give rise to a lien on any collateral for the CRE loan;
    (C) Take any action required to perfect or protect the security
interest of the

originator or any subsequent holder of the loan in the collateral for
the CRE loan or the priority thereof, and to defend such collateral
against claims adverse to the originator's or subsequent holder's
interest;
    (D) Permit the originator or any subsequent holder of the loan, and
the servicer, to inspect the collateral for the CRE loan and the books
and records of the borrower or other party relating to the collateral
for the CRE loan;
    (E) Maintain the physical condition of the collateral for the CRE
loan;
    (F) Comply with all environmental, zoning, building code, licensing
and other laws, regulations, agreements, covenants, use restrictions,
and proffers applicable to the collateral;
    (G) Comply with leases, franchise agreements, condominium
declarations, and other documents and agreements relating to the
operation of the collateral, and to not modify any material terms and
conditions of such agreements over the term of the loan without the
consent of the originator or any subsequent holder of the loan, or the
servicer; and
    (H) Not materially alter the collateral for the CRE loan without
the consent of the originator or any subsequent holder of the loan, or
the servicer.
    (4) The loan documentation for the CRE loan prohibits the borrower
from obtaining a loan secured by a junior lien on any property that
serves as collateral for the CRE loan, unless such loan finances the
purchase of machinery and equipment and the borrower pledges such
machinery and equipment as additional collateral for the CRE loan.
    (5) The CLTV ratio for the loan is:
    (i) Less than or equal to 65 percent; or
    (ii) Less than or equal to 60 percent, if the capitalization rate
used in an appraisal that meets the requirements set forth in paragraph
(b)(2)(ii) of this section is less than or equal to the sum of:
    (A) The 10-year swap rate, as reported in the Federal Reserve Board
H.15 Report as of the date concurrent with the effective date of an
appraisal that meets the requirements set forth in paragraph (b)(2)(ii)
of this section; and
    (B) 300 basis points.
    (6) All loan payments required to be made under the loan agreement
are:
    (i) Based on straight-line amortization of principal and interest
over a term that does not exceed 20 years; and
    (ii) To be made no less frequently than monthly over a term of at
least ten years.
    (7) Under the terms of the loan agreement:
    (i) Any maturity of the note occurs no earlier than ten years
following the date of origination;
    (ii) The borrower is not permitted to defer repayment of principal
or payment of interest; and
    (iii) The interest rate on the loan is:
    (A) A fixed interest rate; or
    (B) An adjustable interest rate and the borrower, prior to or
concurrently with origination of the CRE loan, obtained a derivative
that effectively results in a fixed interest rate.
    (8) The originator does not establish an interest reserve at
origination to fund all or part of a payment on the loan.
    (9) At the closing of the securitization transaction, all payments
due on the loan are contractually current.
    (10) (i) The depositor of the asset-backed security certifies that
it has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all assets that
collateralize the asset-backed security meet all of the requirements
set forth in paragraphs (b)(1) through (9) of this section and has
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's
internal supervisory controls referenced in paragraph (b)(10)(i) of
this section shall be performed, for each issuance of an asset-backed
security, as of a date within 60 days of the cut-off date or similar
date for establishing the composition of the asset pool collateralizing
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (b)(10)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the
exception provided in paragraph (a) of this section with respect to a
securitization transaction shall not lose such exception with respect
to such transaction if, after the closing of the securitization
transaction, it is determined that one or more of the CRE loans
collateralizing the asset-backed securities did not meet all of the
requirements set forth in paragraphs (b)(1) through (b)(9) of this
section provided that:
    (1) The depositor has complied with the certification requirement
set forth in paragraph (b)(10) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at
a price at least equal to the remaining principal balance and accrued
interest on the loan(s) no later than ninety (90) days after the
determination that the loans do not satisfy all of the requirements of
paragraphs (b)(1) through (b)(9) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the
holders of the asset-backed securities issued in the securitization
transaction of any loan(s) included in such securitization transaction
that is required to be repurchased by the sponsor pursuant to paragraph
(c)(2) of this section, including the principal amount of such
repurchased loan(s) and the cause for such repurchase.

Sec.  ----.20 Underwriting standards for qualifying auto loans.

    (a) General. The securitization transaction is collateralized
solely (excluding cash and cash equivalents) by one or more automobile
loans, each of which meets all of the requirements of paragraph (b) of
this section.
    (b) Underwriting, product and other standards. (1) Prior to
origination of the automobile loan, the originator:
    (i) Verified and documented that within 30 days of the date of
origination:
    (A) The borrower was not currently 30 days or more past due, in
whole or in part, on any debt obligation;
    (B) Within the previous twenty-four (24) months, the borrower has
not been 60 days or more past due, in whole or in part, on any debt
obligation;
    (C) Within the previous thirty-six (36) months, the borrower has
not:
    (1) Been a debtor in a proceeding commenced under Chapter 7
(Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer
or Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment)
of the U.S. Bankruptcy Code; or
    (2) Been the subject of any Federal or State judicial judgment for
the collection of any unpaid debt;
    (D) Within the previous thirty-six (36) months, no one-to-four
family property owned by the borrower has been the subject of any
foreclosure, deed in lieu of foreclosure, or short sale; or
    (E) Within the previous thirty-six (36) months, the borrower has
not had any personal property repossessed;
    (ii) Determined and documented that, upon the origination of the
loan, the borrower's DTI ratio is less than or equal to thirty-six (36)
percent. For the purpose of making the determination under paragraph
(b)(1)(ii) of this section, the originator must:
    (A) Verify and document all income of the borrower that the
originator

includes in the borrower's effective monthly income (using payroll
stubs, tax returns, profit and loss statements, or other similar
documentation); and
    (B) On or after the date of the borrower's written application and
prior to origination, obtain a credit report regarding the borrower
from a consumer reporting agency that compiles and maintain files on
consumers on a nationwide basis (within the meaning of 15 U.S.C.
1681a(p)) and verify that all outstanding debts reported in the
borrower's credit report are incorporated into the calculation of the
borrower's DTI ratio under paragraph (b)(1)(ii) of this section;
    (2) An originator will be deemed to have met the requirements of
paragraph (b)(1)(i) of this section if:
    (i) The originator, no more than 90 days before the closing of the
loan, obtains a credit report regarding the borrower from at least two
consumer reporting agencies that compile and maintain files on
consumers on a nationwide basis (within the meaning of 15 U.S.C.
1681a(p));
    (ii) Based on the information in such credit reports, the borrower
meets all of the requirements of paragraph (b)(1)(i) of this section,
and no information in a credit report subsequently obtained by the
originator before the closing of the mortgage transaction contains
contrary information; and
    (iii) The originator obtains electronic or hard copies of such
credit reports.
    (3) At closing of the automobile loan, the borrower makes a down
payment from the borrower's personal funds and trade-in allowance, if
any, that is at least equal to the sum of:
    (i) The full cost of the vehicle title, tax, and registration fees;
    (ii) Any dealer-imposed fees; and
    (iii) 20 percent of the vehicle purchase price.
    (4) The transaction documents require the originator, subsequent
holder of the loan, or an agent of the originator or subsequent holder
of the loan to maintain physical possession of the title for the
vehicle until the loan is repaid in full and the borrower has otherwise
satisfied all obligations under the terms of the loan agreement.
    (5) If the loan is for a new vehicle, the terms of the loan
agreement provide a maturity date for the loan that does not exceed 5
years from the date of origination.
    (6) If the loan is for a vehicle other than a new vehicle, the term
of the loan (as set forth in the loan agreement) plus the difference
between the current model year and the vehicle's model year does not
exceed 5 years.
    (7) The terms of the loan agreement:
    (i) Specify a fixed rate of interest for the life of the loan;
    (ii) Provide for a monthly payment amount that:
    (A) Is based on straight-line amortization of principal and
interest over the term of the loan; and
    (B) Do not permit the borrower to defer repayment of principal or
payment of interest; and
    (C) Require the borrower to make the first payment on the
automobile loan within 45 days of the date of origination.
    (8) At the closing of the securitization transaction, all payments
due on the loan are contractually current; and
    (9) (i) The depositor of the asset-backed security certifies that
it has evaluated the effectiveness of its internal supervisory controls
with respect to the process for ensuring that all assets that
collateralize the asset-backed security meet all of the requirements
set forth in paragraphs (b)(1) through (b)(8) of this section and has
concluded that its internal supervisory controls are effective;
    (ii) The evaluation of the effectiveness of the depositor's
internal supervisory controls referenced in paragraph (b)(9)(i) of this
section shall be performed, for each issuance of an asset-backed
security, as of a date within 60 days of the cut-off date or similar
date for establishing the composition of the asset pool collateralizing
such asset-backed security; and
    (iii) The sponsor provides, or causes to be provided, a copy of the
certification described in paragraph (b)(9)(i) of this section to
potential investors a reasonable period of time prior to the sale of
asset-backed securities in the issuing entity, and, upon request, to
its appropriate Federal banking agency, if any.
    (c) Buy-back requirement. A sponsor that has relied on the
exception provided in this paragraph (a) of this section with respect
to a securitization transaction shall not lose such exception with
respect to such transaction if, after the closing of the securitization
transaction, it is determined that one or more of the automobile loans
collateralizing the asset-backed securities did not meet all of the
requirements set forth in paragraphs (b)(1) through (b)(8) of this
section provided that:
    (1) The depositor has complied with the certification requirement
set forth in paragraph (b)(9) of this section;
    (2) The sponsor repurchases the loan(s) from the issuing entity at
a price at least equal to the remaining principal balance and accrued
interest on the loan(s) no later than 90 days after the determination
that the loans do not satisfy all of the requirements of paragraphs
(b)(1) through (b)(8) of this section; and
    (3) The sponsor promptly notifies, or causes to be notified, the
holders of the asset-backed securities issued in the securitization
transaction of any loan(s) included in such securitization transaction
that is required to be repurchased by the sponsor pursuant to paragraph
(c)(2) of this section, including the principal amount of such
repurchased loan(s) and the cause for such repurchase.

Sec.  --.21 General exemptions.

    (a) This part shall not apply to:
    (1) Any securitization transaction that:
    (i) Is collateralized solely (excluding cash and cash equivalents)
by residential, multifamily, or health care facility mortgage loan
assets that are insured or guaranteed as to the payment of principal
and interest by the United States or an agency of the United States; or
    (ii) Involves the issuance of asset-backed securities that:
    (A) Are insured or guaranteed as to the payment of principal and
interest by the United States or an agency of the United States; and
    (B) Are collateralized solely (excluding cash and cash equivalents)
by residential, multifamily, or health care facility mortgage loan
assets or interests in such assets.
    (2) Any securitization transaction that is collateralized solely
(excluding cash and cash equivalents) by loans or other assets made,
insured, guaranteed, or purchased by any institution that is subject to
the supervision of the Farm Credit Administration, including the
Federal Agricultural Mortgage Corporation;
    (3) Any asset-backed security that is a security issued or
guaranteed by any State of the United States, or by any political
subdivision of a State or territory, or by any public instrumentality
of a State or territory that is exempt from the registration
requirements of the Securities Act of 1933 by reason of section 3(a)(2)
of that Act (15 U.S.C. 77c(a)(2)); and
    (4) Any asset-backed security that meets the definition of a
qualified scholarship funding bond, as set forth in section 150(d)(2)
of the Internal Revenue Code of 1986 (26 U.S.C. 150(d)(2)).
    (5) Any securitization transaction that:
    (i) Is collateralized solely (other than cash and cash equivalents)
by existing

asset-backed securities issued in a securitization transaction:
    (A) For which credit risk was retained as required under subpart B
of this part; or
    (B) That was exempted from the credit risk retention requirements
of this part pursuant to subpart D of this part;
    (ii) Is structured so that it involves the issuance of only a
single class of ABS interests; and
    (iii) Provides for the pass-through of all principal and interest
payments received on the underlying ABS (net of expenses of the issuing
entity) to the holders of such class.
    (b) This part shall not apply to any securitization transaction if
the asset-backed securities issued in the transaction are:
    (1) Collateralized solely (excluding cash and cash equivalents) by
obligations issued by the United States or an agency of the United
States;
    (2) Collateralized solely (excluding cash and cash equivalents) by
assets that are fully insured or guaranteed as to the payment of
principal and interest by the United States or an agency of the United
States (other than those referred to in paragraph (a)(1)(i) of this
section); or
    (3) Fully guaranteed as to the timely payment of principal and
interest by the United States or any agency of the United States;
    (c) Rule of construction. Securitization transactions involving the
issuance of asset-backed securities that are either issued, insured, or
guaranteed by, or are collateralized by obligations issued by, or loans
that are issued, insured, or guaranteed by, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, or a
Federal home loan bank shall not on that basis qualify for exemption
under this section.

Sec.  --.22 Safe harbor for certain foreign-related transactions.

    (a) In general. This part shall not apply to a securitization
transaction if all the following conditions are met:
    (1) The securitization transaction is not required to be and is not
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
    (2) 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;
    (3) Neither the sponsor of the securitization transaction nor the
issuing entity is:
    (i) Chartered, incorporated, or organized under the laws of the
United States, any State of the United States, the District of
Columbia, Puerto Rico, the Virgin Islands, or any other possession of
the United States (each of the foregoing, a ``U.S. jurisdiction'');
    (ii) An unincorporated branch or office (wherever located) of an
entity chartered, incorporated, or organized under the laws of a U.S.
jurisdiction; or
    (iii) An unincorporated branch or office located in a U.S.
jurisdiction of an entity that is chartered, incorporated, or organized
under the laws of a jurisdiction other than a U.S. jurisdiction; and
    (4) If the sponsor or issuing entity is chartered, incorporated, or
organized under the laws of a jurisdiction other than a U.S.
jurisdiction, no more than 25 percent (as determined based on unpaid
principal balance) of the assets that collateralize the ABS interests
sold in the securitization transaction were acquired by the sponsor or
issuing entity, directly or indirectly, from:
    (i) A consolidated affiliate of the sponsor or issuing entity that
is chartered, incorporated, or organized under the laws of a U.S.
jurisdiction; or
    (ii) An unincorporated branch or office of the sponsor or issuing
entity that is located in a U.S. jurisdiction.
    (b) Evasions prohibited. In view of the objective of these rules
and the policies underlying Section 15G of the Exchange Act, the safe
harbor described in paragraph (a) of this section is not available with
respect to any transaction or series of transactions that, although in
technical compliance with such paragraph (a), is part of a plan or
scheme to evade the requirements of section 15G and this Regulation. In
such cases, compliance with section 15G and this part is required.

Sec.  --.23 Additional exemptions.

    (a) Securitization transactions. The federal agencies with
rulewriting authority under section 15G(b) of the Exchange Act (15
U.S.C. 78o-11(b)) with respect to the type of assets involved may
jointly provide a total or partial exemption of any securitization
transaction as such agencies determine may be appropriate in the public
interest and for the protection of investors.
    (b) Exceptions, exemptions, and adjustments. The Federal banking
agencies and the Commission, in consultation with the Federal Housing
Finance Agency and the Department of Housing and Urban Development, may
jointly adopt or issue exemptions, exceptions or adjustments to the
requirements of this part, including exemptions, exceptions or
adjustments for classes of institutions or assets in accordance with
section 15G(e) of the Exchange Act (15 U.S.C. 78o-11(e)).

Appendix A to Part ------Additional QRM Standards; Standards for
Determining Acceptable Sources of Borrower Funds, Borrower's Monthly
Gross Income, Monthly Housing Debt, and Total Monthly Debt

I. Borrower Funds to Close

A. Cash and Savings/Checking Accounts as Acceptable Sources of Funds

1. Earnest Money Deposit
    a. The lender must verify with documentation, the deposit amount
and source of funds, if the amount of the earnest money deposit:
    i. Exceeds 2 percent of the sales price, or
    ii. Appears excessive based on the borrower's history of
accumulating savings. Satisfactory documentation includes:
    iii. A copy of the borrower's cancelled check
    iv. Certification from the deposit-holder acknowledging receipt of
funds, or
    v. Separate evidence of the source of funds.
    b. Separate evidence includes a verification of deposit (VOD) or
bank statement showing that the average balance was sufficient to cover
the amount of the earnest money deposit, at the time of the deposit.
2. Savings and Checking Accounts
    a. A VOD, along with the most recent bank statement, may be used to
verify savings and checking accounts.
    b. If there is a large increase in an account, or the account was
recently opened, the lender must obtain from the borrower a credible
explanation of the source of the funds.
3. Cash Saved at Home
    a. Borrowers who have saved cash at home and are able to adequately
demonstrate the ability to do so, are permitted to have this money
included as an acceptable source of funds to close the mortgage.
    b. To include cash saved at home when assessing the borrower's cash
assets, the:
    i. Money must be verified, whether deposited in a financial
institution, or held by the escrow/title company, and
    ii. Borrower must provide satisfactory evidence of the ability to
accumulate such savings.

4. Verifying Cash Saved at Home
    Verifying the cash saved at home assets requires the borrower to
explain in writing:
    a. How the funds were accumulated, and
    b. The amount of time it took to accumulate the funds.
    The lender must determine the reasonableness of the accumulation,
based on the:
    c. Borrower's income stream
    d. Time period during which the funds were saved
    e. Borrower's spending habits, and
    f. Documented expenses and the borrower's history of using
financial institutions.

    Note: Borrowers with checking and/or savings accounts are less
likely to save money at home, than individuals with no history of
such accounts.

5. Cash Accumulated With Private Savings Clubs
    a. Some borrowers may choose to use non-traditional methods to save
money by making deposits into private savings clubs. Often, these
private savings clubs pool resources for use among the membership.
    b. If a borrower claims that the cash to close mortgage is from
savings held with a private savings club, he/she must be able to
adequately document the accumulation of the funds with the club.
6. Requirements for Private Savings Clubs
    a. While private savings clubs are not supervised banking
institutions, the clubs must, at a minimum, have:
    i. Account ledgers
    ii. Receipts from the club
    iii. Verification from the club treasurer, and
    iv. Identification of the club.
    b. The lender must reverify the information, and the underwriter
must be able to determine that:
    i. It was reasonable for the borrower to have saved the money
claimed, and
    ii. There is no evidence that the funds were borrowed with an
expectation of repayment.

B. Investments as an Acceptable Source of Funds

1. IRAs, Thrift Savings Plans, and 401(k)s and Keogh Accounts
    Up to 60 percent of the value of assets such as IRAs, thrift
savings plans, 401(k) and Keogh accounts may be included in the
underwriting analysis, unless the borrower provides conclusive evidence
that a higher percentage may be withdrawn, after subtracting any:
    a. Federal income tax, and
    b. Withdrawal penalties.
    Notes:
    i. Redemption evidence is required.
    ii. The portion of the assets not used to meet closing
requirements, after adjusting for taxes and penalties may be counted as
reserves.
2. Stocks and Bonds
    The monthly or quarterly statement provided by the stockbroker or
financial institution managing the portfolio may be used to verify the
value of stocks and bonds.

    Note: The actual receipt of funds must be verified and
documented.

3. Savings Bonds
    Government issued bonds are counted at the original purchase price,
unless eligibility for redemption and the redemption value are
confirmed.

    Note: The actual receipt of funds at redemption must be
verified.

C. Gifts as an Acceptable Source of Funds

1. Description of Gift Funds
    In order for funds to be considered a gift there must be no
expected or implied repayment of the funds to the donor by the
borrower.

    Note: The portion of the gift not used to meet closing
requirements may be counted as reserves.

2. Who can provide a gift?
    An outright gift of the cash investment is acceptable if the donor
is:
    a. The borrower's relative
    b. The borrower's employer or labor union
    c. A charitable organization
    d. A governmental agency or public entity that has a program
providing home ownership assistance to
    i. Low- and moderate-income families
    ii. First-time homebuyers, or
    e. A close friend with a clearly defined and documented interest in
the borrower.
3. Who cannot provide a gift?
    a. The gift donor may not be a person or entity with an interest in
the sale of the property, such as:
    i. The seller
    ii. The real estate agent or broker
    iii. The builder, or
    iv. An associated entity.
    b. Gifts from these sources are considered inducements to purchase,
and must be subtracted from the sales price.

    Note: This applies to properties where the seller is a
government agency selling foreclosed properties, such as the US
Department of Veterans Affairs (VA) or Rural Housing Services.

4. Lender Responsibility for Verifying the Acceptability of Gift Fund
Sources
    a. Regardless of when gift funds are made available to a borrower,
the lender must be able to determine that the gift funds were not
provided by an unacceptable source, and were the donor's own funds.
    b. When the transfer occurs at closing, the lender is responsible
for verifying that the closing agent received the funds from the donor
for the amount of the gift, and that the funds were from an acceptable
source.
5. Requirements Regarding Donor Source of Funds
    a. As a general rule, how a donor obtains gift funds is not of
concern, provided that the funds are not derived in any manner from a
party to the sales transaction.
    b. Donors may borrow gift funds from any other acceptable source,
provided the mortgage borrowers are not obligors to any note to secure
money borrowed to give the gift.
6. Equity Credit
    Only family members may provide equity credit as a gift on property
being sold to other family members.
7. Payment of Consumer Debt Must Result in Sales Price Reduction
    a. The payment of consumer debt by third parties is considered to
be an inducement to purchase.
    b. While sellers and other parties may make contributions subject
to any percentage limitation of the sales price of a property toward a
buyer's actual closing costs and financing concessions, this applies
exclusively to the mortgage financing provision.
    c. When someone other than a family member has paid off debts or
other expenses on behalf of the borrower:
    i. The funds must be treated as an inducement to purchase, and
    ii. There must be a dollar for dollar reduction to the sales price
when calculating the maximum insurable mortgage.

    Note: The dollar for dollar reduction to the sales price also
applies to gift funds not meeting the requirement that:
    i. The gift be for down payment assistance, and
    ii. That it be provided by an acceptable source.

8. Using Downpayment Assistance Programs
    a. Downpayment assistance programs providing gifts administered by

charitable organizations, such as nonprofits should be carefully
monitored. Nonprofit entities should not provide gifts to pay off:
    i. Installment loans
    ii. Credit cards
    iii. Collections
    iv. Judgments, and
    v. Similar debts.
    b. Lenders must ensure that a gift provided by a charitable
organization meets these requirements and that the transfer of funds is
properly documented.
9. Gifts From Charitable Organizations That Lose or Give Up Their
Federal Tax-Exempt Status
    If a charitable organization makes a gift that is to be used for
all, or part, of a borrower's down payment, and the organization
providing the gift loses or gives up its Federal tax exempt status, the
gift will be recognized as an acceptable source of the down payment
provided that:
    a. The gift is made to the borrower
    b. The gift is properly documented, and
    c. The borrower has entered into a contract of sale (including any
amendments to purchase price) on, or before, the date the IRS
officially announces that the charitable organization's tax exempt
status is terminated.
10. Lender Responsibility for Ensuring That an Entity Is a Charitable
Organization
    a. The lender is responsible for ensuring that an entity is a
charitable organization as defined by Section 501(a) of the Internal
Revenue Code (IRC) of 1986 (26 U.S.C. 150(d)(2)) pursuant to Section
501(c)(3) of the IRC.
    b. One resource available to lenders for obtaining this information
is the Internal Revenue Service (IRS) Publication 78, Cumulative List
of Organizations described in Section 170(c) of the Internal Revenue
Code of 1986, which contains a list of organizations eligible to
receive tax-deductible charitable contributions.
    c. The IRS has an online version of this list that can help lenders
and others conduct a search of these organizations. The online version
can be found at http://apps.irs.gov/app/pub78 using the following
instructions to obtain the latest update:
    i. Enter search data and click ``Search''
    ii. Click ``Search for Charities'' under the ``Charities & Non-
Profits Topics'' heading on the left-hand side of the page
    iii. Click ``Recent Revocations and Deletions from Cumulative
List'' under the ``Additional Information'' heading in the middle of
the page, and
    iv. Click the name of the organization if the name appears on the
list displayed.

D. Gift Fund Required Documentation

1. Gift Letter Requirement
    A lender must document any borrower gift funds through a gift
letter, signed by the donor and borrower. The gift letter must show the
donor's name, address, telephone number, specify the dollar amount of
the gift, and state the nature of the donor's relationship to the
borrower and that no repayment is required. If sufficient funds
required for closing are not already verified in the borrower's
accounts, document the transfer of the gift funds to the borrower's
accounts, in accordance with the instructions described in section
(I)(D)(2).
2. Documenting the Transfer of Gift Funds
    The lender must document the transfer of the gift funds from the
donor to the borrower. The table below describes the requirements for
the transfer of gift funds.

------------------------------------------------------------------------
        If the gift funds . . .                     Then . . .
------------------------------------------------------------------------
 Are in the borrower's account.  Obtain
                                            A copy of the
                                         withdrawal document showing
                                         that the withdrawal is from the
                                         donor's account, and
                                            The borrower's
                                         deposit slip and bank statement
                                         showing the deposit.
 Are to be provided at closing,  Obtain a
 and                                      Bank statement showing
 Are in the form of a certified   the withdrawal from the
 check from the donor's account.          donor's account, and
                                          Copy of the certified
                                          check.
 Are to be provided at closing,  Have the donor provide a
 and                                      withdrawal document or
 Are in the form of a cashier's   cancelled check for the amount
 check, money order, official check, or   of the gift, showing that the
 other type of bank check.                funds came from the donor's
                                          personal account.
 Are to be provided at closing,  Have the donor provide
 and                                      documentation of the wire
 Are in the form of an            transfer.
 electronic wire transfer to the         Note: The lender must obtain
 closing agent.                           and keep the documentation of
                                          the wire transfer in its
                                          mortgage loan application
                                          binder. While the document
                                          does not need to be provided
                                          in the insurance binder, it
                                          must be available for
                                          inspection.
 Are being borrowed by the       Have the donor provide written
 donor, and                               evidence that the funds were
 Documentation from the bank or   borrowed from an acceptable
 other savings account is not available.  source, not from a party to
                                          the transaction, including the
                                          lender.
                                         IMPORTANT: Cash on hand is not
                                          an acceptable source of donor
                                          gift funds.
------------------------------------------------------------------------

E. Property Related Acceptable Sources of Funds

1. Type of Personal Property
    In order to obtain cash for closing, a borrower may sell various
personal property items. The types of personal property items that a
borrower can sell include
    a. Cars
    b. Recreational vehicles
    c. Stamps
    d. Coins, and
    e. Baseball card collections.
2. Sale of Personal Property Documentation Requirement
    a. If a borrower plans to sell personal property items to obtain
funds for closing, he/she must provide
    i. Satisfactory estimate of the worth of the personal property
items, and
    ii. Evidence that the items were sold.
    b. The estimated worth of the items being sold may be in the form
of
    i. Published value estimates issued by organizations, such as
automobile dealers, or philatelic or numismatic associations, or

    ii. A separate written appraisal by a qualified appraiser with no
financial interest in the loan transaction.
    c. Only the lesser of the estimated value or actual sales prices
are considered as assets to close.
3. Net Sales Proceeds From a Property
    a. The net proceeds from an arms-length sale of a currently owned
property may be used for the cash investment on a new house. The
borrower must provide satisfactory evidence of the accrued cash sales
proceeds.
    b. If the property has not sold by the time of underwriting,
condition loan approval by verifying the actual proceeds received by
the borrower. The lender must document the
    i. Actual sale, and
    ii. Sufficiency of the net proceeds required for settlement.

    Note: If the property has not sold by the time of the subject
settlement, the existing mortgage must be included as a liability
for qualifying purposes.

4. Commission From the Sale of the Property
    a. If the borrower is a licensed real estate agent entitled to a
real estate commission from the sale of the property being purchased,
then he/she may use that amount for the cash investment, with no
adjustment to the maximum mortgage required.
    b. A family member entitled to the commission may also provide gift
funds to the borrower.
5. Trade Equity
    a. The borrower may agree to trade his/her real property to the
seller as part of the cash investment. The amount of the borrower's
equity contribution is determined by
    i. Using the lesser of the property's appraised value or sales
price, and
    ii. Subtracting all liens against the property being traded, along
with any real estate commission.
    b. In order to establish the property value, the borrower must
provide
    i. A residential appraisal no more than six months old to determine
the property's value, and
    ii. Evidence of ownership.

    Note: If the property being traded has an FHA-insured mortgage,
assumption processing requirements and restrictions apply.

6. Rent Credit
    a. The cumulative amount of rental payments that exceed the
appraiser's estimate of fair market rent may be considered accumulation
of the borrower's cash investment.
    b. The following must be included in the endorsement package:
    i. Rent with option to purchase agreement, and
    ii. Appraiser's estimate of market rent.
    c. Conversely, treat the rent as an inducement to purchase with an
appropriate reduction to the mortgage, if the sales agreement reveals
that the borrower
    i. Has been living in the property rent-free, or
    ii. Has an agreement to occupy the property as a rental
considerably below fair market value in anticipation of eventual
purchase.
    d. Exception: An exception may be granted when a builder
    i. Fails to deliver a property at an agreed to time, and
    ii. Permits the borrower to occupy an existing or other unit for
less than market rent until construction is complete.
7. Sweat Equity Considered a Cash Equivalent
    Labor performed, or materials furnished by the borrower before
closing on the property being purchased (known as ``sweat equity''),
may be considered the equivalent of a cash investment, to the amount of
the estimated cost of the work or materials.

    Note: Sweat equity may also be ``gifted,'' subject to
    i. The additional requirements in section (I)(E)(8), and
    ii. The gift fund requirements described in section (I)(D).

8. Additional Sweat Equity Requirements
    The table below describes additional requirements for applying
sweat equity as a cash equivalent and as an acceptable source of
borrower funds.

------------------------------------------------------------------------
         Sweat Equity Category                     Requirement
------------------------------------------------------------------------
Existing Construction..................  Only repairs or improvements
                                          listed on the appraisal are
                                          eligible for sweat equity.
                                         Any work completed or materials
                                          provided before the appraisal
                                          are not eligible.
Proposed Construction..................  The sales contract must
                                          indicate the tasks to be
                                          performed by the borrower
                                          during construction.
Borrower's Labor.......................  The borrower must demonstrate
                                          his/her ability to complete
                                          the work in a satisfactory
                                          manner.
                                         The lender must document the
                                          contributory value of the
                                          labor either through
                                            The appraiser's
                                         estimate, or
                                            A cost-estimating
                                         service.
Delayed Work...........................  The following cannot be
                                          included as sweat equity:
                                            Delayed work (on-
                                         site escrow)
                                            Clean up
                                            Debris removal, and
                                            Other general
                                         maintenance.
Cash Back..............................  Cash back to the borrower in
                                          sweat equity transactions is
                                          not permitted.
Sweat Equity on Property Not Being       Sweat equity is not acceptable
 Purchased.                               on property other than the
                                          property being purchased.
                                         Compensation for work performed
                                          on other properties must be
                                            In cash, and
                                            Properly documented.
Source of Funds Evidence...............  Evidence of the following must
                                          be provided if the borrower
                                          furnishes funds and materials:
                                            Source of the funds,
                                         and
                                            Market value of the
                                         materials.
------------------------------------------------------------------------

9. Trade-In Manufactured Home
    An acceptable source of borrower cash investment commonly
associated with manufactured homes is the sale or trade-in of another
manufactured home that is not considered real estate. Trade-ins for
cash funds are considered a seller inducement and are not permitted.

II. Borrower Eligibility

A. Stability of Income

1. Effective Income
    Income may not be used in calculating the borrower's income ratios
if it comes from any source that cannot be verified, is not stable, or
will not continue.
2. Verifying Employment History
    a. The lender must verify the borrower's employment for the most
recent two full years, and the borrower must
    i. Explain any gaps in employment that span one or more months, and
    ii. Indicate if he/she was in school or the military for the recent
two full years, providing Evidence supporting this claim, such as
college transcripts, or discharge papers.
    b. Allowances can be made for seasonal employment, typical for the
building trades and agriculture, if documented by the lender.

    Note:  A borrower with a 25 percent or greater ownership
interest in a business is considered self employed and will be
evaluated as a self employed borrower for underwriting purposes.

3. Analyzing a Borrower's Employment Record
    a. When analyzing the probability of continued employment, lenders
must examine:
    i. The borrower's past employment record
    ii. Qualifications for the position
    iii. Previous training and education, and
    iv. The employer's confirmation of continued employment.
    b. Favorably consider a borrower for a mortgage if he/she changes
jobs frequently within the same line of work, but continues to advance
in income or benefits. In this analysis, income stability takes
precedence over job stability.
4. Borrowers Returning to Work After an Extended Absence
    A borrower's income may be considered effective and stable when
recently returning to work after an extended absence if he/she:
    a. Is employed in the current job for six months or longer, and
    b. Can document a two year work history prior to an absence from
employment using
    i. Traditional employment verifications, and/or
    ii. Copies of W-2 forms or pay stubs.

    Note: An acceptable employment situation includes individuals
who took several years off from employment to raise children, then
returned to the workforce.

    c. Important: Situations not meeting the criteria listed above may
only be considered as compensating factors. Extended absence is defined
as six months.

B. Salary, Wage and Other Forms of Income

1. General Policy on Borrower Income Analysis
    a. The income of each borrower who will be obligated for the
mortgage debt must be analyzed to determine whether his/her income
level can be reasonably expected to continue through at least the first
three years of the mortgage loan.
    b. In most cases, a borrower's income is limited to salaries or
wages. Income from other sources can be considered as effective, when
properly verified and documented by the lender.

    Notes:
    i. Effective income for borrowers planning to retire during the
first three-year period must include the amount of:
    a. Documented retirement benefits
    b. Social Security payments, or
    c. Other payments expected to be received in retirement.
    ii. Lenders must not ask the borrower about possible, future
maternity leave.

2. Overtime and Bonus Income
    a. Overtime and bonus income can be used to qualify the borrower if
he/she has received this income for the past two years, and it will
likely continue. If the employment verification states that the
overtime and bonus income is unlikely to continue, it may not be used
in qualifying.
    b. The lender must develop an average of bonus or overtime income
for the past two years. Periods of overtime and bonus income less than
two years may be acceptable, provided the lender can justify and
document in writing the reason for using the income for qualifying
purposes.
3. Establishing an Overtime and Bonus Income Earning Trend
    a. The lender must establish and document an earnings trend for
overtime and bonus income. If either type of income shows a continual
decline, the lender must document in writing a sound rationalization
for including the income when qualifying the borrower.
    b. A period of more than two years must be used in calculating the
average overtime and bonus income if the income varies significantly
from year to year.
4. Qualifying Part-Time Income
    a. Part-time and seasonal income can be used to qualify the
borrower if the lender documents that the borrower has worked the part-
time job uninterrupted for the past two years, and plans to continue.
Many low and moderate income families rely on part-time and seasonal
income for day to day needs, and lenders should not restrict
consideration of such income when qualifying these borrowers.
    b. Part-time income received for less than two years may be
included as effective income, provided that the lender justifies and
documents that the income is likely to continue.
    c. Part-time income not meeting the qualifying requirements may be
considered as a compensating factor only.

    Note: For qualifying purposes, ``part-time'' income refers to
employment taken to supplement the borrower's income from regular
employment; part-time employment is not a primary job and it is
worked less than 40 hours.

5. Income from Seasonal Employment
    a. Seasonal income is considered uninterrupted, and may be used to
qualify the borrower, if the lender documents that the borrower:
    i. Has worked the same job for the past two years, and
    ii. Expects to be rehired the next season.
    b. Seasonal employment includes:
    i. Umpiring baseball games in the summer, or
    ii. Working at a department store during the holiday shopping
season.
6. Primary Employment Less Than 40 Hour Work Week
    a. When a borrower's primary employment is less than a typical 40-
hour work week, the lender should evaluate the stability of that income
as regular, on-going primary employment.
    b. Example: A registered nurse may have worked 24 hours per week
for the last year. Although this job is less than the 40-hour work
week, it is the borrower's primary employment, and should be considered
effective income.

7. Commission Income
    a. Commission income must be averaged over the previous two years.
To qualify commission income, the borrower must provide:
    i. Copies of signed tax returns for the last two years, and
    ii. The most recent pay stub.
    b. Commission income showing a decrease from one year to the next
requires significant compensating factors before a borrower can be
approved for the loan.
    c. Borrowers whose commission income was received for more than one
year, but less than two years may be considered favorably if the
underwriter can:
    i. Document the likelihood that the income will continue, and
    ii. Soundly rationalize accepting the commission income.

    Notes:
    i. Unreimbursed business expenses must be subtracted from gross
income.
    ii. A commissioned borrower is one who receives more than 25
percent of his/her annual income from commissions.
    iii. A tax transcript obtained directly from the IRS may be used
in lieu of signed tax returns, and the cost of the transcript may be
charged to the borrower.

8. Qualifying Commission Income Earned for Less Than One Year
    a. Commission income earned for less than one year is not
considered effective income. Exceptions may be made for situations in
which the borrower's compensation was changed from salary to commission
within a similar position with the same employer.
    b. A borrower may also qualify when the portion of earnings not
attributed to commissions would be sufficient to qualify the borrower
for the mortgage.
9. Employer Differential Payments
    If the employer subsidizes a borrower's mortgage payment through
direct payments, the amount of the payments:
    a. Is considered gross income, and
    b. Cannot be used to offset the mortgage payment directly, even if
the employer pays the servicing lender directly.
10. Retirement Income
    Retirement income must be verified from the former employer, or
from Federal tax returns. If any retirement income, such as employer
pensions or 401(k)s, will cease within the first full three years of
the mortgage loan, the income may only be considered as a compensating
factor.
 11. Social Security Income
    Social Security income must be verified by the Social Security
Administration or on Federal tax returns. If any benefits expire within
the first full three years of the loan, the income source may be
considered only as a compensating factor.

    Notes:
    i. The lender must obtain a complete copy of the current awards
letter.
    ii. Not all Social Security income is for retirement-aged
recipients; therefore, documented continuation is required.
    iii. Some portion of Social Security income may be ``grossed
up'' if deemed nontaxable by the IRS.

12. Automobile Allowances and Expense Account Payments
    a. Only the amount by which the borrower's automobile allowance or
expense account payments exceed actual expenditures may be considered
income.
    b. To establish the amount to add to gross income, the borrower
must provide the following:
    i. IRS Form 2106, Employee Business Expenses, for the previous two
years, and
    ii. Employer verification that the payments will continue.
    c. If the borrower uses the standard per-mile rate in calculating
automobile expenses, as opposed to the actual cost method, the portion
that the IRS considers depreciation may be added back to income.
    d. Expenses that must be treated as recurring debt include:
    i. The borrower's monthly car payment, and
    ii. Any loss resulting from the calculation of the difference
between the actual expenditures and the expense account allowance.

C. Borrowers Employed by a Family Owned Business

1. Income Documentation Requirement
    In addition to normal employment verification, a borrower employed
by a family owned businesses are required to provide evidence that he/
she is not an owner of the business, which may include:
    a. Copies of signed personal tax returns, or
    b. A signed copy of the corporate tax return showing ownership
percentage.

    Note: A tax transcript obtained directly from the IRS may be
used in lieu of signed tax returns, and the cost of the transcript
may be charged to the borrower.

D. General Information on Self Employed Borrowers and Income Analysis

1. Definition: Self Employed Borrower
    A borrower with a 25 percent or greater ownership interest in a
business is considered self employed.
2. Types of Business Structures
    There are four basic types of business structures. They include:
    a. Sole proprietorships
    b. Corporations
    c. Limited liability or ``S'' corporations, and
    d. Partnerships.
3. Minimum Length of Self Employment
    a. Income from self employment is considered stable, and effective,
if the borrower has been self employed for two or more years.
    b. Due to the high probability of failure during the first few
years of a business, the requirements described in the table below are
necessary for borrowers who have been self employed for less than two
years.

------------------------------------------------------------------------
If the period of self employment is .
                 . .                               Then . . .
------------------------------------------------------------------------
Between one and two years............  To be eligible for a mortgage
                                        loan, the individual must have
                                        at least two years of documented
                                        previous successful employment
                                        in the line of work in which the
                                        individual is self employed, or
                                        in a related occupation.
                                       Note: A combination of one year
                                        of employment and formal
                                        education or training in the
                                        line of work in which the
                                        individual is self employed or
                                        in a related occupation is also
                                        acceptable.
Less than one year...................  The income from the borrower may
                                        not be considered effective
                                        income.
------------------------------------------------------------------------

4. General Documentation Requirements for Self Employed Borrowers
    Self employed borrowers must provide the following documentation:
    a. Signed, dated individual tax returns, with all applicable tax
schedules for the most recent two years
    b. For a corporation, ``S'' corporation, or partnership, signed
copies of Federal business income tax returns for the last two years,
with all applicable tax schedules
    c. Year to date profit and loss (P&L) statement and balance sheet,
and
    d. Business credit report for corporations and ``S'' corporations.
5. Establishing a Borrower's Earnings Trend
    a. When qualifying a borrower for a mortgage loan, the lender must
establish the borrower's earnings trend from the previous two years
using the borrower's tax returns.
    b. If a borrower:
    i. Provides quarterly tax returns, the income analysis may include
income through the period covered by the tax filings, or
    ii. Is not subject to quarterly tax returns, or does not file them,
then the income shown on the P&L statement may be included in the
analysis, provided the income stream based on the P&L is consistent
with the previous years' earnings.
    c. If the P&L statements submitted for the current year show an
income stream considerably greater than what is supported by the
previous year's tax returns, the lender must base the income analysis
solely on the income verified through the tax returns.
    d. If the borrower's earnings trend for the previous two years is
downward and the most recent tax return or P&L is less than the prior
year's tax return, the borrower's most recent year's tax return or P&L
must be used to calculate his/her income.
6. Analyzing the Business's Financial Strength
    a. To determine if the business is expected to generate sufficient
income for the borrower's needs, the lender must carefully analyze the
business's financial strength, including the:
    i. Source of the business's income
    ii. General economic outlook for similar businesses in the area.
    b. Annual earnings that are stable or increasing are acceptable,
while businesses that show a significant decline in income over the
analysis period are not acceptable.

E. Income Analysis: Individual Tax Returns (IRS Form 1040)

1. General Policy on Adjusting Income Based on a Review of IRS Form
1040
    The amount shown on a borrower's IRS Form 1040 as adjusted gross
income must either be increased or decreased based on the lender's
analysis of the individual tax return and any related tax schedules.
2. Guidelines for Analyzing IRS Form 1040
    The table below contains guidelines for analyzing IRS Form 1040:

------------------------------------------------------------------------
        IRS Form 1040 heading                     Description
------------------------------------------------------------------------
Wages, Salaries and Tips.............  An amount shown under this
                                        heading may indicate that the
                                        individual
                                        Is a salaried employee
                                        of a corporation, or
                                        Has other sources of
                                        income.
                                       This section may also indicate
                                        that the spouse is employed, in
                                        which case the spouse's income
                                        must be subtracted from the
                                        borrower's adjusted gross
                                        income.
Business Income and Loss (from         Sole proprietorship income
 Schedule C).                           calculated on Schedule C is
                                        business income.
                                       Depreciation or depletion may be
                                        added back to the adjusted gross
                                        income.
Rents, Royalties, Partnerships (from   Any income received from rental
 Schedule E).                           properties or royalties may be
                                        used as income, after adding
                                        back any depreciation shown on
                                        Schedule E. xxx
Capital Gain and Losses (from          Capital gains or losses generally
 Schedule D).                           occur only one time, and should
                                        not be considered when
                                        determining effective income.
                                       However, if the individual has a
                                        constant turnover of assets
                                        resulting in gains or losses,
                                        the capital gain or loss must be
                                        considered when determining the
                                        income. Three years' tax returns
                                        are required to evaluate an
                                        earning trend. If the trend
                                          Results in a gain, it
                                       may be added as effective income,
                                       or
                                          Consistently shows a
                                       loss, it must be deducted from
                                       the total income.
                                       Lender must document anticipated
                                        continuation of income through
                                        verified assets.
                                       Example: A lender can consider
                                        the capital gains for an
                                        individual who purchases old
                                        houses, remodels them, and sells
                                        them for profit.
Interest and Dividend Income (from     This taxable/tax-exempt income
 Schedule B).                           may be added back to the
                                        adjusted gross income only if it
                                        Has been received for
                                        the past two years, and
                                        Is expected to continue.
                                       If the interest-bearing asset
                                        will be liquidated as a source
                                        of the cash investment, the
                                        lender must appropriately adjust
                                        the amount.
Farm Income or Loss (from Schedule F)  Any depreciation shown on
                                        Schedule F may be added back to
                                        the adjusted gross income.
IRA Distributions, Pensions,           The non-taxable portion of these
 Annuities, and Social Security         items may be added back to the
 Benefits.                              adjusted gross income, if the
                                        income is expected to continue
                                        for the first three years of the
                                        mortgage.
Adjustments to Income................  Adjustments to income may be
                                        added back to the adjusted gross
                                        income if they are
                                          IRA and Keogh
                                       retirement deductions
                                          Penalties on early
                                       withdrawal of savings
                                          Health insurance
                                       deductions, and
                                          Alimony payments.
Employee Business Expenses...........  Employee business expenses are
                                        actual cash expenses that must
                                        be deducted from the adjusted
                                        gross income.
------------------------------------------------------------------------

F. Income Analysis: Corporate Tax Returns (IRS Form 1120)

1. Description: Corporation
    A Corporation is a state-chartered business owned by its
stockholders.
2. Need To Obtain Borrower Percentage of Ownership Information
    a. Corporate compensation to the officers, generally in proportion
to the percentage of ownership, is shown on the
    i. Corporate tax return IRS Form 1120, and
    ii. Individual tax returns.
    b. When a borrower's percentage of ownership does not appear on the
tax returns, the lender must obtain the information from the
corporation's accountant, along with evidence that the borrower has the
right to any compensation.
3. Analyzing Corporate Tax Returns
    a. In order to determine a borrower's self employed income from a
corporation the adjusted business income must
    i. Be determined, and
    ii. Multiplied by the borrower's percentage of ownership in the
business.
    b. The table below describes the items found on IRS Form 1120 for
which an adjustment must be made in order to determine adjusted
business income.

------------------------------------------------------------------------
           Adjustment item                 Description of adjustment
------------------------------------------------------------------------
Depreciation and Depletion...........  Add the corporation's
                                        depreciation and depletion back
                                        to the after-tax income.
Taxable Income.......................  Taxable income is the
                                        corporation's net income before
                                        Federal taxes. Reduce taxable
                                        income by the tax liability.
Fiscal Year vs. Calendar Year........  If the corporation operates on a
                                        fiscal year that is different
                                        from the calendar year, an
                                        adjustment must be made to
                                        relate corporate income to the
                                        individual tax return.
Cash Withdrawals.....................  The borrower's withdrawal of cash
                                        from the corporation may have a
                                        severe negative impact on the
                                        corporation's ability to
                                        continue operating.
------------------------------------------------------------------------

G. Income Analysis: ``S'' Corporation Tax Returns (IRS Form 1120S)

1. Description: ``S'' Corporation
    a. An ``S'' Corporation is generally a small, start-up business,
with gains and losses passed to stockholders in proportion to each
stockholder's percentage of business ownership.
    b. Income for owners of ``S'' corporations comes from W-2 wages,
and is taxed at the individual rate. The IRS Form 1120S, Compensation
of Officers line item is transferred to the borrower's individual IRS
Form 1040.
2. Analyzing ``S'' Corporation Tax Returns
    a. ``S'' corporation depreciation and depletion may be added back
to income in proportion to the borrower's share of the corporation's
income.
    b. In addition, the income must also be reduced proportionately by
the total obligations payable by the corporation in less than one year.
    c. IMPORTANT: The borrower's withdrawal of cash from the
corporation may have a severe negative impact on the corporation's
ability to continue operating, and must be considered in the income
analysis.

H. Income Analysis: Partnership Tax Returns (IRS Form 1065)

1. Description: Partnership
    a. A Partnership is formed when two or more individuals form a
business, and share in profits, losses, and responsibility for running
the company.
    b. Each partner pays taxes on his/her proportionate share of the
partnership's net income.
2. Analyzing Partnership Tax Returns
    a. Both general and limited partnerships report income on IRS Form
1065, and the partners' share of income is carried over to Schedule E
of IRS Form 1040.
    b. The lender must review IRS Form 1065 to assess the viability of
the business. Both depreciation and depletion may be added back to the
income in proportion to the borrower's share of income.
    c. Income must also be reduced proportionately by the total
obligations payable by the partnership in less than one year.
    d. IMPORTANT: Cash withdrawals from the partnership may have a
severe negative impact on the partnership's ability to continue
operating, and must be considered in the income analysis.

III. Non-Employment Related Borrower Income

A. Alimony, Child Support, and Maintenance Income Criteria

    Alimony, child support, or maintenance income may be considered
effective, if:
    1. Payments are likely to be received consistently for the first
three years of the mortgage
    2. The borrower provides the required documentation, which includes
a copy of the
    1. Final divorce decree
    ii. Legal separation agreement,
    iii. Court order, or
    iv. Voluntary payment agreement, and
    3. The borrower can provide acceptable evidence that payments have
been received during the last 12 months, such as
    i. Cancelled checks
    ii. Deposit slips
    iii. Tax returns, or
    iv. Court records.
    Notes:
    i. Periods less than 12 months may be acceptable, provided the
lender can adequately document the payer's ability and willingness to
make timely payments.
    ii. Child support may be ``grossed up'' under the same provisions
as non-taxable income sources.

B. Investment and Trust Income

1. Analyzing Interest and Dividends
    a. Interest and dividend income may be used as long as tax returns
or account statements support a two-year receipt history. This income
must be averaged over the two years.
    b. Subtract any funds that are derived from these sources, and are
required for the cash investment, before calculating the projected
interest or dividend income.
2. Trust Income
    a. Income from trusts may be used if guaranteed, constant payments
will continue for at least the first three years of the mortgage term.
    b. Required trust income documentation includes a copy of the Trust
Agreement or other trustee statement, confirming the
    i. Amount of the trust

    ii. Frequency of distribution, and
    iii. Duration of payments.
    c. Trust account funds may be used for the required cash investment
if the borrower provides adequate documentation that the withdrawal of
funds will not negatively affect income. The borrower may use funds
from the trust account for the required cash investment, but the trust
income used to determine repayment ability cannot be affected
negatively by its use.
3. Notes Receivable Income
    a. In order to include notes receivable income to qualify a
borrower, he/she must provide
    i. A copy of the note to establish the amount and length of
payment, and
    ii. Evidence that these payments have been consistently received
for the last 12 months through deposit slips, cancelled checks, or tax
returns.
    b. If the borrower is not the original payee on the note, the
lender must establish that the borrower is now a holder in due course,
and able to enforce the note.
4. Eligible Investment Properties
    Follow the steps in the table below to calculate an investment
property's income or loss if the property to be subject to a mortgage
is an eligible investment property.

------------------------------------------------------------------------
               Step                                Action
------------------------------------------------------------------------
1.................................  Subtract the monthly payment (PITI)
                                     from the monthly net rental income
                                     of the subject property.
                                    Note: Calculate the monthly net
                                     rental by taking the gross rents,
                                     and subtracting the 25 percent
                                     reduction for vacancies and
                                     repairs.
2.................................  Does the calculation in Step 1 yield
                                     a positive number?
                                       If yes, add the number to
                                    the borrower's monthly gross income.
                                       If no, and the
                                    calculation yields a negative
                                    number, consider it a recurring
                                    monthly obligation.
------------------------------------------------------------------------

C. Military, Government Agency, and Assistance Program Income

1. Military Income
    a. Military personnel not only receive base pay, but often times
are entitled to additional forms of pay, such as
    i. Income from variable housing allowances
    ii. Clothing allowances
    iii. Flight or hazard pay
    iv. Rations, and
    v. Proficiency pay.
    b. These types of additional pay are acceptable when analyzing a
borrower's income as long as the probability of such pay to continue is
verified in writing.

    Note: The tax-exempt nature of some of the above payments should
also be considered.

2. VA Benefits
    a. Direct compensation for service-related disabilities from the
Department of Veterans Affairs (VA) is acceptable, provided the lender
receives documentation from the VA.
    b. Education benefits used to offset education expenses are not
acceptable.
3. Government Assistance Programs
    a. Income received from government assistance programs is
acceptable as long as the paying agency provides documentation
indicating that the income is expected to continue for at least three
years.
    b. If the income from government assistance programs will not be
received for at least three years, it may be considered as a
compensating factor.
    c. Unemployment income must be documented for two years, and there
must be reasonable assurance that this income will continue. This
requirement may apply to seasonal employment.
4. Mortgage Credit Certificates
    a. If a government entity subsidizes the mortgage payments either
through direct payments or tax rebates, these payments may be
considered as acceptable income.
    b. Either type of subsidy may be added to gross income, or used
directly to offset the mortgage payment, before calculating the
qualifying ratios.
5. Homeownership Subsidies
    a. A monthly subsidy may be treated as income, if a borrower is
receiving subsidies under the housing choice voucher home ownership
option from a public housing agency (PHA). Although continuation of the
homeownership voucher subsidy beyond the first year is subject to
Congressional appropriation, for the purposes of underwriting, the
subsidy will be assumed to continue for at least three years.
    b. If the borrower is receiving the subsidy directly, the amount
received is treated as income. The amount received may also be treated
as non taxable income and be ``grossed up'' by 25 percent, which means
that the amount of the subsidy, plus 25 percent of that subsidy may be
added to the borrower's income from employment and/or other sources.
    c. Lenders may treat this subsidy as an ``offset'' to the monthly
mortgage payment (that is, reduce the monthly mortgage payment by the
amount of the home ownership assistance payment before dividing by the
monthly income to determine the payment-to-income and debt-to-income
ratios). The subsidy payment must not pass through the borrower's
hands.
    d. The assistance payment must be:
    i. Paid directly to the servicing lender, or
    ii. Placed in an account that only the servicing lender may access.

    Note: Assistance payments made directly to the borrower must be
treated as income.

D. Rental Income

1. Analyzing the Stability of Rental Income
    a. Rent received for properties owned by the borrower is acceptable
as long as the lender can document the stability of the rental income
through
    i. A current lease
    ii. An agreement to lease, or
    iii. A rental history over the previous 24 months that is free of
unexplained gaps greater than three months (such gaps could be
explained by student, seasonal, or military renters, or property
rehabilitation).
    b. A separate schedule of real estate is not required for rental
properties as long as all properties are documented on the URLA.

    Note: The underwriting analysis may not consider rental income
from any property being vacated by the borrower, except under the
circumstances described below.

2. Rental Income From Borrower Occupied Property
    a. The rent for multiple unit property where the borrower resides
in one or more units and charges rent to tenants of other units may be
used for qualifying purposes.
    b. Projected rent for the tenant-occupied units only may:
    i. Be considered gross income, only after deducting vacancy and
maintenance factors, and
    ii. Not be used as a direct offset to the mortgage payment.

3. Income from Roommates in a Single Family Property
    a. Income from roommates in a single family property occupied as
the borrower's primary residence is not acceptable. Rental income from
boarders however, is acceptable, if the boarders are related by blood,
marriage, or law.
    b. The rental income may be considered effective, if shown on the
borrower's tax return. If not on the tax return, rental income paid by
the boarder
    i. May be considered a compensating factor, and
    ii. Must be adequately documented by the lender.
4. Documentation Required To Verify Rental Income
    Analysis of the following required documentation is necessary to
verify all borrower rental income:
    a. IRS Form 1040 Schedule E; and
    b. Current leases/rental agreements.
5. Analyzing IRS Form 1040 Schedule E
    a. The IRS Form 1040 Schedule E is required to verify all rental
income. Depreciation shown on Schedule E may be added back to the net
income or loss.
    b. Positive rental income is considered gross income for qualifying
purposes, while negative income must be treated as a recurring
liability.
    c. The lender must confirm that the borrower still owns each
property listed, by comparing Schedule E with the real estate owned
section of the URLA. If the borrower owns six or more units in the same
general area, a map must be provided disclosing the locations of the
units, as evidence of compliance with FHA's seven-unit limitation.
6. Using Current Leases To Analyze Rental Income
    a. The borrower can provide a current signed lease or other rental
agreement for a property that was acquired since the last income tax
filing, and is not shown on Schedule E.
    b. In order to calculate the rental income:
    i. Reduce the gross rental amount by 25 percent for vacancies and
maintenance
    ii. Subtract PITI and any homeowners' association dues, and
    iii. Apply the resulting amount to income, if positive, or
recurring debts, if negative.
7. Exclusion of Rental Income From Property Being Vacated by the
Borrower
    Underwriters may not consider any rental income from a borrower's
principal residence that is being vacated in favor of another principal
residence, except under the conditions described below:

    Notes: i. This policy assures that a borrower either has
sufficient income to make both mortgage payments without any rental
income, or has an equity position not likely to result in defaulting
on the mortgage on the property being vacated.
    ii. This applies solely to a principal residence being vacated
in favor of another principal residence. It does not apply to
existing rental properties disclosed on the loan application and
confirmed by tax returns (Schedule E of form IRS 1040).

8. Policy Exceptions Regarding the Exclusion of Rental Income From a
Principal Residence Being Vacated by a Borrower
    When a borrower vacates a principal residence in favor of another
principal residence, the rental income, reduced by the appropriate
vacancy factor, may be considered in the underwriting analysis under
the circumstances listed in the table below.

------------------------------------------------------------------------
              Exception                           Description
------------------------------------------------------------------------
Relocations..........................  The borrower is relocating with a
                                        new employer, or being
                                        transferred by the current
                                        employer to an area not within
                                        reasonable and locally-
                                        recognized commuting distance.
                                       A properly executed lease
                                        agreement (that is, a lease
                                        signed by the borrower and the
                                        lessee) of at least one year's
                                        duration after the loan is
                                        closed is required.
                                       Note: Underwriters should also
                                        obtain evidence of the security
                                        deposit and/or evidence the
                                        first month's rent was paid to
                                        the homeowner.
Sufficient Equity in Vacated Property  The borrower has a loan-to-value
                                        ratio of 75 percent or less, as
                                        determined either by
                                          A current (no more
                                       than six months old) residential
                                       appraisal, or
                                          Comparing the unpaid
                                       principal balance to the original
                                       sales price of the property.
                                       Note: The appraisal, in addition
                                        to using forms Fannie Mae1004/
                                        Freddie Mac 70, may be an
                                        exterior-only appraisal using
                                        form Fannie Mae/Freddie Mac
                                        2055, and for condominium units,
                                        form Fannie Mae 1075/Freddie Mac
                                        466.
------------------------------------------------------------------------

E. Non Taxable and Projected Income

1. Types of Non Taxable Income
    Certain types of regular income may not be subject to Federal tax.
Such types of non taxable income include
    a. Some portion of Social Security, some Federal government
employee retirement income, Railroad Retirement Benefits, and some
state government retirement income
    b. Certain types of disability and public assistance payments
    c. Child support
    d. Military allowances, and
    e. Other income that is documented as being exempt from Federal
income taxes.
2. Adding Non Taxable Income to a Borrower's Gross Income
    a. The amount of continuing tax savings attributed to regular
income not subject to Federal taxes may be added to the borrower's
gross income.
    b. The percentage of non-taxable income that may be added cannot
exceed the appropriate tax rate for the income amount. Additional
allowances for dependents are not acceptable.
    c. The lender:
    i. Must document and support the amount of income grossed up for
any non-taxable income source, and
    ii. Should use the tax rate used to calculate the borrower's last
year's income tax.

    Note: If the borrower is not required to file a Federal tax
return, the tax rate to use is 25 percent.

3. Analyzing Projected Income
    a. Projected or hypothetical income is not acceptable for
qualifying purposes. However, exceptions are permitted for income from
the following sources:
    i. Cost-of-living adjustments
    ii. Performance raises, and
    iii. Bonuses.
    b. For the above exceptions to apply, the income must be
    i. Verified in writing by the employer, and
    ii. Scheduled to begin within 60 days of loan closing.

4. Project Income for New Job
    a. Projected income is acceptable for qualifying purposes for a
borrower scheduled to start a new job within 60 days of loan closing if
there is a guaranteed, non-revocable contract for employment.
    b. The lender must verify that the borrower will have sufficient
income or cash reserves to support the mortgage payment and any other
obligations between loan closing and the start of employment. Examples
of this type of scenario are teachers whose contracts begin with the
new school year, or physicians beginning a residency after the loan
closes fall under this category.
    c. The loan is not eligible for endorsement if the loan closes more
than 60 days before the borrower starts the new job. To be eligible for
endorsement, the lender must obtain from the borrower a pay stub or
other acceptable evidence indicating that he/she has started the new
job.

IV. Borrower Liabilities: Recurring Obligations

1. Types of Recurring Obligations

    Recurring obligations include:
    a. All installment loans
    b. Revolving charge accounts
    c. Real estate loans
    d. Alimony
    e. Child support, and
    f. Other continuing obligations.

2. Debt to Income Ratio Computation for Recurring Obligations

    a. The lender must include the following when computing the debt to
income ratios for recurring obligations:
    i. Monthly housing expense, and
    ii. Additional recurring charges extending ten months or more, such
as
    a. Payments on installment accounts
    b. Child support or separate maintenance payments
    c. Revolving accounts, and
    d. Alimony.
    b. Debts lasting less than ten months must be included if the
amount of the debt affects the borrower's ability to pay the mortgage
during the months immediately after loan closing, especially if the
borrower will have limited or no cash assets after loan closing.

    Note: Monthly payments on revolving or open-ended accounts,
regardless of the balance, are counted as a liability for qualifying
purposes even if the account appears likely to be paid off within 10
months or less.

3. Revolving Account Monthly Payment Calculation

    If the credit report shows any revolving accounts with an
outstanding balance but no specific minimum monthly payment, the
payment must be calculated as the greater of
    a. 5 percent of the balance, or
    b. $10.

    Note: If the actual monthly payment is documented from the
creditor or the lender obtains a copy of the current statement
reflecting the monthly payment, that amount may be used for
qualifying purposes.

4. Reduction of Alimony Payment for Qualifying Ratio Calculation

    Since there are tax consequences of alimony payments, the lender
may choose to treat the monthly alimony obligation as a reduction from
the borrower's gross income when calculating qualifying ratios, rather
than treating it as a monthly obligation.

V. Borrower Liabilities: Contingent Liability

1. Definition: Contingent Liability

    A contingent liability exists when an individual is held
responsible for payment of a debt if another party, jointly or
severally obligated, defaults on the payment.

2. Application of Contingent Liability Policies

    The contingent liability policies described in this topic apply
unless the borrower can provide conclusive evidence from the debt
holder that there is no possibility that the debt holder will pursue
debt collection against him/her should the other party default.

3. Contingent Liability on Mortgage Assumptions

    Contingent liability must be considered when the borrower remains
obligated on an outstanding FHA-insured, VA-guaranteed, or conventional
mortgage secured by property that:
    a. Has been sold or traded within the last 12 months without a
release of liability, or
    b. Is to be sold on assumption without a release of liability being
obtained.

4. Exemption From Contingent Liability Policy on Mortgage Assumptions

    When a mortgage is assumed, contingent liabilities need not be
considered if the
    a. Originating lender of the mortgage being underwritten obtains,
from the servicer of the assumed loan, a payment history showing that
the mortgage has been current during the previous 12 months, or
    b. Value of the property, as established by an appraisal or the
sales price on the HUD-1 Settlement Statement from the sale of the
property, results in a loan-to-value (LTV) ratio of 75 percent or less.

5. Contingent Liability on Cosigned Obligations

    a. Contingent liability applies, and the debt must be included in
the underwriting analysis, if an individual applying for a mortgage is
a cosigner/co-obligor on:
    i. A car loan
    ii. A student loan
    iii. A mortgage, or
    iv. Any other obligation.
    b. If the lender obtains documented proof that the primary obligor
has been making regular payments during the previous 12 months, and
does not have a history of delinquent payments on the loan during that
time, the payment does not have to be included in the borrower's
monthly obligations.

VI. Borrower Liabilities: Projected Obligations and Obligations Not
Considered Debt

1. Projected Obligations

    a. Debt payments, such as a student loan or balloon note scheduled
to begin or come due within 12 months of the mortgage loan closing,
must be included by the lender as anticipated monthly obligations
during the underwriting analysis.
    b. Debt payments do not have to be classified as projected
obligations if the borrower provides written evidence that the debt
will be deferred to a period outside the 12-month timeframe.
    c. Balloon notes that come due within one year of loan closing must
be considered in the underwriting analysis.

2. Obligations Not Considered Debt

    Obligations not considered debt, and therefore not subtracted from
gross income, include
    a. Federal, state, and local taxes
    b. Federal Insurance Contributions Act (FICA) or other retirement
contributions, such as 401(k) accounts (including repayment of debt
secured by these funds)
    c. Commuting costs
    d. Union dues
    e. Open accounts with zero balances
    f. Automatic deductions to savings accounts
    g. Child care, and
    h.Voluntary deductions.

END OF COMMON RULE

Adoption of the Common Rule Text

    The proposed adoption of the common rules by the agencies, as
modified by agency-specific text, is set forth below:

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

List of Subjects in 12 CFR Part 43

    Banks and banking, Credit risk, National banks, Reporting and
recordkeeping requirements, Risk retention, Securitization, Mortgages,
Commercial loans, Commercial real estate, Auto loans.

Authority and Issuance

    For the reasons stated in the Common Preamble, the Office of the
Comptroller of the Currency proposes to amend chapter I of Title 12,
Code of Federal Regulations as follows:

PART 43--CREDIT RISK RETENTION

    1. The authority citation for part 43 is added to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a, 161, 1818, and 15 U.S.C.
78o-11.

    2. Part 43 is added as set forth at the end of the Common Preamble.
    3. Section 43.1 is added to read as follows:

Sec.  43.1  Authority, purpose, scope, and reservation of authority.

    (a) Authority. This part is issued under the authority of 12 U.S.C.
1 et seq., 93a, 161, 1818, and 15 U.S.C. 78o-11.
    (b) Purpose. (1) This part requires securitizers to retain an
economic interest in a portion of the credit risk for any asset that
the securitizer, through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party. This part specifies the
permissible types, forms, and amounts of credit risk retention, and it
establishes certain exemptions for securitizations collateralized by
assets that meet specified underwriting standards.
    (2) Nothing in this part shall be read to limit the authority of
the OCC to take supervisory or enforcement action, including action to
address unsafe or unsound practices or conditions, or violations of
law.
    (c) Scope. This part applies to any securitizer that is a national
bank, a Federal branch or agency of a foreign bank, or an operating
subsidiary thereof.
    (d) Effective dates. This part shall become effective:
    (1) With respect to any securitization transaction collateralized
by residential mortgages, one year after the date on which final rules
under section 15G(b) of the Exchange Act (15 U.S.C. 78o-11(b)) are
published in the Federal Register; and
    (2) With respect to any other securitization transaction, two years
after the date on which final rules under section 15G(b) of the
Exchange Act (15 U.S.C. 78o-11(b)) are published in the Federal
Register.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Chapter II

List of Subjects in 12 CFR Part 244

    Banks and banking, Bank holding companies, State member banks,
Foreign banking organizations, Edge and agreement corporations, Credit
risk, Reporting and recordkeeping requirements, Risk retention,
Securitization, Mortgages, Commercial loans, Commercial real estate,
Auto loans.

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the
Board of Governors of the Federal Reserve System proposes to add the
text of the common rule as set forth at the end of the Supplementary
Information as Part 244 to chapter II of Title 12, Code of Federal
Regulations, modified as follows:

PART 244--CREDIT RISK RETENTION (REGULATION RR)

    4. The authority citation for part 244 is added to read as follows:

    Authority: 12 U.S.C. 221 et seq., 1818, 1841 et seq., 3103 et
seq., and 15 U.S.C. 78o-11.
    5. Section 244.1 is added to read as follows:

Sec.  244.1  Authority, purpose, and scope

    (a) Authority. (1) In general. This part (Regulation RR) is issued
by the Board of Governors of the Federal Reserve System under section
15G of the Securities Exchange Act of 1934, as amended (Exchange Act)
(15 U.S.C. 78o-11), as well as under the Federal Reserve Act, as
amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit
Insurance Act (FDI Act), as amended (12 U.S.C. 1818); the Bank Holding
Company Act of 1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); and
the International Banking Act of 1978, as amended (12 U.S.C. 3101 et
seq.).
    (2) Nothing in this part shall be read to limit the authority of
the Board to take action under provisions of law other than 15 U.S.C.
78o-11, including action to address unsafe or unsound practices or
conditions, or violations of law or regulation, under section 8 of the
FDI Act.
    (b) Purpose. This part requires any securitizer to retain an
economic interest in a portion of the credit risk for any asset that
the securitizer, through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party in a transaction within
the scope of section 15G of the Exchange Act. This part specifies the
permissible types, forms, and amounts of credit risk retention, and
establishes certain exemptions for securitizations collateralized by
assets that meet specified underwriting standards or that otherwise
qualify for an exemption.
    (c) Scope. (1) This part applies to any securitizer that is:
    (i) A state member bank (as defined in 12 CFR 208.2(g)); or
    (ii) Any subsidiary of a state member bank.
    (2) Section 15G of the Exchange Act and the rules issued thereunder
apply to any securitizer that is:
    (i) A bank holding company (as defined in 12 U.S.C. 1842);
    (ii) A foreign banking organization (as defined in 12 CFR
211.21(o));
    (iii) An Edge or agreement corporation (as defined in 12 CFR
211.1(c)(2) and (3));
    (iv) A nonbank financial company that the Financial Stability
Oversight Council has determined under section 113 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12
U.S.C. 5323) shall be supervised by the Board and for which such
determination is still in effect; or
    (v) Any subsidiary of the foregoing. The Federal Reserve will
enforce section 15G of the Exchange Act and the rules issued thereunder
under section 8 of the FDI Act against any of the foregoing entities.
    (3) On and after the transfer date established under section 311 of
the Dodd-Frank Act (12 U.S.C. 5411), the Federal Reserve will enforce
section 15G of the Exchange Act and the rules issued thereunder under
section 8 of the FDI Act against any securitizer that is a savings and
loan holding company and any subsidiary thereof (as defined in 12
U.S.C. 1467a).

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

List of Subjects in 12 CFR Part 373

    Banks, Banking, State nonmember banks, Credit risk, Reporting and
recordkeeping requirements, Risk retention, Securitization, Mortgages,
Commercial loans, Commercial real estate, Auto loans.

Authority and Issuance

    For the reasons set forth in the Supplementary Information, the
Federal Deposit Insurance Corporation proposes to add the text of the
common rule as set forth at the end of the Supplementary Information as
Part 373 to chapter III of Title 12, Code of Federal Regulations,
modified as follows:

PART 373--CREDIT RISK RETENTION

    6. The authority citation for part 373 is added to read as follows:

    Authority: 12 U.S.C. 1801 et seq. and 3103 et seq., and 15
U.S.C. 78o-11.

    7. Section 373.1 is added to read as follows:

Sec.  373.1  Purpose and scope.

    (a) Authority. (1) In general. This part is issued by the Federal
Deposit Insurance Corporation (FDIC) under section 15G of the
Securities Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C.
78o-11), as well as the Federal Deposit Insurance Act (12 U.S.C. 1801
et seq.) and the International Banking Act of 1978, as amended (12
U.S.C. 3101 et seq.).
    (2) Nothing in this part shall be read to limit the authority of
the FDIC to take action under provisions of law other than 15 U.S.C.
78o-11, including to address unsafe or unsound practices or conditions,
or violations of law or regulation under section 8 of the Federal
Deposit Insurance Act (12 U.S.C. 1818).
    (b) Purpose. This part requires securitizers to retain an economic
interest in a portion of the credit risk for any asset that the
securitizer, through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party in a transaction within
the scope of section 15G of the Exchange Act. This part specifies the
permissible types, forms, and amounts of credit risk retention, and it
establishes certain exemptions for securitizations collateralized by
assets that meet specified underwriting standards or that otherwise
qualify for an exemption.
    (c) Scope. This part applies to any securitizer that is:
    (1) A state nonmember bank (as defined in 12 U.S.C. 1813(e)(2));
    (2) An insured federal or state branch of a foreign bank (as
defined in 12 CFR 347.202); or
    (3) Any subsidiary of the foregoing.

FEDERAL HOUSING FINANCE AGENCY

List of Subjects in 12 CFR Part 1234

    Government sponsored enterprises, Mortgages, Securities.

Authority and Issuance

    For the reasons stated in the Supplementary Information, and under
the authority of 12 U.S.C. 4526, the Federal Housing Finance Agency
proposes to add the text of the common rule as set forth at the end of
the Supplementary Information as Part 1234 of subchapter B of chapter
XII of title 12 of the Code of Federal Regulations, modified as
follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

SUBCHAPTER B--ENTITY REGULATIONS

PART 1234--CREDIT RISK RETENTION

    8. The authority citation for part 1234 is added to read as
follows:

    Authority: 12 U.S.C. 4511(b), 4526, 4617; 15 U.S.C. 78o-
11(b)(2).

    9. Section 1234.1 is added to read as follows:

Sec.  1234.1  Purpose, scope and reservation of authority.

    (a) Purpose. This part requires securitizers to retain an economic
interest in a portion of the credit risk for any residential mortgage
asset that the securitizer, through the issuance of an asset-backed
security, transfers, sells, or conveys to a third party in a
transaction within the scope of section 15G of the Exchange Act. This
part specifies the permissible types, forms, and amounts of credit risk
retention, and it establishes certain exemptions for securitizations
collateralized by assets that meet specified underwriting standards or
that otherwise qualify for an exemption.
    (b) Scope. Effective [DATE ONE YEAR AFTER PUBLICATION IN THE
FEDERAL REGISTER AS A FINAL RULE], this part will apply to any
securitizer that is an entity regulated by the Federal Housing Finance
Agency.
    (c) Reservation of authority. Nothing in this part shall be read to
limit the authority of the Director of the Federal Housing Finance
Agency to take supervisory or enforcement action, including action to
address unsafe or unsound practices or conditions, or violations of
law.
    10. Amend Sec.  1234.16 as follows:
    a. Revise the section heading to read as set forth below.
    b. In the introductory text, remove the words ``Sec.  1234.17
through Sec.  1234.20'' and add in their place the words ``Sec.
1234.19''.
    c. Remove the definitions of ``Automobile loan'', ``Commercial
loan'', ``Debt to income (DTI) ratio'', ``Earnings before interest,
taxes, depreciation, and amortization (EBITDA)'', ``Leverage Ratio'',
``Machinery and equipment (M&E) collateral'', ``Model year'', ``New
vehicle'', ``Payment-in-kind (PIK)'', ``Purchase price'', ``Salvage
title'', ``Total debt'', ``Total liabilities ratio'', ``Trade-in
allowance'' and ``Used vehicle''.
    d. Revise the definition of ``Debt service coverage (DSC) ratio''
to read as follows:

Sec.  1234.16  Definitions applicable to qualifying commercial
mortgages.

* * * * *
    Debt service coverage (DSC) ratio means the ratio of:
    (1) The annual NOI less the annual replacement reserve of the CRE
property at the time of origination of the CRE loans; to
    (2) The sum of the borrower's annual payments for principal and
interest on any debt obligation.
* * * * *

Sec. Sec.  1234.17, 1234.18, and 1234.20  [Removed and reserved]

    11. Remove and reserve Sec. Sec.  1234.17, 1234.18 and 1234.20.
    12. Amend Sec.  1234.19 as follows:
    a. Revise the section heading to read as set forth below.
    b. Add introductory text to read as set forth below.

Sec.  1234.19  Exception for qualifying CRE loans.

    The risk retention requirements in subpart B of this part shall not
apply to securitization transactions that satisfy the standards
provided in this section.
* * * * *

SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II

List of Subjects in 17 CFR Part 246

    Reporting and recordkeeping requirements, Securities.

Authority and Issuance

    For the reasons stated in the Supplementary Information, the
Securities and Exchange Commission proposes the amendments to 17 CFR
chapter II under the authority set forth in Sections 7, 10, 19(a), and
28 of the Securities Act and Sections 3, 13, 15, 15G, 23 and 36 of the
Exchange Act.

PART 246--CREDIT RISK RETENTION

    13. The authority citation for part 246 is added to read as
follows:

    Authority: 15 U.S.C. 77g, 77j, 77s, 77z-3, 78c, 78m, 78o, 78o-
11, 78w, 78mm.

    14. Part 246 is added as set forth at the end of the Common
Preamble.
    15. Section 246.1 is added to read as follows:

Sec.  246.1  Authority, purpose and scope.

    (a) Authority and purpose. This part (Regulation RR) is issued by
the Securities and Exchange Commission (``Commission'') jointly with
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, and, in the case of the securitization of any residential
mortgage asset, together with the Secretary of Housing and Urban
Development and the Federal Housing Finance Agency, pursuant to Section
15G of the Securities Exchange Act of 1934 (15 U.S.C. 78o-11). The
Commission also is issuing this part pursuant to its authority under
Sections 7, 10, 19(a), and 28 of the Securities Act and Sections 3, 13,
15, 23, and 36 of the Exchange Act. This part requires securitizers to
retain an economic interest in a portion of the credit risk for any
asset that the securitizer, through the issuance of an asset-backed
security, transfers, sells, or conveys to a third party. This part
specifies the permissible types, forms, and amounts of credit risk
retention, and establishes certain exemptions for securitizations
collateralized by assets that meet specified underwriting standards or
otherwise qualify for an exemption.
    (b) The authority of the Commission under this part shall be in
addition to the authority of the Commission to otherwise enforce the
federal securities laws, including, without limitation, the antifraud
provisions of the securities laws.

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 267

List of Subjects in 24 CFR Part 267

    Mortgages.

Authority and Issuance

    For the reasons stated in the SUPPLEMENTARY INFORMATION, HUD
proposes to add the text of the common rule as set forth at the end of
the SUPPLEMENTARY INFORMATION to 24 CFR chapter II, subchapter B, as a
new part 267 to read as follows:

PART 267--CREDIT RISK RETENTION

    16. The authority citation for part 267 is added to read as
follows:

    Authority: 15 U.S.C. 78-o-11; 42 U.S.C. 3535(d).

    17. Section 267.1 is added to read as follows:

Sec.  267.1  Credit risk retention exceptions and exemptions for HUD
programs.

    The credit risk retention regulations codified at 12 CFR part 43
(Office of the Comptroller of the Currency); 12 CFR part 244 (Federal
Reserve System); 12 CFR part 373 (Federal Deposit Insurance
Corporation); 17 CFR part 246 (Securities and Exchange Commission); and
12 CFR part 1234 (Federal Housing Finance Agency) include exceptions
and exemptions in Subpart D of each of these codified regulations for
certain transactions involving programs and entities under the
jurisdiction of the Department of Housing and Urban Development.

    Dated: March 28, 2011.
John Walsh,
Acting Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve
System, March 30, 2011.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, this 29th of March 2011.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: March 29, 2011.
Edward J. Demarco,
Acting Director, Federal Housing Finance Agency.
    By the Securities and Exchange Commission.

    Dated: March 30, 2011.
Elizabeth M. Murphy,
Secretary.
    Jointly prescribed with the Agencies.

    By the Department of Housing and Urban Development.

    Dated: March 31, 2011.
Shaun Donovan,
Secretary.
[FR Doc. 2011-8364 Filed 4-28-11; 8:45 am]
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