[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Proposed Rules]
[Pages 36252-36264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14919]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 709
RIN 3133-AE41
Safe Harbor
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA Board (``Board'') proposes to amend its regulations
regarding the treatment by the Board, as liquidating agent or
conservator (the ``liquidating agent'' or ``conservator,''
respectively) of a federally insured credit union (``FICU'') of
financial assets transferred by the credit union in connection with a
securitization or a participation. The proposed rule continues the safe
harbor for financial assets transferred in connection with
securitizations and participations in which the financial assets were
transferred in compliance with the existing regulation and defines the
conditions for safe harbor protection for securitizations and
participations for which transfers of financial assets would be made
after the effective date of this proposed rule.
[[Page 36253]]
DATES: Comments must be received on or before August 25, 2014.
ADDRESSES: You may submit comments by any of the following methods
(please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the
instructions for submitting comments.
Email: Address to [email protected]. Include ``[Your
name]--Comments on Proposed Rule--Safe Harbor'' in the email subject
line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Gerard Poliquin, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
FOR FURTHER INFORMATION CONTACT: Dale Klein, Senior Capital Markets
Specialist, Office of Examination and Insurance, at the above address
or telephone (703) 518-6360; or Lisa Henderson, Staff Attorney, Office
of General Counsel, at the above address or telephone (703) 518-6540.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
1. 2000 Rule
2. Modifications to GAAP Accounting Standards
3. FCU Act Changes
4. Why is NCUA proposing this rule?
II. Proposed Rule
1. Generally
2. Capital Structure and Financial Assets
3. Disclosure
4. Documentation and Recordkeeping
5. Compensation
6. Origination and Retention Requirements
7. Additional Conditions
8. The Safe Harbor
9. Consent to Certain Payments and Servicing
10. Miscellaneous
III. Regulatory Procedures
1. Regulatory Flexibility Act
2. Paperwork Reduction Act
3. Executive Order 13132
4. Assessment of Federal Regulations and Policies on Families
I. Background
1. 2000 Rule
In 2000, the Board clarified the scope of its statutory authority
as conservator or liquidating agent to disaffirm or repudiate contracts
of a FICU with respect to transfers of financial assets by a FICU in
connection with a securitization or participation when it adopted a
regulation codified at 12 CFR 709.10 (the ``2000 Rule''). The 2000 Rule
provides that a conservator or liquidating agent will not use its
statutory authority to disaffirm or repudiate contracts to reclaim,
recover, or recharacterize as property of a FICU or the liquidation
estate any financial assets transferred by the FICU in connection with
a securitization or in the form of a participation, provided that such
transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles (``GAAP'').\1\ The rule was a
clarification, rather than a limitation, of the repudiation power. Such
power authorizes the conservator or liquidating agent to disaffirm a
contract or lease entered into by a FICU and be legally excused from
further performance, but it is not an avoiding power enabling the
conservator or liquidating agent to recover assets that were previously
sold and no longer reflected on the books and records of a FICU.
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\1\ NCUA has not previously stated that federal credit unions
(``FCUs'') have the authority to issue asset-backed securities
(``ABS'') and does not believe that any FCUs have done so. NCUA also
does not believe that any state-chartered, federally insured credit
unions (``FISCUs'') have issued ABS. Therefore, the securitization
aspect of the 2000 Rule has not been applied. In connection with
this proposed update to the 2000 Rule, the Board has issued a
companion proposal, published elsewhere in today's Federal Register,
which adds new Sec. 721.3(n) to clarify the authority of FCUs to
securitize assets. If the Board ultimately adopts that rule, and an
FCU (or a FISCU if permitted by state law) issues ABS, these
proposed amendments to Sec. 709.10 are necessary to preserve the
safe harbor established by the current rule.
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The 2000 Rule provided a ``safe harbor'' by confirming ``legal
isolation'' if all other standards for off balance sheet accounting
treatment, along with some additional conditions focusing on the
enforceability of the transaction, were met by the transfer in
connection with a securitization or a participation. Satisfaction of
``legal isolation'' was vital to securitization transactions because of
the risk that the pool of financial assets transferred into the
securitization trust could be recovered in bankruptcy or in a credit
union liquidation. Generally, to satisfy the legal isolation condition,
the transferred financial assets must have been presumptively placed
beyond the reach of the transferor, its creditors, a bankruptcy
trustee, or in the case of a FICU, NCUA as conservator or liquidating
agent. The 2000 Rule, thus, addressed only purported sales which met
the conditions for off balance sheet accounting treatment under GAAP.
However, in recent years, the implementation of new accounting rules
has created uncertainty for potential securitization participants.
2. Modifications to GAAP Accounting Standards
In 2009, the Financial Accounting Standards Board (``FASB'')
finalized modifications to GAAP through Statement of Financial
Accounting Standards No. 166, (now codified in FASB Accounting
Standards Codification (ASC) Topic 860, Transfers and Servicing) and
Statement of Financial Accounting Standards No. 167 (now codified in
FASB ASC Topic 810, Consolidation) (together, the ``2009 GAAP
Modifications''). The 2009 GAAP Modifications made changes that affect
whether a special purpose entity (``SPE'') must be consolidated for
financial reporting purposes, thereby subjecting many SPEs to GAAP
consolidation requirements. These accounting changes may require a FICU
to consolidate an issuing entity to which financial assets have been
transferred for securitization on to its balance sheet for financial
reporting purposes primarily because an affiliate of the FICU retains
control over the financial assets. Given the 2009 GAAP Modifications,
legal and accounting treatment of a transaction may no longer be
aligned. As a result, the safe harbor provision of the 2000 Rule may
not apply to a transfer in connection with a securitization that does
not qualify for off balance sheet accounting treatment.
FASB ASC Topic 860 also affects the treatment of participation
interests transferred by a FICU, in that it defines participating
interests as pari-passu pro-rata interests in financial assets, and
subjects the sale of a participation interest to the same conditions as
the sale of financial assets. FASB ASC Topic 860 provides that
transfers of participation interests that do not qualify for sale
treatment will be viewed as secured borrowings. While the GAAP
modifications have some effect on participations, most participations
are likely to continue to meet the conditions for sale accounting
treatment under GAAP.
3. FCU Act Changes
In 2005, Congress enacted Section 207(c)(13)(C) \2\ of the Federal
Credit Union Act (the ``FCU Act'').\3\ In relevant part, this paragraph
provides that generally no person may exercise any right or power to
terminate, accelerate, or declare a default under a contract to which
the FCU is a party, or obtain possession of or exercise control over
[[Page 36254]]
any property of the FCU, or affect any contractual rights of the FCU,
without the consent of the conservator or liquidating agent, as
appropriate, during the 45-day period beginning on the date of the
appointment of the conservator or the 90-day period beginning on the
date of the appointment of the liquidating agent. If a securitization
is treated as a secured borrowing, section 207(c)(13)(C) could prevent
the investors from recovering monies due to them for up to 90 days.
Consequently, securitized assets that remain property of the FCU (but
subject to a security interest) would be subject to the stay, raising
concerns that any attempt by securitization investors to exercise
remedies with respect to the FCU's assets would be delayed. During the
stay, interest and principal on the securitized debt could remain
unpaid. This 90-day delay could cause substantial downgrades in the
ratings provided on existing securitizations and could prevent planned
securitizations for multiple asset classes, such as credit cards,
automobile loans, and other credits, from being brought to market.
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\2\ 12 U.S.C. 1787(c)(13)(C).
\3\ 12 U.S.C. 1751 et. seq.
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4. Why is NCUA proposing this rule?
The Federal Deposit Insurance Corporation (FDIC) has issued
proposed and final rules to resolve the issues raised by the 2009 GAAP
modifications and parallel 2005 changes to the Federal Deposit
Insurance Act.\4\ This preamble and proposed rule track the language of
the FDIC's final rule, codified at 12 CFR 360.6.
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\4\ 75 FR 60287 (Sept. 30, 2010) (Final Rule); 75 FR 27471 (May
17, 2010) (Proposed Rule).
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The Board believes that several of the issues of concern for
securitization investors and loan participants regarding the impact of
the 2009 GAAP Modifications on the eligibility of transfers of
financial assets for safe harbor protection can be addressed by
clarifying the position of the conservator or liquidating agent under
established law. Under Section 207(c)(12) of the FCU Act,\5\ the
conservator or liquidating agent cannot use its statutory power to
repudiate or disaffirm contracts to avoid a legally enforceable and
perfected security interest in transferred financial assets. This
provision applies whether or not a securitization or participation
transaction meets the conditions for sale accounting. The proposed rule
would clarify that, prior to any monetary default or repudiation, the
conservator or liquidating agent would consent to the making of
required payments of principal and interest and other amounts due on
the securitized obligations during the statutory stay period. In
addition, the proposed rule states that, if the conservator or
liquidating agent decides to repudiate the securitization transaction,
the payment of repudiation damages in an amount equal to the par value
of the outstanding obligations on the date of liquidation will
discharge the lien on the securitization assets. This clarification in
paragraphs (d)(3) and (e) of the proposed rule addresses the scope of
the stay codified in 12 U.S.C. 1787(c)(13)(C).
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\5\ 12 U.S.C. 1787(c)(12).
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A conservator or liquidating agent generally makes a determination
of what constitutes the property of a FICU based on the books and
records of the FICU. If a securitization is reflected on the books and
records of a FICU for accounting purposes, the conservator or
liquidating agent would evaluate all facts and circumstances existing
at the time of conservatorship or liquidation, as applicable, to
determine whether a transaction is a sale under applicable state law or
a secured borrowing. Given the 2009 GAAP Modifications, there may be
circumstances in which a sale transaction will continue to be reflected
on the books and records of the FICU because the FICU or a credit union
service organization controlled by the FICU continues to exercise
control over the assets either directly or indirectly. The proposed
rule would provide comfort that conforming securitizations which do not
qualify for off balance sheet treatment would have access to the assets
in a timely manner irrespective of whether a transaction is viewed as a
legal sale.
If a transfer of financial assets by a FICU to an issuing entity in
connection with a securitization is not characterized as a sale, the
securitized assets would be viewed as subject to a perfected security
interest. This is significant because the conservator or liquidating
agent is prohibited by statute from avoiding a legally enforceable or
perfected security interest, except where such an interest is taken in
contemplation of insolvency or with the intent to hinder, delay, or
defraud the institution or the creditors of such institution.\6\
Consequently, the ability of the conservator or liquidating agent to
reach financial assets transferred by a FICU to an issuing entity in
connection with a securitization, if such transfer is characterized as
a transfer for security, is limited by the combination of the status of
the entity as a secured party with a perfected security interest in the
transferred assets and the statutory provision that prohibits the
conservator or liquidating agent from avoiding a legally enforceable or
perfected security interest.
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\6\ 12 U.S.C. 1787(c)(12).
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Thus, for securitizations that are consolidated on the books of a
FICU, the proposed rule would provide a meaningful safe harbor
irrespective of the legal characterization of the transfer. There are
two situations in which consent to expedited access to transferred
assets would be given--(i) monetary default under a securitization by
the conservator or liquidating agent or (ii) repudiation of the
securitization agreements by the conservator or liquidating agent. The
proposed rule provides that in the event of a monetary default under
the securitization documents and the default continues for a period of
ten business days after written notice of the default, the conservator
or liquidating agent will be deemed to consent pursuant to 12 U.S.C.
1787(c)(13)(C) to the exercise of contractual rights under the
documents on account of such monetary default, and such consent shall
constitute satisfaction in full of obligations of the FICU and the
conservator or liquidating agent to the holders of the securitization
obligations.
The proposed rule also provides that, in the event the conservator
or liquidating agent repudiates the securitization asset transfer
agreement, the conservator or liquidating agent shall have the right to
discharge the lien on the financial assets included in the
securitization by paying damages in an amount equal to the par value of
the obligations in the securitization on the date of the appointment of
the conservator or liquidating agent, less any principal payments made
to the date of repudiation. If such damages are not paid within ten
business days of repudiation, NCUA will be deemed to consent pursuant
to 12 U.S.C. 1787(c)(13)(C) to the exercise of contractual rights under
the securitization agreements.
The proposed rule would also confirm that, if the transfer of the
assets is viewed as a sale for accounting purposes (and thus the assets
are not reflected on the books of a FICU), as the conservator or
liquidating agent would not reclaim, recover, or recharacterize as
property of the FICU or the liquidation estate assets of a
securitization through repudiation or otherwise, but only if the
transactions comply with the requirements set forth in paragraphs (b)
and (c) of the proposed rule. The treatment of off balance sheet
transfers of the proposed rule is consistent with the safe harbor under
the 2000 Rule.
Pursuant to 12 U.S.C. 1787(c)(13)(C), no person may exercise any
right or
[[Page 36255]]
power to terminate, accelerate, or declare a default under a contract
to which the FICU is a party, or to obtain possession of or exercise
control over any property of the FICU, or affect any contractual rights
of the FICU, without the consent of the conservator or liquidating
agent, as appropriate, during the 45-day period beginning on the date
of the appointment of the conservator or the 90-day period beginning on
the date of the appointment of the liquidating agent. In order to
address concerns that the statutory stay could delay repayment of
investors in a securitization or delay a secured party from exercising
its rights with respect to securitized financial assets, the proposed
rule provides for the consent by the conservator or liquidating agent,
subject to certain conditions, to the continued making of required
payments under the securitization documents and continued servicing of
the assets, as well as the ability to exercise self-help remedies after
a payment default by NCUA or the repudiation of a securitization asset
transfer agreement during the stay period of 12 U.S.C. 1787(c)(13)(C).
II. Proposed Rule
1. Generally
The proposed rule would replace the 2000 Rule. Paragraph (a) of the
proposed rule sets forth definitions of terms used in the proposed
rule. It retains many of the definitions used in the 2000 Rule but
modifies or adds definitions to the extent necessary to accurately
reflect current industry practice in securitizations. Pursuant to these
definitions, the safe harbor does not apply to certain government
sponsored enterprises (``Specified GSEs''), affiliates of certain such
enterprises, or any entity established or guaranteed by those GSEs. In
addition, the proposed rule is not intended to apply to the Government
National Mortgage Association (``Ginnie Mae'') or Ginnie Mae-guaranteed
securitizations. When Ginnie Mae guarantees a security, the mortgages
backing the security are assigned to Ginnie Mae, an entity owned
entirely by the United States government. Ginnie Mae's statute contains
broad authority to enforce its contract with the lender/issuer and its
ownership rights in the mortgages backing Ginnie Mae-guaranteed
securities. In the event that an entity otherwise subject to the
proposed rule issues both guaranteed and non-guaranteed
securitizations, the securitizations guaranteed by a Specified GSE are
not subject to the proposed rule.
Paragraph (b) of the proposed rule imposes conditions to the
availability of the safe harbor for transfers of financial assets to an
issuing entity in connection with a securitization. These conditions
make a clear distinction between the conditions imposed on residential
mortgage-backed securities (``RMBS'') from those imposed on
securitizations for other asset classes. In the context of a
conservatorship or liquidation, the conditions applicable to all
securitizations will improve overall transparency and clarity through
disclosure and documentation requirements along with ensuring effective
incentives for prudent lending by requiring that the payment of
principal and interest be based primarily on the performance of the
financial assets and by requiring retention of a share of the credit
risk in the securitized loans.
The conditions applicable to RMBS are more detailed and include
additional capital structure, disclosure, documentation and
compensation requirements as well as a requirement for the
establishment of a reserve fund. These requirements are intended to
address the factors that caused significant losses in RMBS
securitization structures as demonstrated in the recent crisis.
Confidence can be restored in RMBS markets only through greater
transparency and other structures that support sustainable mortgage
origination practices and require increased disclosures. These
standards respond to investor demands for greater transparency and
alignment of the interests of parties to the securitization. In
addition, they are generally consistent with industry efforts while
taking into account legislative and regulatory initiatives.
2. Capital Structure and Financial Assets
For all securitizations, the benefits of the proposed rule should
be available only to securitizations that are readily understood by the
market, increase liquidity of the financial assets, and reduce consumer
costs. Consistent with the Security and Exchange Commission's
(``SEC's'') new Regulation AB, the documents governing the
securitization will be required to provide that there be financial
asset level disclosure as appropriate to the securitized financial
assets for any re-securitizations (securitizations supported by other
securitization obligations). These disclosures must include full
disclosure of the obligations, including the structure and the assets
supporting each of the underlying securitization obligations, and not
just the obligations that are transferred in the re-securitization.
This requirement applies to all re-securitizations, including static
re-securitizations as well as managed collateralized debt obligations.
The proposed rule provides that securitizations that are unfunded
or synthetic transactions are not eligible for expedited consent. To
support sound lending, the documents governing all securitizations must
require that payments of principal and interest on the obligations be
primarily dependent on the performance of the financial assets
supporting the securitization and that such payments not be contingent
on market or credit events that are independent of the assets
supporting the securitization, except for interest rate or currency
mismatches between the financial assets and the obligations to
investors.
For RMBS only, the proposed rule limits the capital structure of
the securitization to six tranches or fewer to discourage complex and
opaque structures. The most senior tranche could include time-based
sequential pay or planned amortization and companion sub-tranches,
which are not viewed as separate tranches for the purpose of the six
tranche requirement. This condition will not prevent an issuer from
creating the economic equivalent of multiple tranches by re-
securitizing one or more tranches, so long as they meet the conditions
set forth in the rule, including adequate disclosure in connection with
the re-securitization. In addition, RMBS cannot include leveraged
tranches that introduce market risks (such as leveraged super senior
tranches). Although the financial assets transferred into an RMBS will
be permitted to benefit from asset level credit support, such as
guarantees (including guarantees provided by governmental agencies,
private companies, or government-sponsored enterprises), co-signers, or
insurance, the RMBS cannot benefit from external credit support at the
issuing entity or pool level. It is intended that guarantees permitted
at the asset level include guarantees of payment or collection, but not
credit default swaps or similar items. The temporary payment of
principal and interest, however, can be supported by liquidity
facilities. These conditions are designed to limit both the complexity
and the leverage of an RMBS and therefore the systemic risks introduced
by them in the market. In addition, the proposed rule provides that the
securitization obligations can be enhanced by credit support or
guarantees provided by Specified GSEs.
[[Page 36256]]
However, as noted in the discussion of the definitions above, a
securitization that is wholly guaranteed by a Specified GSE is not
subject to the proposed rule and thus not eligible for the safe harbor.
In formulating the proposed rule, NCUA was mindful of the need to
permit innovation and accommodate financing needs, and thus attempted
to strike a balance between permitting multi-tranche structures for
RMBS transactions, on the one hand, and promoting readily
understandable securitization structures and limiting overleveraging of
residential mortgage assets, on the other hand.
NCUA is of the view that permitting pool level, external credit
support in an RMBS can lead to overleveraging of assets, as investors
might focus on the credit quality of the credit support provider as
opposed to the sufficiency of the financial asset pool to service the
securitization obligations. However, the proposed rule permits pool
level credit support by Specified GSEs.
Finally, although the proposed rule excludes unfunded and synthetic
securitizations from the safe harbor, NCUA does not view the inclusion
of existing credit lines that are not fully drawn in a securitization
as causing such securitization to be an ``unfunded securitization.''
The provision is intended to emphasize that the proposed rule applies
only where there is an actual transfer of financial assets. In
addition, to the extent an unfunded or synthetic transaction qualifies
for treatment as a qualified financial contract under Section 207(c) of
the FCU Act, it would not need the benefits of the safe harbor provided
in the proposed rule in an NCUA liquidation.\7\
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\7\ 12 U.S.C. 1787(c)(10).
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3. Disclosure
For all securitizations, disclosure serves as an effective tool for
increasing the demand for high quality financial assets and thereby
establishing incentives for robust financial asset underwriting and
origination practices. By increasing transparency in securitizations,
the proposed rule would enable investors to decide whether to invest in
a securitization based on full information with respect to the quality
of the asset pool and thereby provide additional liquidity only for
sustainable origination practices.
The data must enable investors to analyze the credit quality for
the specific asset classes that are being securitized. The documents
governing securitizations must, at a minimum, require disclosure for
all issuances to include the types of information required under
current Regulation AB or any successor disclosure requirements with the
level of specificity that applies to public issuances, even if the
obligations are issued in a private placement or are not otherwise
required to be registered.
The documents governing securitizations that will qualify under the
proposed rule must require disclosure of the structure of the
securitization and the credit and payment performance of the
obligations, including the relevant capital or tranche structure and
any liquidity facilities and credit enhancements. The disclosure must
be required to include the priority of payments and any specific
subordination features, as well as any waterfall triggers or priority
of payment reversal features. The disclosure at issuance will also be
required to include the representations and warranties made with
respect to the financial assets and the remedies for breach of such
representations and warranties, including any relevant timeline for
cure or repurchase of financial assets, and policies governing
delinquencies, servicer advances, loss mitigation and write offs of
financial assets. The documents must also require that periodic reports
provided to investors include the credit performance of the obligations
and financial assets, including periodic and cumulative financial asset
performance data, modification data, substitution and removal of
financial assets, servicer advances, losses that were allocated to each
tranche and remaining balance of financial assets supporting each
tranche as well as the percentage coverage for each tranche in relation
to the securitization as a whole. Where appropriate for the type of
financial assets included in the pool, reports must also include asset
level information that may be relevant to investors (e.g. changes in
occupancy, loan delinquencies, defaults, etc.). NCUA recognizes that
for certain asset classes, such as credit card receivables, the
disclosure of asset level information is less informative and, thus,
will not be required.
The securitization documents must also require disclosure to
investors of the nature and amount of compensation paid to any mortgage
or other broker, the servicer(s), rating agency or third-party advisor,
and the originator or sponsor, and the extent to which any risk of loss
on the underlying financial assets is retained by any of them for such
securitization. The documents must also require disclosure of changes
to this information while obligations are outstanding. This disclosure
should enable investors to assess potential conflicts of interests and
how the compensation structure affects the quality of the assets
securitized or the securitization as a whole.
For RMBS, loan level data as to the financial assets securing the
mortgage loans, such as loan type, loan structure, maturity, interest
rate and location of property, will also be required to be disclosed by
the sponsor. Sponsors of securitizations of residential mortgages will
be required to affirm compliance in all material respects with
applicable statutory and regulatory standards for origination of
mortgage loans. None of the disclosure conditions should be construed
as requiring the disclosure of personally identifiable information of
obligors or information that would violate applicable privacy laws. The
proposed rule also requires sponsors to disclose a third party due
diligence report on compliance with such standards and the
representations and warranties made with respect to the financial
assets.
Finally, the proposed rule requires that the securitization
documents require the disclosure by servicers of any ownership interest
of the servicer or any affiliate of the servicer in other whole loans
secured by the same real property that secures a loan included in the
financial asset pool. This provision does not require disclosure of
interests held by servicers or their affiliates in the securitization
securities. This provision is intended to give investors information to
evaluate potential servicer conflicts of interest that might impede the
servicer's actions to maximize value for the benefit of investors.
4. Documentation and Recordkeeping
For all securitizations, the operative agreements are required to
use as appropriate available standardized documentation for each
available asset class. It is not possible to define in advance when use
of standardized documentation will be appropriate, but certainly when
there is general market use of a form of documentation for a particular
asset class, or where a trade group has formulated standardized
documentation generally accepted by the industry, such documentation
must be used.
The proposed rule also requires that the securitization documents
define the contractual rights and responsibilities of the parties,
including but not limited to representations and warranties, ongoing
disclosure requirements and any measures to avoid conflicts of
interest. The documents are also required to provide authority for the
parties to
[[Page 36257]]
fulfill their rights and responsibilities under the securitization
contracts.
Additional conditions apply to RMBS to address a significant issue
that has been demonstrated in the mortgage crisis by requiring that
servicers have the authority to mitigate losses on mortgage loans
consistent with maximizing the net present value of the mortgages.
Therefore, for RMBS, contractual provisions in the servicing agreement
must provide servicers with the authority to modify loans to address
reasonably foreseeable defaults and to take other action to maximize
the value and minimize losses on the securitized financial assets. The
documents must require servicers to apply industry best practices
related to asset management and servicing.
The RMBS documents may not give control of servicing discretion to
a particular class of investors. The documents must require that the
servicer act for the benefit of all investors rather for the benefit of
any particular class of investors. Consistent with the forgoing, the
documents must require the servicer to commence action to mitigate
losses no later than ninety days after an asset first becomes
delinquent unless all delinquencies on such asset have been cured. A
servicer must also be required to maintain sufficient records of its
actions to permit appropriate review of its actions.
NCUA believes that a prolonged period of servicer advances in a
market downturn misaligns servicer incentives with those of the RMBS
investors. Servicing advances also serve to aggravate liquidity
concerns, exposing the market to greater systemic risk. Occasional
advances for late payments, however, are beneficial to ensure that
investors are paid in a timely manner. To that end, the servicing
agreement for RMBS must not require the primary servicer to advance
delinquent payments of principal and interest by borrowers for more
than three payment periods unless financing or reimbursement facilities
to fund or reimburse the primary servicers are available. However, such
facilities shall not be dependent for repayment on foreclosure
proceeds.
5. Compensation
The compensation requirements of the proposed rule apply only to
RMBS. Due to the demonstrated issues in the compensation incentives in
RMBS, in this asset class the proposed rule seeks to realign
compensation to parties involved in the rating and servicing of
residential mortgage securitizations.
The securitization documents are required to provide that any fees
payable credit rating agencies or similar third-party evaluation
companies must be payable in part over the five year period after the
initial issuance of the obligations based on the performance of
surveillance services and the performance of the financial assets, with
no more than sixty percent of the total estimated compensation due at
closing. Thus payments to rating agencies must be based on the actual
performance of the financial assets, not their ratings.
A second area of concern is aligning incentives for proper
servicing of the mortgage loans. Therefore, the documents must require
that compensation to servicers must include incentives for servicing,
including payment for loan restructuring or other loss mitigation
activities, which maximizes the net present value of the financial
assets in the RMBS.
6. Origination and Retention Requirements
To provide further incentives for quality origination practices,
several conditions address origination and retention requirements for
all securitizations. For all securitizations, the sponsor must retain
an economic interest in a material portion, defined as not less than
five percent, of the credit risk of the financial assets.\8\ The
retained interest may be either in the form of an interest of not less
than five percent in each credit tranche or in a representative sample
of the securitized financial assets equal to not less than five percent
of the principal amount of the financial assets at transfer. This
retained interest cannot be sold, pledged or hedged during the life of
the transaction, except for the hedging of interest rate. If required
to retain an economic interest in the asset pool without hedging the
credit risk of such portion, the sponsor will be less likely to
originate low quality financial assets. The proposed rule provides that
upon the effective date of final regulations required by Section 941(b)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act, such
final regulations shall exclusively govern the requirement to retain an
economic interest in a portion of the credit risk of the financial
assets under the proposed rule.
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\8\ For loan participations, an originating lender that is an
FCU must retain an interest of at least 10 percent of the
outstanding balance of the loan. 12 U.S.C. 1757(5)(E); 12 CFR
701.22(b)(3). An originating lender that is a FISCU must retain an
interest of at least 5 percent of the outstanding balance of the
loan, unless a higher percentage is required by state law. 12 CFR
701.22(b)(3).
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The proposed rule requires that RMBS securitization documents
require that a reserve fund be established in an amount equal to at
least five percent of the cash proceeds due to the sponsor and that
this reserve be held for twelve months to cover any repurchases
required for breaches of representations and warranties. This reserve
fund will ensure that the sponsor bears a significant risk for poorly
underwritten loans during the first year of the securitization. In
addition, the securitization documents must include a representation
that residential mortgage loans in an RMBS have been originated in all
material respects in compliance with statutory, regulatory and
originator underwriting standards in effect at the time of origination.
NCUA believes that requiring the sponsor to retain an economic
interest in the credit risk relating to each credit tranche or in a
representative sample of financial assets will help ensure quality
origination practices. A risk retention requirement that did not cover
all types of exposure would not be sufficient to create an incentive
for quality underwriting at all levels of the securitization. The
recent economic crisis made clear that, if quality underwriting is to
be assured, it will require true risk retention by sponsors, and that
the existence of representations and warranties or regulatory standards
for underwriting will not alone be sufficient.
7. Additional Conditions
Paragraph (c) of the proposed rule includes general conditions for
securitizations and the transfer of financial assets. These conditions
also include requirements that are consistent with good financial
institution practices.
The transaction should be an arms-length, bona fide securitization
transaction and the documents must limit sales to credit union service
organizations in which the sponsor credit union has an interest (other
than a wholly-owned credit union service organization consolidated for
accounting and capital purposes with the credit union), and insiders of
the sponsor. The securitization agreements must be in writing, approved
by the board of directors of the credit union or its loan committee (as
reflected in the minutes of a meeting of the board of directors or
committee), and have been, continuously, from the time of execution, in
the official record of the credit union. The securitization also must
have been entered into in the ordinary course of business, not in
contemplation of insolvency and with no intent to hinder, delay or
defraud the credit union or its creditors.
[[Page 36258]]
The proposed rule applies only to transfers made for adequate
consideration. The transfer and/or security interest need to be
properly perfected under the UCC or applicable state law. NCUA
anticipates that it will be difficult to determine whether a transfer
complying with the proposed rule is a sale or a security interest, and
therefore expects that a security interest will be properly perfected
under the UCC, either directly or as a backup.
The governing documents must require that the sponsor separately
identify in its financial asset data bases the financial assets
transferred into a securitization and maintain an electronic or paper
copy of the closing documents in a readily accessible form, and that
the sponsor maintain a current list of all of its outstanding
securitizations and issuing entities, and the most recent SEC Form 10-K
or other periodic financial report for each securitization and issuing
entity. The documents must also provide that if acting as servicer,
custodian or paying agent, the sponsor is not permitted to commingle
amounts received with respect to the financial assets with its own
assets except for the time necessary to clear payments received, and in
event for more than two business days. The documents must require the
sponsor to make these records available to NCUA promptly upon request.
This requirement will facilitate the timely fulfillment of the
conservator's or liquidating agent's responsibilities upon appointment
and will expedite the conservator's or liquidating agent's analysis of
securitization assets. This will also facilitate the conservator's or
liquidating agent's analysis of the credit union's assets and
determination of which assets have been securitized and are therefore
potentially eligible for expedited access by investors.
In addition, the proposed rule requires that the transfer of
financial assets and the duties of the sponsor as transferor be
evidenced by an agreement separate from the agreement governing the
sponsor's duties, if any, as servicer, custodian, paying agent, credit
support provider or in any capacity other than transferor.
8. The Safe Harbor
Paragraph (d)(1) of the proposed rule continues the safe harbor
provision that was provided by the 2000 Rule with respect to
participations so long as the participation satisfies the conditions
for sale accounting treatment set forth by generally accepted
accounting principles. In addition, last-in first-out participations
are specifically included in the safe harbor, provided that they
satisfy requirements for sale accounting treatment other than the pari-
passu, proportionate interest requirement that is not satisfied solely
as a result of the last-in first-out structure.
Paragraph (d)(2) of the Rule addresses transfers of financial
assets made in connection with a securitization for which transfers of
financial assets are made after the effective date of this rule or
securitizations from a master trust or revolving trust established
after the date of adoption of this rule, that (in each case) satisfy
the conditions for sale accounting treatment under GAAP in effect for
reporting periods after November 15, 2009. For such securitizations,
NCUA as conservator or liquidating agent will not, in the exercise of
its statutory authority to disaffirm or repudiate contracts, reclaim,
recover, or recharacterize as property of the institution or the
liquidation estate any such transferred financial assets, provided that
such securitizations comply with the conditions set forth in paragraphs
(b) and (c) of the proposed rule.
Paragraph (d)(3) of the Rule addresses transfers of financial
assets in connection with a securitization for which transfers of
financial assets were made after the effective date of this rule or
securitizations from a master trust or revolving trust established
after the date of adoption of the rule, that (in each case) satisfy the
conditions set forth in paragraphs (b) and (c), but where the transfer
does not satisfy the conditions for sale accounting treatment under
GAAP in effect for reporting periods after November 15, 2009.
Paragraph (d)(3)(i) provides that if the conservator or liquidating
agent is in monetary default due to its failure to pay or apply
collections from the financial assets received by it in accordance with
the securitization documents, and remains in monetary default for ten
business days after actual delivery of a written notice to the
conservator or liquidating agent requesting exercise of contractual
rights because of such default, the conservator or liquidating agent
consents to the exercise of such contractual rights, including any
rights to obtain possession of the financial assets or the exercise of
self-help remedies as a secured creditor, provided that no involvement
of the conservator or liquidating agent is required, other than
consents, waivers or the execution of transfer documents reasonably
requested in the ordinary course of business in order facilitate the
exercise of such contractual rights. This paragraph also provides that
the consent to the exercise of such contractual rights shall serve as
full satisfaction for all amounts due.
Paragraph (d)(3)(ii) provides that, if the conservator or
liquidating agent gives a written notice of repudiation of the
securitization agreement pursuant to which assets were transferred and
does not pay the damages due by reason of such repudiation within ten
business days following the effective date of the notice, the
conservator or liquidating agent consents to the exercise of any
contractual rights, including any rights to obtain possession of the
financial assets or the exercise of self-help remedies as a secured
creditor, provided that no involvement of the conservator or
liquidating agent is required other than consents, waivers or the
execution of transfer documents reasonably requested in the ordinary
course of business in order facilitate the exercise of such contractual
rights. Paragraph 3(d)(ii) also provides that the damages due for these
purposes shall be an amount equal to the par value of the obligations
outstanding on the date of liquidation less any payments of principal
received by the investors through the date of repudiation, plus unpaid,
accrued interest through the date of repudiation to the extent actually
received through payments on the financial assets received through the
date of repudiation, and that upon receipt of such payment all liens on
the financial assets created pursuant to the securitization documents
shall be released.
In computing amounts payable as repudiation damages, consistent
with the FCU Act, the conservator or liquidating agent will not give
effect to any provisions of the securitization documents increasing the
amount payable based on the appointment of as the conservator or
liquidating agent.\9\ The proposed rule clarifies that repudiation
damages will be equal to the par value of the obligations as of the
date of liquidation, less payments of principal received by the
investors to the date of repudiation, plus unpaid, accrued interest
through the date of repudiation to the extent actually received through
payments on the financial assets received through the date of
repudiation. The proposed rule also provides that the conservator or
liquidating agent consents to the exercise of remedies by investors,
including self-help remedies as secured creditors, in the event that
NCUA repudiates a securitization transfer agreement and does not pay
damages in such amount within ten business days following the effective
date of notice of
[[Page 36259]]
repudiation. Thus, if NCUA repudiates and the investors are not paid
the par value of the securitization obligations, plus unpaid, accrued
interest through the date of repudiation to the extent actually
received through payments on the financial assets received through the
date of repudiation, they will be permitted to obtain the asset pool.
Accordingly, exercise by the conservator or the liquidating agent of
its repudiation rights will not expose investors to market value risks
relating to the asset pool.
---------------------------------------------------------------------------
\9\ 12 U.S.C. 1787(c)(13).
---------------------------------------------------------------------------
9. Consent to Certain Payments and Servicing
Paragraph (e) provides that prior to repudiation or, in the case of
monetary default, prior to the effectiveness of the consent referred to
in paragraph (d)(3)(i), the conservator or liquidating agent consents
to the making of, or if acting as servicer agrees to make, required
payments to the investors during the stay period imposed by 12 U.S.C.
1787(c)(13)(C). The proposed rule also provides that the conservator or
liquidating agent consents to any servicing activity required in
furtherance of the securitization (subject to its rights to repudiate
the servicing agreements), in connection with securitizations that meet
the conditions set forth in paragraphs (b) and (c) of the proposed
rule.
10. Miscellaneous
Paragraph (f) requires that any party requesting consent pursuant
to paragraph (d)(3), provide notice to the conservator or liquidating
agent, together with a statement of the basis upon which the request is
made, together with copies of all documentation supporting the request.
This includes a copy of the applicable agreements (such as the transfer
agreement and the security agreement) and of any applicable notices
under the agreements.
Paragraph (g) provides that the conservator or liquidating agent
will not seek to avoid an otherwise legally enforceable agreement that
is executed by a FICU in connection with a securitization solely
because the agreement does not meet the ``contemporaneous'' requirement
of 12 U.S.C. 1787(b)(9) and 1788(a)(3).
Paragraph (h) of the proposed rule provides that the consents set
forth in the proposed rule will not act to waive or relinquish any
rights granted to NCUA, the conservator, or the liquidating agent, in
any capacity, pursuant to any other applicable law or any agreement or
contract except as specifically set forth in the proposed rule, and
nothing contained in the section will alter the claims priority of the
securitized obligations.
Paragraph (i) provides that except as specifically set forth in the
proposed rule, the proposed rule does not authorize, and shall not be
construed as authorizing the attachment of any involuntary lien upon
the property of the conservator or liquidating agent. The proposed rule
should not be construed as waiving, limiting or otherwise affecting the
rights or powers of NCUA, the conservator, or the liquidating agent to
take any action or to exercise any power not specifically mentioned,
including but not limited to any rights, powers or remedies of the
conservator or the liquidating agent regarding transfers taken in
contemplation of the FICU's insolvency or with the intent to hinder,
delay or defraud the FICU, or the creditors of such FICU, or that is a
fraudulent transfer under applicable law.
The right to consent under 12 U.S.C. 1787(c)(13)(C) may not be
assigned or transferred to any purchaser of property from a conservator
or liquidating agent, other than to a conservator or bridge credit
union. The rule can be repealed by NCUA upon 30 days notice provided in
the Federal Register, but any repeal will not apply to any issuance
that complied with the rule before such repeal.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
of any significant economic impact any proposed regulation may have on
a substantial number of small entities (primarily those under $50
million in assets).\10\ The proposed rule will only apply to the
largest credit unions, as they are the only ones with the
infrastructure and resources to securitize assets. Accordingly, it will
not have an economic impact on small credit unions.
---------------------------------------------------------------------------
\10\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
---------------------------------------------------------------------------
2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or increases an existing burden.\11\ For purposes of the PRA,
a paperwork burden may take the form of a reporting or recordkeeping
requirement, both referred to as information collections. The proposed
changes to part 709 impose new information collection requirements. As
required by the PRA, NCUA is submitting a copy of this proposal to OMB
for its review and approval. Persons interested in submitting comments
with respect to the information collection aspects of the proposed rule
should submit them to OMB at the address noted below.
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\11\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------
a. Estimated PRA Burden
The information collection requirements are related to federal
security filings, which NCUA estimates will take a total of 83.5 hours
per year to complete. As NCUA further estimates that only one FCU will
undertake asset securitization activities, the annual paperwork burden
is 83.5 hours.
b. Submission of Comments
NCUA considers comments by the public on this proposed collection
of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of NCUA,
including whether the information will have a practical use;
evaluating the accuracy of NCUA's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
enhancing the quality, usefulness, and clarity of the
information to be collected; and
minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses.
The PRA requires OMB to make a decision concerning the collection
of information contained in the proposed regulation between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to NCUA on the substantive
aspects of the proposed regulation.
Comments on the proposed information collection requirements should
be sent to: Office of Information and Regulatory Affairs, OMB, New
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk
Officer, with a copy to Tracy Crews at the National Credit Union
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.
[[Page 36260]]
3. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The proposed rule does not have substantial
direct effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. NCUA has,
therefore, determined that this proposal does not constitute a policy
that has federalism implications for purposes of the executive order.
4. Assessment of Federal Regulations and Policies on Families
NCUA has determined that this proposed rule will not affect family
well-being within the meaning of Sec. 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
List of Subjects
12 CFR Part 709
Credit unions, Liquidations.
By the National Credit Union Administration Board, on June 19,
2014.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration proposes to amend part 709 as follows:
PART 709--INVOLUNTARY LIQUIDATION OF FEDERAL CREDIT UNIONS AND
ADJUDICATION OF CREDITOR CLAIMS INVOLVING FEDERALLY INSURED CREDIT
UNIONS IN LIQUIDATION
0
1. The authority citation for part 709 continues to read as follows:
Authority: 12 U.S.C. 1757, 1766, 1767, 1786(h), 1787, 1789,
1789a.
0
2. Revise Sec. 709.10 to read as follows:
Sec. 709.10 Treatment of financial assets transferred in connection
with a securitization or participation.
(a) Definitions.
Financial asset means cash or a contract or instrument that conveys
to one entity a contractual right to receive cash or another financial
instrument from another entity.
Investor means a person or entity that owns an obligation issued by
an issuing entity.
Issuing entity means an entity that owns a financial asset or
financial assets transferred by the sponsor and issues obligations
supported by such asset or assets. Issuing entities may include, but
are not limited to, corporations, partnerships, trusts, and limited
liability companies and are commonly referred to as special purpose
vehicles or special purpose entities. To the extent a securitization is
structured as a multi-step transfer, the term issuing entity would
include both the issuer of the obligations and any intermediate
entities that may be a transferee. Notwithstanding the foregoing, a
Specified GSE or an entity established or guaranteed by a Specified GSE
does not constitute an issuing entity.
Monetary default means a default in the payment of principal or
interest when due following the expiration of any cure period.
Obligation means a debt or equity (or mixed) beneficial interest or
security that is primarily serviced by the cash flows of one or more
financial assets or financial asset pools, either fixed or revolving,
that by their terms convert into cash within a finite time period, or
upon the disposition of the underlying financial assets, and by any
rights or other assets designed to assure the servicing or timely
distributions of proceeds to the security holders issued by an issuing
entity. The term may include beneficial interests in a grantor trust,
common law trust or similar issuing entity to the extent that such
interests satisfy the criteria set forth in the preceding sentence, but
does not include LLC interests, partnership interests, common or
preferred equity, or similar instruments evidencing ownership of the
issuing entity.
Participation means the transfer or assignment of an undivided
interest in all or part of a financial asset, that has all of the
characteristics of a ``participating interest,'' from a seller, known
as the ``lead,'' to a buyer, known as the ``participant,'' without
recourse to the lead, pursuant to an agreement between the lead and the
participant. ``Without recourse'' means that the participation is not
subject to any agreement that requires the lead to repurchase the
participant's interest or to otherwise compensate the participant upon
the borrower's default on the underlying obligation.
Securitization means the issuance by an issuing entity of
obligations for which the investors are relying on the cash flow or
market value characteristics and the credit quality of transferred
financial assets (together with any external credit support permitted
by this section) to repay the obligations.
Servicer means any entity responsible for the management or
collection of some or all of the financial assets on behalf of the
issuing entity or making allocations or distributions to holders of the
obligations, including reporting on the overall cash flow and credit
characteristics of the financial assets supporting the securitization
to enable the issuing entity to make payments to investors on the
obligations. The term ``servicer'' does not include a trustee for the
issuing entity or the holders of obligations that makes allocations or
distributions to holders of the obligations if the trustee receives
such allocations or distributions from a servicer and the trustee does
not otherwise perform the functions of a servicer.
Specified GSE means each of the following: (i) The Federal National
Mortgage Association and any affiliate thereof; (ii) Federal Home Loan
Mortgage Corporation and any affiliate thereof; (iii) the Government
National Mortgage Association; and (iv) any federal or state sponsored
mortgage finance agency.
Sponsor means a person or entity that organizes and initiates a
securitization by transferring financial assets, either directly or
indirectly, including through an affiliate, to an issuing entity,
whether or not such person owns an interest in the issuing entity or
owns any of the obligations issued by the issuing entity.
Transfer means: (i) The conveyance of a financial asset or
financial assets to an issuing entity; or (ii) the creation of a
security interest in such asset or assets for the benefit of the
issuing entity.
(b) Coverage. This section applies to securitizations that meet the
following criteria:
(1) Capital structure and financial assets. The documents creating
the securitization must define the payment structure and capital
structure of the transaction.
(i) Requirements applicable to all securitizations:
(A) The securitization may not consist of re-securitizations of
obligations or collateralized debt obligations unless the documents
creating the securitization require that disclosures required in
paragraph (b)(2) of this section are made available to investors for
the underlying assets supporting the securitization at initiation and
while obligations are outstanding; and
(B) The documents creating the securitization must require that
payment of principal and interest on the securitization obligation will
be primarily based on the performance of
[[Page 36261]]
financial assets that are transferred to the issuing entity and, except
for interest rate or currency mismatches between the financial assets
and the obligations, will not be contingent on market or credit events
that are independent of such financial assets. The securitization may
not be an unfunded securitization or a synthetic transaction.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) The capital structure of the securitization must be limited to
no more than six credit tranches and cannot include ``sub-tranches,''
grantor trusts or other structures. Notwithstanding the foregoing, the
most senior credit tranche may include time-based sequential pay or
planned amortization and companion sub-tranches; and
(B) The credit quality of the obligations cannot be enhanced at the
issuing entity or pool level through external credit support or
guarantees. However, the credit quality of the obligations may be
enhanced by credit support or guarantees provided by Specified GSEs and
the temporary payment of principal and/or interest may be supported by
liquidity facilities, including facilities designed to permit the
temporary payment of interest following appointment of the NCUA Board
as conservator or liquidating agent. Individual financial assets
transferred into a securitization may be guaranteed, insured, or
otherwise benefit from credit support at the loan level through
mortgage and similar insurance or guarantees, including by private
companies, agencies or other governmental entities, or government-
sponsored enterprises, and/or through co-signers or other guarantees.
(2) Disclosures. The documents must require that the sponsor,
issuing entity, and/or servicer, as appropriate, will make available to
investors, information describing the financial assets, obligations,
capital structure, compensation of relevant parties, and relevant
historical performance data set forth in paragraph (b)(2) of this
section.
(i) Requirements applicable to all securitizations:
(A) The documents must require that, on or prior to issuance of
obligations and at the time of delivery of any periodic distribution
report and, in any event, at least once per calendar quarter, while
obligations are outstanding, information about the obligations and the
securitized financial assets will be disclosed to all potential
investors at the financial asset or pool level and security level, as
appropriate for the financial assets, to enable evaluation and analysis
of the credit risk and performance of the obligations and financial
assets. The documents must require that such information and its
disclosure, at a minimum, complies with the requirements of Securities
and Exchange Commission Regulation AB, or any successor disclosure
requirements for public issuances, even if the obligations are issued
in a private placement or are not otherwise required to be registered.
Information that is unknown or not available to the sponsor or the
issuer after reasonable investigation may be omitted if the issuer
includes a statement in the offering documents disclosing that the
specific information is otherwise unavailable.
(B) The documents must require that, on or prior to issuance of
obligations, the structure of the securitization and the credit and
payment performance of the obligations will be disclosed, including the
capital or tranche structure, the priority of payments, and specific
subordination features; representations and warranties made with
respect to the financial assets, the remedies for, and the time
permitted for cure of any breach of representations and warranties,
including the repurchase of financial assets, if applicable; liquidity
facilities and any credit enhancements permitted by this rule, any
waterfall triggers, or priority of payment reversal features; and
policies governing delinquencies, servicer advances, loss mitigation,
and write-offs of financial assets.
(C) The documents must require that while obligations are
outstanding, the issuing entity will provide to investors information
with respect to the credit performance of the obligations and the
financial assets, including periodic and cumulative financial asset
performance data, delinquency and modification data for the financial
assets, substitutions and removal of financial assets, servicer
advances, as well as losses that were allocated to such tranche and
remaining balance of financial assets supporting such tranche, if
applicable, and the percentage of each tranche in relation to the
securitization as a whole.
(D) In connection with the issuance of obligations, the documents
must disclose the nature and amount of compensation paid to the
originator, sponsor, rating agency or third-party advisor, any mortgage
or other broker, and the servicer(s), and the extent to which any risk
of loss on the underlying assets is retained by any of them for such
securitization be disclosed. The securitization documents must require
the issuer to provide to investors while obligations are outstanding
any changes to such information and the amount and nature of payments
of any deferred compensation or similar arrangements to any of the
parties.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) Prior to issuance of obligations, sponsors must disclose loan
level information about the financial assets including, but not limited
to, loan type, loan structure (for example, fixed or adjustable,
resets, interest rate caps, balloon payments, etc.), maturity, interest
rate and/or Annual Percentage Rate, and location of the property.
(B) Prior to issuance of obligations, sponsors must affirm
compliance in all material respects with applicable statutory and
regulatory standards for the underwriting and origination of
residential mortgage loans. Sponsors must disclose a third party due
diligence report on compliance with such standards and the
representations and warranties made with respect to the financial
assets.
(C) The documents must require that prior to issuance of
obligations and while obligations are outstanding, servicers will
disclose any ownership interest by the servicer or an affiliate of the
servicer in other whole loans secured by the same real property that
secures a loan included in the financial asset pool. The ownership of
an obligation, as defined in this regulation, does not constitute an
ownership interest requiring disclosure.
(3) Documentation and recordkeeping. The documents creating the
securitization must specify the respective contractual rights and
responsibilities of all parties and include the requirements described
in paragraph (b)(3) of this section and use as appropriate any
available standardized documentation for each different asset class.
(i) Requirements applicable to all securitizations. The documents
must define the contractual rights and responsibilities of the parties,
including but not limited to representations and warranties and ongoing
disclosure requirements, and any measures to avoid conflicts of
interest; and provide authority for the parties, including but not
limited to the originator, sponsor, servicer, and investors, to fulfill
their respective duties and exercise their rights under the contracts
and clearly distinguish between any multiple roles performed by any
party.
(ii) Requirements applicable only to securitizations in which the
financial
[[Page 36262]]
assets include any residential mortgage loans:
(A) Servicing and other agreements must provide servicers with
authority, subject to contractual oversight by any master servicer or
oversight advisor, if any, to mitigate losses on financial assets
consistent with maximizing the net present value of the financial
asset. Servicers must have the authority to modify assets to address
reasonably foreseeable default, and to take other action to maximize
the value and minimize losses on the securitized financial assets. The
documents must require that the servicers apply industry best practices
for asset management and servicing. The documents must require the
servicer to act for the benefit of all investors, and not for the
benefit of any particular class of investors, that the servicer must
commence action to mitigate losses no later than ninety days after an
asset first becomes delinquent unless all delinquencies on such asset
have been cured, and that the servicer maintains records of its actions
to permit full review by the trustee or other representative of the
investors.
(B) The servicing agreement may not require a primary servicer to
advance delinquent payments of principal and interest for more than
three payment periods, unless financing or reimbursement facilities are
available, which may include, but are not limited to, the obligations
of the master servicer or issuing entity to fund or reimburse the
primary servicer, or alternative reimbursement facilities. Such
``financing or reimbursement facilities'' under this paragraph may not
be dependent for repayment on foreclosure proceeds.
(4) Compensation. The following requirements apply only to
securitizations in which the financial assets include any residential
mortgage loans. Compensation to parties involved in the securitization
of such financial assets must be structured to provide incentives for
sustainable credit and the long-term performance of the financial
assets and securitization as follows:
(i) The documents must require that any fees or other compensation
for services payable to credit rating agencies or similar third-party
evaluation companies are payable, in part, over the five-year period
after the first issuance of the obligations based on the performance of
surveillance services and the performance of the financial assets, with
no more than sixty percent of the total estimated compensation due at
closing; and
(ii) The documents must provide that compensation to servicers will
include incentives for servicing, including payment for loan
restructuring or other loss mitigation activities, which maximizes the
net present value of the financial assets. Such incentives may include
payments for specific services, and actual expenses, to maximize the
net present value or a structure of incentive fees to maximize the net
present value, or any combination of the foregoing that provides such
incentives.
(5) Origination and retention requirements--(i) Requirements
applicable to all securitizations. (A) Prior to the effective date of
regulations required under new Section 15G of the Securities Exchange
Act, 15 U.S.C. 78a et seq., added by Section 941(b) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the documents must
require that the sponsor retain an economic interest in a material
portion, defined as not less than five percent, of the credit risk of
the financial assets. This retained interest may be either in the form
of an interest of not less than five percent in each of the credit
tranches sold or transferred to the investors or in a representative
sample of the securitized financial assets equal to not less than five
percent of the principal amount of the financial assets at transfer.
This retained interest may not be sold or pledged or hedged, except for
the hedging of interest rate risk, during the term of the
securitization.
(B) Upon the effective date of regulations required under new
Section 15G of the Securities Exchange Act, 15 U.S.C. 78a et seq.,
added by Section 941(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, such final regulations will exclusively govern
the requirement to retain an economic interest in a portion of the
credit risk of the financial assets under this rule.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) The documents must require the establishment of a reserve fund
equal to at least five (5) percent of the cash proceeds of the
securitization payable to the sponsor to cover the repurchase of any
financial assets required for breach of representations and warranties.
The balance of such fund, if any, must be released to the sponsor one
year after the date of issuance.
(B) The documents must include a representation that the assets
were originated in all material respects in compliance with statutory,
regulatory, and originator underwriting standards in effect at the time
of origination. The documents must include a representation that the
mortgages included in the securitization were underwritten at the fully
indexed rate, based upon the borrowers' ability to repay the mortgage
according to its terms, and rely on documented income and comply with
all existing all laws, rules, regulations, and guidance governing the
underwriting of residential mortgages by federally insured credit
unions.
(c) Other requirements. (1) The transaction should be an arms
length, bona fide securitization transaction. The documents must
require that the obligations issued in a securitization shall not be
predominantly sold to a credit union service organization in which the
sponsor credit union has an interest (other than a wholly-owned credit
union service organization consolidated for accounting and capital
purposes with the credit union) or insider of the sponsor;
(2) The securitization agreements are in writing, approved by the
board of directors of the credit union or its loan committee (as
reflected in the minutes of a meeting of the board of directors or
committee), and have been, continuously, from the time of execution in
the official record of the credit union;
(3) The securitization was entered into in the ordinary course of
business, not in contemplation of insolvency and with no intent to
hinder, delay, or defraud the credit union or its creditors;
(4) The transfer was made for adequate consideration;
(5) The transfer and/or security interest was properly perfected
under the UCC or applicable state law;
(6) The transfer and duties of the sponsor as transferor must be
evidenced in a separate agreement from its duties, if any, as servicer,
custodian, paying agent, credit support provider, or in any capacity
other than the transferor; and
(7) The documents must require that the sponsor separately identify
in its financial asset data bases the financial assets transferred into
any securitization and maintain (i) an electronic or paper copy of the
closing documents for each securitization in a readily accessible form,
(ii) a current list of all of its outstanding securitizations and the
respective issuing entities, and (iii) the most recent Securities and
Exchange Commission Form 10-K, if applicable, or other periodic
financial report for each securitization and issuing entity. The
documents must provide that to the extent serving as servicer,
custodian, or paying agent for the securitization, the sponsor may not
comingle amounts received with respect to the financial assets with its
own assets except for the time, not to exceed two business days,
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necessary to clear any payments received. The documents must require
that the sponsor will make these records readily available for review
by NCUA promptly upon written request.
(d) Safe harbor--(1) Participations. With respect to transfers of
financial assets made in connection with participations, the NCUA Board
as conservator or liquidating agent will not, in the exercise of its
statutory authority to disaffirm or repudiate contracts, reclaim,
recover, or recharacterize as property of the credit union or the
liquidation estate any such transferred financial assets, provided that
such transfer satisfies the conditions for sale accounting treatment
under generally accepted accounting principles, except for the ``legal
isolation'' condition that is addressed by this section. The foregoing
sentence applies to a last-in, first-out participation, provided that
the transfer of a portion of the financial asset satisfies the
conditions for sale accounting treatment under generally accepted
accounting principles that would have applied to such portion if it had
met the definition of a ``participating interest,'' except for the
``legal isolation'' condition that is addressed by this section.
(2) For securitizations meeting sale accounting requirements. With
respect to any securitization for which transfers of financial assets
were made after adoption of this rule, or from a master trust or
revolving trust established after adoption of this rule, and which
complies with the requirements applicable to that securitization as set
forth in paragraphs (b) and (c) of this section, the NCUA Board as
conservator or liquidating agent will not, in the exercise of its
statutory authority to disaffirm or repudiate contracts, reclaim,
recover, or recharacterize as property of the credit union or the
liquidation estate such transferred financial assets, provided that
such transfer satisfies the conditions for sale accounting treatment
under generally accepted accounting principles in effect for reporting
periods after November 15, 2009, except for the ``legal isolation''
condition that is addressed by this paragraph (d)(2).
(3) For securitizations not meeting sale accounting requirements.
With respect to any securitization for which transfers of financial
assets were made after adoption of this rule, or from a master trust or
revolving trust established after adoption of this rule, and which
complies with the requirements applicable to that securitization as set
forth in paragraphs (b) and (c) of this section, but where the transfer
does not satisfy the conditions for sale accounting treatment set forth
by generally accepted accounting principles in effect for reporting
periods after November 15, 2009, the following conditions apply:
(i) Monetary default. If, at any time after appointment, the NCUA
Board as conservator or liquidating agent is in a monetary default
under a securitization due to its failure to pay or apply collections
from the financial assets received by it in accordance with the
securitization documents, whether as servicer or otherwise, and remains
in monetary default for ten business days after actual delivery of a
written notice to the NCUA Board as conservator or liquidating agent
pursuant to paragraph (f) of this section requesting the exercise of
contractual rights because of such monetary default, the NCUA Board as
conservator or liquidating agent hereby consents pursuant to 12 U.S.C.
1787(c)(13)(C) to the exercise of any contractual rights in accordance
with the documents governing such securitization, including but not
limited to taking possession of the financial assets and exercising
self-help remedies as a secured creditor under the transfer agreements,
provided no involvement of the conservator or liquidating agent is
required other than such consents, waivers, or execution of transfer
documents as may be reasonably requested in the ordinary course of
business in order to facilitate the exercise of such contractual
rights. Such consent does not waive or otherwise deprive the NCUA Board
as conservator or liquidating agent or its assignees of any seller's
interest or other obligation or interest issued by the issuing entity
and held by the conservator or liquidating agent or its assignees, but
shall serve as full satisfaction of the obligations of the insured
credit union in conservatorship or liquidation and the NCUA Board as
conservator or liquidating agent for all amounts due.
(ii) Repudiation. If the NCUA Board as conservator or liquidating
agent provides a written notice of repudiation of the securitization
agreement pursuant to which the financial assets were transferred, and
does not pay damages, defined in this paragraph, within ten business
days following the effective date of the notice, the NCUA Board as
conservator or liquidating agent hereby consents pursuant to 12 U.S.C.
1787(c)(13)(C) to the exercise of any contractual rights in accordance
with the documents governing such securitization, including but not
limited to taking possession of the financial assets and exercising
self-help remedies as a secured creditor under the transfer agreements,
provided no involvement of the conservator or liquidating agent is
required other than such consents, waivers, or execution of transfer
documents as may be reasonably requested in the ordinary course of
business in order to facilitate the exercise of such contractual
rights. For purposes of this paragraph, the damages due will be in an
amount equal to the par value of the obligations outstanding on the
date of appointment of the conservator or liquidating agent, less any
payments of principal received by the investors through the date of
repudiation, plus unpaid, accrued interest through the date of
repudiation in accordance with the contract documents to the extent
actually received through payments on the financial assets received
through the date of repudiation. Upon payment of such repudiation
damages, all liens or claims on the financial assets created pursuant
to the securitization documents shall be released. Such consent does
not waive or otherwise deprive the NCUA Board as conservator or
liquidating agent or its assignees of any seller's interest or other
obligation or interest issued by the issuing entity and held by the
conservator or liquidating agent or its assignees, but serves as full
satisfaction of the obligations of the insured credit union in
conservatorship or liquidation and the NCUA Board as conservator or
liquidating agent for all amounts due.
(iii) Effect of repudiation. If the NCUA Board as conservator or
liquidating agent repudiates or disaffirms a securitization agreement,
it will not assert that any interest payments made to investors in
accordance with the securitization documents before any such
repudiation or disaffirmance remain the property of the conservatorship
or liquidation.
(e) Consent to certain actions. Prior to repudiation or, in the
case of a monetary default referred to in paragraph (d)(3)(i) of this
section, prior to the effectiveness of the consent referred to therein,
the NCUA Board as conservator or liquidating agent consents pursuant to
12 U.S.C. 1787(c)(13)(C) to the making of, or if serving as servicer,
does make, the payments to the investors to the extent actually
received through payments on the financial assets (but in the case of
repudiation, only to the extent supported by payments on the financial
assets received through the date of the giving of notice of
repudiation) in accordance with the securitization documents, and,
subject to the conservator's or liquidating agent's rights to repudiate
such agreements, consents to any servicing
[[Page 36264]]
activity required in furtherance of the securitization or, if acting as
servicer, the conservator or liquidating agent performs such servicing
activities in accordance with the terms of the applicable servicing
agreements, with respect to the financial assets included in
securitizations that meet the requirements applicable to that
securitization as set forth in paragraphs (b) and (c) of this section.
(f) Notice for consent. Any party requesting the NCUA Board's
consent as conservator or liquidating agent under 12 U.S.C.
1787(c)(13)(C) pursuant to paragraph (d)(3)(i) of this section must
provide notice to the President, NCUA Asset Management & Assistance
Center, 4807 Spicewood Springs Road, Suite 5100, Austin, TX 78759-8490,
and a statement of the basis upon which such request is made, and
copies of all documentation supporting such request, including without
limitation a copy of the applicable agreements and of any applicable
notices under the contract.
(g) Contemporaneous requirement. The NCUA Board as conservator or
liquidating agent will not seek to avoid an otherwise legally
enforceable agreement that is executed by an insured credit union in
connection with a securitization or in the form of a participation
solely because the agreement does not meet the ``contemporaneous''
requirement of 12 U.S.C.1787(b)(9) and 1788(a)(3).
(h) Limitations. The consents set forth in this section do not act
to waive or relinquish any rights granted to NCUA in any capacity,
including the NCUA Board as conservator or liquidating agent, pursuant
to any other applicable law or any agreement or contract except as
specifically set forth herein. Nothing contained in this section alters
the claims priority of the securitized obligations.
(i) No waiver. This section does not authorize the attachment of
any involuntary lien upon the property of the NCUA Board as conservator
or liquidating agent. Nor does this section waive, limit, or otherwise
affect the rights or powers of NCUA in any capacity, including the NCUA
Board as conservator or liquidating agent, to take any action or to
exercise any power not specifically mentioned, including but not
limited to any rights, powers or remedies of the NCUA Board as
conservator or liquidating agent regarding transfers or other
conveyances taken in contemplation of the credit union's insolvency or
with the intent to hinder, delay or defraud the credit union or the
creditors of such credit union, or that is a fraudulent transfer under
applicable law.
(j) No assignment. The right to consent under 12 U.S.C.
1787(c)(13)(C) may not be assigned or transferred to any purchaser of
property from the NCUA Board as conservator or liquidating agent, other
than to a conservator or bridge credit union.
(k) Repeal. This section may be repealed by NCUA upon 30 days'
notice provided in the Federal Register, but any repeal does not apply
to any issuance made in accordance with this section before such
repeal.
[FR Doc. 2014-14919 Filed 6-25-14; 8:45 am]
BILLING CODE 7535-01-P