securitizations will also likely experience no increase in their
borrowing costs.
Seller's Interest Method
    Securitizations of revolving lines of credit, such as credit card
accounts or dealer floorplan loans, are typically structured using a
revolving master trust, which issues more than one series of ABS backed
by a single pool of revolving assets. The proposed rule would allow a
sponsor of a revolving asset master trust that is collateralized by
revolving loans or other extensions of revolving credit to meet its
risk retention requirement by retaining a seller's interest in an
amount not less than 5 percent of the unpaid principal balance of the
pool assets held by the issuer. The definitions of a seller's interest
and a revolving asset master trust are intended to be consistent with
market practices and, with respect to seller's interest, designed to
help ensure that any seller's interest retained by a sponsor under the
proposal would expose the sponsor to the credit risk of the underlying
assets. This should benefit all parties to the securitization by
balancing implementation costs for sponsors utilizing the master trust
structure with incentive-alignment benefits for investors.
3. Definition of Qualified Residential Mortgages
    Section 15G requires the Commission, along with the other Agencies,
to jointly specify underwriting standards for QRMs that take into
consideration underwriting and product features that historical loan
performance data indicate result in lower risk of default. Section 15G
exempts ABS entirely backed by QRMs from the risk retention mandated by
Section 15G. In defining QRMs, the Agencies examined data on mortgage
performance supplied by Lender Processing Services' (``LPS'') Applied
Analytics division (formerly McDash Analytics). To minimize performance
differences arising from unobservable changes across products, and to
focus on loan performance through stressful environments, the analysis
generally used prime fixed-rate loans originated from 2005 to 2008.
Since the LPS data do not include detailed borrower information, the
Agencies also analyzed data from the triennial Survey of Consumer
Finances (``SCF'') for the 1992-2007 period. To isolate the borrower
characteristics closest in time to the mortgage origination, the
analysis was limited to the approximately 1,500 families, who purchased
their homes in the year prior to or of the survey. The Agencies also
examined a combined data set of loans purchased or securitized by the
Enterprises from 1997 to 2009. This data set 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.
    The analysis of the data described above and the conclusions of
numerous academic studies support a definition of QRM that takes into
account the following underwriting and product features: the borrower's
ability to repay the mortgage (as captured the borrower's debt-to-
income ratio); the borrower's credit history; the borrower's down
payment amount and sources; the loan-to-value ratio for the loan; the
form of valuation used in underwriting the loan; the type of mortgage
involved; and the owner-occupancy status of the property securing the
mortgage.\236\ The Commission believes that selecting this subset of
features will be beneficial to loan originators, because these are the
features typically considered in the mortgage underwriting process.
Although there might be factors among those listed above that loan
originators had not previously used in their lending decisions, the
Commission believes that this is unlikely. Thus, the Commission expects
that loan originators would not have to incur significant new or
additional costs to collect information on these specific underwriting
and product features, which should have the effect of not unnecessarily
disrupting existing lending practices. As a result,

the Commission expects that mortgage rates would not be adversely
impacted by the Agencies' choice of the features used to define QRMs
and therefore this choice would not have a negative effect on
efficiency and capital formation.
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    \236\ See Demyanyk, Yuliya, and Otto Van Hemert, ``Understanding
the Subprime Crisis,'' Working paper. St. Louis, Missouri: Federal
Reserve Bank of St. Louis (2008); Quercia, Roberto, Michael Stegman,
and Walter R. Davis, ``Residential Mortgage Default: A Review of the
Literature,'' Journal of Housing Research 3(2): 341-379 (2005);
Ambrose, Brent W., Michael LaCour-Little, and Zsuzsa Huszar, ``A
Note on Hybrid Mortgages,'' Real Estate Economics 33(4): 765-782
(2005); Anderson, Dennis Capozza and Robert Van Order,
``Deconstructing the Mortgage Meltdown: A Methodology for
Decomposing Underwriting Quality,'' Social Science Research Network.
http://ssrn.com/abstract=1411782 (2009); Gerardi, Kristopher,
Andreas Lehnert, Shane Sherlund, and Paul Willen ``Making Sense of
the Subprime Crisis,'' Brookings Papers on Economic Activity (Fall
2008), 59-145; Austin Kelly, ``Skin in the Game: Zero Down Payment
Mortgage Default,'' Federal Housing Finance Agency, Journal of
Housing Research, Vol. 19, No. 2 (2008); Neil Bhutta, Jane Dokko and
Hui Shan, ``The Depth of Negative Equity and Mortgage Default
Decisions,'' Finance and Economics Discussion Series, Federal
Reserve Board, 2010-35 (2010); Deng, Yongheng, John M. Quigley and
Robert van Order (2000), ``Mortgage Terminations, Heterogeneity and
the Exercise of Mortgage Options,'' Econometrica, Vol. 68, No. 2
(2000), pp. 275-307.
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    The Agencies also have sought to make the standards applicable to
QRMs transparent to, and verifiable by, originators, securitizers,
investors and supervisors. The Commission believes that investors will
also benefit from the proposed approach to defining QRMs using the
above subset of mortgage features, since these include the factors most
commonly considered by the market as determinants of loan quality and
expected mortgage default. Therefore, investors will likely be familiar
with them, which will have the effect of facilitating investors'
interpretation and understanding of the QRM standard as proposed.
    When considering the underwriting and product features to be used
in the QRM definition, the Agencies selected features that are
transparent or verifiable. The Commission believes that this will
benefit all entities involved in the securitization process. Loan
originators will be able to easily discern whether a mortgage is a QRM
during the underwriting process. Sponsors will be able to unambiguously
determine whether an ABS is backed by QRMs alone and therefore
qualifies for the risk retention exemption. And finally, investors will
be able to assess without difficulty whether they are investing in a
QRM ABS or not. Thus, the Commission expects that as a result of the
transparency and verifiability of the mortgage features used to define
QRMs, there will be no reduction in efficiency or impediment to capital
formation.
    Some of the QRM standards proposed by the Agencies rely on
definitions and calculations which may be defined in multiple ways. To
provide clarity, the Agencies are proposing the use of definitions of
key terms as established in the U.S. Department of Housing and Urban
Development (HUD) Handbook 4155.1 (New Version), Mortgage Credit
Analysis for Mortgage Insurance, as in effect on December 31, 2010.
Since the HUD definitions have been time-tested and are well understood
by the market, the Commission believes this approach will be efficient
and beneficial to both investors and sponsors. On the other hand, loan
originators and sponsors who have been using alternative definitions
might incur adjustment costs, if they have to modify their loan
origination systems and processes. These new lending costs might be
passed onto borrowers in the form of higher mortgage rates or fees,
thus impeding capital formation.
    The QRM standards that the Agencies are proposing prescribe fixed
thresholds for several borrower and loan features. For instance, a QRM
cannot have a front-end debt-to-income ratio higher than 28 percent or
a loan-to-value ratio higher than 80 percent. The thresholds chosen in
the proposed rule reflect a balance between setting standards that are
over- or under-conservative with regard to mortgage default risk. If
the Agencies had been more conservative in their choices of thresholds
such that fewer mortgages were QRMs, more sponsors would have incurred
compliance costs for risk retention for non-QRMs. These additional
costs would likely be passed on to borrowers whose loans comprise the
securitized pool, which would have the effect of increasing mortgage
rates for a larger proportion of home buyers. On the other hand, QRM
standards that are more restrictive and that result in more non-QRMs
would likely create a larger and therefore more liquid secondary market
for non-QRMs, and thus reduce the liquidity premium for non-QRM ABS.
The reduced liquidity premium, which would decrease non-QRM rates,
might counteract the possible increase in non-QRM rates resulting from
risk retention compliance costs.
    The opposite would also have been true. If the Agencies had been
less conservative in their choices of thresholds such that a larger
fraction of mortgages would have qualified as QRMs, then non-QRMs might
face illiquidity in the secondary market. However, fewer borrowers
would have had to face increased mortgage rates resulting from
compliance costs for risk retention.
4. Risk Retention Allocation for Non-QRMs and Non-QAs
    Many securitization transactions are brought to the market by
aggregators who purchase assets from one or many originators, combine
these assets in a pool, and then issue securities backed by the assets
to investors. This securitization chain allows for the possibility of
implementing risk retention at either the originator or the sponsor
level. Risk retention imposed directly on originators may be more
effective in improving underwriting standards than if imposed on
sponsors. On the other hand, many of the risk retention forms discussed
earlier would be unfeasible to implement due to the complexity
introduced by the two-stage nature of a securitization by an
aggregator. Nonetheless, the Agencies believe that the imposition of