December 18, 2013 Newsletter
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December 18, 2013


Issue Spotlight

Recent Developments

SFIG members and staff met with regulators from the Federal Deposit Insurance Corporation, Federal Reserve Board, Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission to discuss risk retention comments regarding master trusts and ABCP conduits on December 16, 2013. Please contact Sairah Burki, Director of ABS Policy at with any questions.

SFIG will hold a member-wide call on Volcker’s impact on securitization on Thursday, December 19, 2013 at 1pm EST. If you would like to join the Volcker Taskforce to be included in further Volcker discussions please contact Sairah Burki, Director of ABS Policy at

SFIG will not publish a newsletter on Wednesday, December 25, 2013 or Wednesday, January 1, 2013. We will resume publication of the newsletter on Wednesday, January 8, 2013.

ABS Vegas momentum continues to be incredibly strong, with 132 sponsors to-date and more in process. We already have approximately 3,200 participants registered, with over 1400 investors and issuers. Rooms at The Cosmopolitan are already sold out, with the overflow block of hotel rooms at the Aria also selling fast. Don’t miss the chance to be part of the Structured Finance Industry’s largest conference.

Click here for the conference agenda. Click here to register for ABS Vegas 2014.

By Carol Hitselberger, Partner, Mayer Brown
The federal financial agencies on December 10, 2013 approved joint final regulations (Final Regulation) implementing section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule. Section 619 added a new section 13 to the Bank Holding Company Act of 1956 (BHCA) that generally prohibits any banking entity from engaging in proprietary trading and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with, a hedge fund or a private equity fund, subject to exemptions for certain permitted activities.

Over 70 pages in rule text and nearly 900 pages of adopting release (Preamble), the Final Regulation made numerous changes to the proposed regulations (Proposal) which had been subject to an unprecedented number of comment letters. These changes address many but far from all of the concerns raised in the comment letters. In many respects the Final Regulation is likely to be perceived as an improvement over the Proposal. For example, the Final Regulation substantially mitigates concerns about its extraterritorial impact and its excessively narrow implementation of the exemptions in the statute. Nevertheless, some changes will be potentially more restrictive than the Proposal. Given the complexity of the Final Regulation, this legal update provides a number of initial observations, and the full impact will only become apparent as financial institutions ultimately become more familiar with the Final Regulation following the effective date of April 1, 2014.

Fortunately, there will be a period of time in which to resolve some of the uncertainty. At the same time that the Final Regulation was approved, the Board of Governors of the Federal Reserve System approved a one year extension of the conformance period until July 21, 2015. However, banking entities that exceed $50 billion in gross trading assets and liabilities will be required to begin reporting certain metrics on June 30, 2014.

This legal update addresses the impact of the Final Regulation on securitization activities and therefore focuses on the prohibition on covered funds activities and certain of the exceptions thereto.

Prohibition Against Covered Fund Activities

The Final Regulation retains the basic framework of the Proposal as it relates to covered fund activities but makes some significant changes that are important to securitization activities. Like the Proposal, the Final Regulation generally prohibits or restricts a banking entity from investing in, sponsoring, or having certain relationships with, a covered fund. Specifically, the Final Regulation implements the provisions in section 13 of the Bank Holding Company Act that:

  • Prohibit a banking entity from sponsoring or acquiring “ownership interests” in a private equity fund or a hedge fund;
  • Provide certain exemptions from this prohibition; and
  • Prohibit a banking entity from making loans or entering into other “covered transactions” with a covered fund for which a banking entity acts as sponsor, investment manager or investment adviser, and require that any permitted transactions with covered funds be on “market terms.”

Although securitization transactions generally do not utilize private equity funds or hedge funds and the statutory text of the Volcker Rule expressly required that the Final Regulation not prohibit the securitization of loans, the Final Regulation will impact securitizations in a material way due to the breadth of the definition of “covered funds”.

Covered Funds

Importantly, the Final Regulation retains the same basic definition of covered fund that was in the Proposal. A “covered fund” is any issuer that relies solely on the section 3(c)(1) or 3(c)(7) exclusion from the definition of “investment company” under the Investment Company Act of 1940 (1940 Act). A securitization issuer that relies on any other exclusion from the definition of investment company under the 1940 Act would not be a covered fund, even if it could also rely on 3(c)(1) or 3(c)(7). Accordingly, issuers that can rely on exemptions like section 3(c)(5)(C) or Rule 3a-7 under the 1940 Act are not covered funds.

Commodity Pools

The Final Regulation’s inclusion of commodity pools as covered funds is much narrower than in the Proposal. Only certain commodity pools with CFTC registered commodity pool operators are now covered funds, as are commodity pools if the related commodity pool operator has claimed an exemption under 17 C.F.R. 4.7.

Foreign Issuers

The Final Regulation made a significant change in respect of foreign issuers. Whereas the Proposal included as covered funds issuers organized or offered outside the United States that would be investment companies but for section 3(c)(1) or 3(c)(7) of the 1940 Act if the issuer’s securities were offered to one or more residents of the United States, the Final Regulation permits non-U.S. banking entities to exclude its relationships with non U.S. issuers from consideration under the Final Regulation altogether. Specifically, Section ___.10(b)(iii) includes non-U.S. funds as covered funds only in relation to any U.S. banking entity or banking entity controlled by a U.S. banking entity. Consequently, a foreign issuer could be a covered fund with respect to a U.S. banking sponsor or owner while not constituting a covered fund as to its foreign bank sponsor or owner.[1]

Interrelationship of Covered Funds and Super 23A

The Final Regulation provides for 14 separate exclusions from the definition of covered fund in Section ___.10(c). This is a critical change in regulatory structure from the Proposal for two reasons. Although the Proposal provided for certain activities with respect to loan securitization issuers and foreign issuers to be permitted, the Proposal nonetheless included those issuers as covered funds. As a result, even permitted securitization issuers were caught under the so‑called “Super 23A” restrictions and also fell under the commodity pool definition and its consequent restrictions. For example, under the Proposal a banking entity could not provide a liquidity facility or simple interest rate hedge to a permitted loan securitization issuer for which the banking entity acted as investment manager. By carving out loan securitization and foreign funds (as well as other funds) from the definition of covered fund entirely, the Final Regulation solved these critical problems. Also, because bank relationships with covered funds are subject to other restrictions under the Volcker Rule, including limits on aggregate investments and conflicts of interest, as well as monitoring and reporting requirements, a blanket carve out from the definition of covered fund reduces the compliance burden much more than permitting only specific activities with a covered fund.

Exclusions Relevant to Securitization

Of the 14 exclusions from the covered fund definition in Section ___.10(c), there are a handful that are likely available to many securitization issuers.

Loan Securitization Exclusion

First, not surprisingly, the Final Regulation retained the concept of a loan securitization exclusion (LSE) in Section ___.10(c)(8). To meet the LSE, an issuer must issue asset-backed securities (ABS) (as defined in Section 3(a)(79)) of the Securities Exchange Act of 1934 (1934 Act) backed solely by (a) loans, (b) rights or other assets designed to assure the servicing or timely distribution of proceeds to ABS holders and rights or other assets related or incidental to purchasing or otherwise acquiring and holding the loans, (c) interest rate or foreign exchange derivatives that directly relate to the permitted assets of the issuer so long as they reduce interest rate and/or foreign exchange risks related to the assets of the issuer, and (d) special units of beneficial interest “SUBIs” and collateral certificates issued by a special purpose vehicle that itself meets the LSE.[2] The LSE specifically excludes as permitted servicing or incidental assets (1) any security other than cash equivalents or securities received in lieu of debts previously contracted with respect to the permitted loans, (2) any derivative (other than interest rate or currency derivatives described above), and (3) any commodity forward contract.

Though more flexible than in the Proposal, the LSE continues to present challenges to many ordinary securitizations in the market today. Perhaps the most significant challenge is the definition of "loan" itself which now expressly excludes all securities and derivatives. As a threshold matter, it could be asked why a securitization issuer need consider whether it needs any 1940 Act exemption, much less those found in Section 3(c)(1) or 3(c)(7), if it does not invest in any securities (as defined in the 1940 Act). That said, in practice securitization issuers do make sure that an exemption is available under the 1940 Act, even if the pooled assets are primarily ones that would not be considered "securities" under the 1933 Act or1934 Act. In this regard, note that the Section 3(c)(5) of the 1940 Act does provide an exemption for certain entities that primarily invest in assets such as notes, loans and mortgages. While the actual text of the definition of security in the 1940 Act is virtually identical to that in the 1934 Act, fortunately judicial gloss interpreting the terms over the years has led to a narrower definition for purposes of the 1934 Act. Moreover, in the securitization context specifically, Rule 190 under the 1933 Act addresses situations where the assets underlying a securitization are themselves securities, and imposes additional requirements on such situations (including that the underlying assets are either registered, exempt from registration, or transferrable without registration) that do not apply where the pooled assets are not securities. In practice it is generally understood that these additional requirements do not apply to typical securitized assets such as residential mortgages, commercial mortgages, student loans, credit card receivables, auto loans, auto leases and equipment leases. It is within this interpretive band that issuers seeking to utilize the LSE will need to fall. Issuers should consider relevant statements in the Preamble.[3] Although this legal update is not the place for a full blown analysis of judicial history in defining “security”, it is worth noting that for certain types of pooled assets additional analysis may be needed to determine whether it is a security under the 1934 Act, particularly if in the form of a participation or if it is a “structured loan”.[4]

Notwithstanding those sobering facts, there is very helpful commentary around footnote 1970 in the Preamble suggesting the agencies intended a narrower construction of the term “security.” “The Agencies believe that the final rule excludes from the definition of covered fund typical structures used in the most common loan securitizations representing a significant majority of the current securitization market, such as residential mortgages, commercial mortgages, student loans, credit card receivables, auto loans, auto leases and equipment leases. Additionally, the Agencies believe that esoteric asset classes supported by loans may also be able to rely on the loan securitization exclusion, such as time share loans, container leases and servicer advances.” This comment would have been more helpful if it appeared in the LSE discussion rather than in the discussion of qualifying ABCP, but it seems logical to read it as applicable to both since both exclusions include a requirement that the pooled assets be "loans".

The LSE requirement that no securities be held by the related issuer is of particular concern to CLOs, including existing CLOs that may permit a portion of the assets to be securities.

Another significant issue in the LSE relates to its very helpful addition of SUBIs as permitted assets. Although clearly not intended, as evidenced by a straightforward discussion in the Preamble about SUBIs and their use in vehicle lease securitizations to permit centralized ownership of vehicles by a special purpose entity, the LSE requires that the SUBI issuer hold only assets permitted under the LSE. Because the LSE does not permit an entity to hold vehicles, no SUBI issuer could meet this restriction.

Qualifying ABCP Exclusion

Section __. 10(c)(9) provides a separate exemption for qualifying ABCP conduits (QABCP). The QABCP exclusion requires that the ABCP conduit hold only loans and other assets permitted under the LSE, but also permits the conduit to hold ABS supported by LSE permitted assets; provided the ABS is acquired by the conduit in an initial issuance. To satisfy the QABCP exclusion, the conduit’s securities must be comprised solely of a residual interest and ABCP with a legal maturity of 397 days or less. In addition, similar to the ABCP safe harbor in the most recent U.S. risk retention proposal, a regulated liquidity provider must enter into a legally binding commitment to provide full and unconditional liquidity coverage with respect to all ABCP issued.

The QABCP exclusion suffers from the same uncertainty around the definition of loan as the LSE. In addition, the QABCP exclusion serves up another significant hurdle. Any ABCP issuer that utilizes a liquidity facility with an eligible asset test cannot meet the exemption. This precludes a significant portion of the ABCP industry from availing itself of this exemption. It is also worth mentioning that the language is not clear that liquidity facilities with no asset test satisfy the condition if they are provided by more than one regulated liquidity provider or if (consistent within insolvency laws) they provide for funding to stop in the event of an ABCP issuer bankruptcy.

Qualifying Covered Bond Exclusion

Qualifying covered bonds that meet the conditions in Section __.10(c)(10) also are exempt from all Volcker Rule restrictions applicable to covered funds. A qualifying covered bond must be either (a) a debt obligation issued by a foreign banking organization the payment obligations of which is fully and unconditionally guaranteed by a cover pool or (b) a debt obligation of a cover pool that is fully and unconditionally guaranteed by its parent foreign banking organization. A “cover pool” for this purpose is an entity owning or holding a dynamic or fixed pool of LSE permitted assets for the benefit of the holders of covered bonds. Because the assets of the covered bond entity all must be LSE permitted assets, the considerations relating to the scope of those discussed above apply equally to this exclusion.

Wholly-Owned Subsidiary Exclusion

The exclusion of wholly-owned subsidiaries in Section __.10(c)(2) is very helpful. This exemption simply requires all ownership interests to be owed by the applicable banking entity, directly or indirectly. It even permits a small percentage (5%) to be owned by employees or directors and up to 0.5% to be owned by a third party to the extent needed to satisfy legal isolation or similar concerns. This exemption is important for securitization because, among other things, it permits intermediate special purpose entities that hold no assets other than an ownership interest in a securitization issuer (and therefore could not satisfy the LSE) to meet its own covered fund exemption. Banking entities should be mindful, however, that any entity that meets this exemption will itself be a banking entity and subject to all the restrictions under the Final Regulation, including restrictions on its relationships with covered funds, as well as restrictions on proprietary trading.

Ownership Interest

The Final Regulation defines “ownership interest” to mean any equity, partnership, or other similar interest just as the Proposal did. However, the Final Regulation adds significant depth to the previously undefined “other similar interest.” Although the Preamble indicates that the definition focuses on the attributes of the interest and whether it would provide a banking entity with economic exposure to the profits and losses of a covered fund, the actual text provides some additional challenges.

In particular, the definition now includes an interest that has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors or trustees, investment manager, investment adviser, or commodity trading advisor of the covered fund (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or acceleration event). This change has already generated significant concerns in the CLO market where senior debt tranches often have the right to replace a collateral manager in certain circumstances. The definition now also includes an interest that could be reduced based on issues arising from the underlying assets of the covered fund. Because collateral certificates, such as those issued by credit card and other master trusts, typically include this feature, like the CLO concern noted above, this leads to the counterintuitive effect that even the most senior debt class in a securitization could be an ownership interest, making bank investments in those super safe investments prohibited if the issuer is a covered fund that does not have an exclusion..

Definition of Sponsor

Under the Final Regulation (as in the Proposal), the definition of “sponsor” focuses on the ability to control decision-making and operational functions of the fund. A sponsor would include an entity that: (i) acts as a general partner, managing member, trustee, or commodity pool operator of a covered fund, (ii) in any manner selects or controls a majority of the directors, trustees, or management of a covered fund, or (iii) shares the same name, or a variation of the same name, with a covered fund for corporate, marketing, or other purposes.

Separate Asset-Backed Securitization Exemption

As described above, the definition of covered fund excludes certain securitization entities that meet the LSE, QABCP or other covered fund exemption. However, many securitizations will not meet the strict criteria of an exclusion. Some of those that are not eligible may not be covered funds if they rely on Rule 3a-7 of the 1940 Act or otherwise do not rely on Section 3(c)(1) or 3(c)(7) of the 1940 Act. However, recognizing the need for the Volcker Rule to be consistent with the risk retention mandate in the Dodd-Frank Act, the Final Regulation adds a new exemption for asset-backed securitizations that are not eligible for a complete exclusion from the definition of covered fund. The asset-backed securitization exemption is similar in structure to the asset management exemption. Section__.11(b) of the Final Regulation provides an exemption from the Volcker Rule that is intended to give effect to the risk retention requirement. It provides that a banking entity is not prohibited from acquiring or retaining an ownership interest in, or sponsoring, a covered fund that is an issuer of asset-backed securities, in connection with organizing and offering such issuer if most of the conditions of the asset management exemption have been met.

The Final Regulation also clarifies that, for purposes of the asset-backed securitization exemption, organizing and offering a covered fund that is an issuer of asset-backed securities means acting as the “securitizer” of the issuer, as that term is used in Section 15G(a)(3) of the 1934 Act, or acquiring an ownership interest in the issuer as required by Section 15G. This is intended to address the activities that would be included as organizing and offering a securitization, which may differ from organizing and offering other covered funds in that the entity that organizes and offers the securitization may not always provide advisory services to the issuer. The Agencies acknowledged this by not requiring those related conditions in the asset management exemption to be satisfied for purposes of the asset-backed securitization exemption.

Importantly, the exemption in Section __.11(b) does not permit a banking entity to have an ownership interest greater than that required by the U.S. risk retention rules (even if preferred by investors or mandated by a non-U.S. regime). Also, the issuer cannot share any variation of its bank sponsor’s name or use the word “bank” in its name.

Because the exemption afforded in Section ____.11(b) relates only to the activity of owning or sponsoring a covered fund, this exemption does not permit the banking entity to escape the other restrictions in the Volcker Rule that relate to covered funds, including the Super 23A prohibition on covered transactions, the aggregate limits on investment and the required deduction from tier 1 capital of those investments.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

[1] For this purpose, a non-U.S. fund is one (a) organized outside the U.S. in which all ownership interests are offered and sold outside the U.S., (b) that raises money primarily for the purpose of investing in securities for resale or other disposition or otherwise trades in securities, and (c) for which the applicable banking entity (or an affiliate) has an ownership interest or acts as sponsor. It is worth noting that the Final Regulation separately includes a foreign public fund exclusion from the definition of covered fund.

[2] A permitted SUBI or collateral certificate must be (a) used for the sole purpose of transferring the economic risks and benefits of the assets permitted under the LSE, (b) created solely to satisfy legal requirements or otherwise facilitate the structuring of the loan securitization, and (c) issued by an entity established under the direction of the same entity that initiated the loan securitization.

[3] The Preamble states “[w]hether a loan is a ‘note’ or ‘evidence of indebtedness’ and therefore a security under the federal securities laws will depend on the particular facts and circumstances, including the economic terms of the loan” and then includes a string cite at footnote 1831 that includes Reves among other case law.

[4] The Preamble described “structured loans” as deserving additional scrutiny under the Volcker Rule, reasoning, “loans that are structured to provide payments or returns based on, or tied to, the performance of an asset, index or commodity or provide synthetic exposure to the credit of an underlying borrower or an underlying security or index may be securities or derivatives depending on their terms and the circumstances of their creation, use, and distribution. Regardless of whether a party characterizes the instrument as a loan, these kinds of instruments, which may be called “structured loans,” must be evaluated based on the standards associated with evaluating derivatives and securities in order to prevent evasion of the restrictions on proprietary trading and ownership interests in covered funds.”

The Commodity Futures Trading Commission (CFTC) announced on December 16, 2013, that the members of the CFTC unanimously elected Commissioner Mark P. Wetjen to serve as Acting Chairman upon the end of Chairman Gary Gensler’s service. Wetjen was sworn in as a Commissioner of the CFTC on October 25, 2011. Prior to his CFTC service, he worked in the U.S. Senate as a senior leadership staffer advising on all financial-services-related matters. Before his service in the U.S. Senate, Commissioner Wetjen was a lawyer in private practice. Timothy Massad, who was nominated by President Barack Obama to replace Gensler, has not had a Senate confirmation hearing. Gensler must leave the agency when his term expires at the end of the year.

The Basel Committee on Banking Supervision (Basel) has revised its policy framework for the prudential treatment of banks' investments in the equity of funds that are held in the banking book. The revised policy framework will take effect on January 1, 2017 and will apply to investments in all types of funds (e.g. hedge funds, managed funds, investment funds). The framework will be applicable to all banks, irrespective of whether they apply the Basel framework's Standardized Approach or an Internal Ratings-Based (IRB) approach for credit risk.

The revised framework is based on the general principle that banks should apply a look-through approach to identify the underlying assets whenever investing in funds. The Committee recognizes that a full look-through approach may not always be feasible and that a staged approach based on different degrees of granularity of the look-through is warranted. The proposed risk-weighting framework therefore enables the application of a consistent risk-sensitive capital framework which provides incentives for improved risk management practices.

Click here for a copy of the revised framework.

The Securities and Exchange Commission (SEC) issued its final rule on the registration of municipal advisors. This bulletin rescinds OCC Bulletin 2010-38, “Dodd-Frank Act Section 975 and SEC Interim Final Temporary Rule,” September 28, 2010. Among the highlights:

  • The SEC’s final rule requires municipal advisors to register permanently with the SEC.
  • The final rule does not provide a general blanket exemption for banks.
  • Banks should analyze the application of this final rule to their operations. Banks meeting the definition of municipal advisor must file Form MA-T with the SEC and then, when directed, file Form MA. Banks are subject to a fiduciary duty standard with regard to any municipal entity they advise under the rule.

Click here for the final rule.

House Republicans have stated they will launch a comprehensive review of the Federal Reserve and its policies, with the goal of introducing legislation in 2014 that would make significant changes to the central bank. According to House Financial Services Committee Chairman Jeb Hensarling (R-TX) “t will be the most rigorous examination and oversight of the Federal Reserve in its history.” The audit of the Fed will begin on December 19, 2013, when the monetary policy subcommittee chaired by Rep. John Campbell (R-CA) will hold its first hearing reviewing the Fed’s mandates.
The Commodity Futures Trading Commission (CFTC) proposes to amend regulations concerning speculative position limits to conform to the Dodd-Frank amendments to the Commodity Exchange Act. The CFTC proposes to establish speculative position limits for 28 exempt and agricultural commodity futures and option contracts, and physical commodity swaps that are “economically equivalent” to such contracts. In connection with establishing these limits, the CFTC proposes to update some relevant definitions; revise the exemptions from speculative position limits, including for bona fide hedging; and extend and update reporting requirements for persons claiming exemption from these limits.

Click here for a copy of the guidance.

In order to facilitate the introduction of final BCBS-IOSCO guidelines for “Margin requirements for non-centrally cleared derivatives”, published September 2, 2013, the International Swap and Derivatives Association (or ISDA) is proposing a standard initial margin model (SIMM) which could be used by market participants. Agreement between market participants and global regulators on several key assumptions will be required. These assumptions are:

  • General structure of margin calculations;
  • Requirement for margin to meet a 99% confidence level of cover over a 10-day standard margin period of risk;
  • Model validation, supervisory coordination and governance;
  • Use of portfolio risk sensitivities (Greeks) rather than full revaluations; and
  • Explicit inclusion of collateral haircut calculations within the portfolio SIMM calculation.

Click here for the guidance.

The Federal Financial Institutions Examination Council (FFIEC), on behalf of its members, today released final guidance on the applicability of consumer protection and compliance laws, regulations, and policies to activities conducted via social media by banks, savings associations, and credit unions, as well as nonbank entities supervised by the Consumer Financial Protection Bureau. The guidance is effective immediately.

The guidance does not impose any new requirements on financial institutions. Rather, it is intended to help financial institutions understand potential consumer compliance and legal risks, as well as related risks such as reputation and operational risks, associated with the use of social media, along with expectations for managing those risks. The guidance provides considerations that financial institutions may find useful in conducting risk assessments and crafting and evaluating policies and procedures regarding social media.

Click here for a copy of the guidance.

On December 11, 2013 the Federal Housing Finance Agency (FHFA) announced Wanda DeLeo has been chosen to head a newly created Office of Conservatorship. She previously was Deputy Director for the Office of Strategic Initiatives at FHFA. The new role will combine Ms. DeLeo’s current role with the Office of Conservatorship Operations into a single Office of Conservatorship. The Office of Conservatorship Operations was previously headed by Jeffrey Spohn who is retiring.

Click here for a link to the FHFA release.

A joint statement of the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, issued December 13, 2013 clarifies means of satisfying the Consumer Financial Protection Bureau’s ability-to-pay requirements.

The regulatory guidance indicates that institutions may originate both Qualified Mortgages (QMs) and non-QMs, based on their business strategies and risk appetites. Residential mortgage loans will not be subject to safety-and-soundness criticism based solely on their status as QMs or non-QMs. Assuaging potential concern for institutional compliance with Community Reinvestment Act and Fair Lending requirements, the statement provides positive indication that an institutions' decision to originate only QM loans, absent other factors, would adversely affect their CRA evaluations.

Click here for the FDIC guidance.

The Board of Governors of the Federal Reserve System, the Bureau of Consumer Financial Protection, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency, Treasury issued a final rule on December 12, 2013 that creates exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The exemptions are intended to save borrowers time and money while still ensuring that the loans are financially sound.

The appraisal requirements for higher-priced mortgages were established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Under the Dodd-Frank Act, closed-end mortgage loans are considered to be higher-priced if they are secured by a consumer’s home and have interest rates above a certain threshold.

The Dodd-Frank Act requires creditors to obtain a written appraisal based on a physical visit of the home’s interior before making these loans. The final rule provides that loans of $25,000 or less and certain “streamlined” refinancings are exempt from the Dodd-Frank Act appraisal requirements, which go into effect on January 18, 2014. In addition, the final rule contains special provisions for manufactured homes, which can present unique issues in determining the appropriate valuation method.

Click here for a copy of the final rule.

On December 16, 2013, the Federal Housing Finance Agency (FHFA) requested input on a gradual reduction of loan limits for Fannie Mae and Freddie Mac. The loan limits are the maximum loan size that the Government Sponsored Enterprises (GSEs) can purchase and vary based on geographical location in the United States.

FHFA indicated in the release that in areas where the statutory maximum loan limit for one-unit properties is currently $417,000, the plan being contemplated would set the loan purchase limit at $400,000. The loan purchase limit would be reduced by the same percentage in other parts of the country, including those areas where current limits are at $625,500. Those loan purchase limits would be set at $600,000. Any change would only apply to loans originated after October 1, 2014.

Click here for a copy of the release.

According to the American Enterprise Institute's (AEI) new National Mortgage Risk Index (NMRI), in the event of another major economic downturn 23.2% of FHA loans would default over the following 5 years, compared to 5.6% of those purchased by Freddie Mac or Fannie Mae. According to the projections of the NMRI, 87% of FHA loans are high risk. AEI developed the new NMRI to provide guidance to policy makers and industry members in assessing mortgage lending risks.

The Basel Committee on Banking Supervision (Basel) published on December 17, 2013 its second report on the regulatory consistency of risk-weighted assets (RWAs) for market risk in the trading book. This study is a part of its wider Regulatory Consistency Assessment Programme (RCAP), which is intended to ensure consistent implementation of the Basel III framework.

This report, which follows up on an initial study conducted by Basel that was published in January 2013, extended that earlier analysis to more representative and complex trading positions. Consistent with the findings in the first report, the results show significant variation in the outputs of market risk internal models used to calculate regulatory capital. In addition, the results show that variability typically increases for more complex trading positions.

According to Basel, the analysis confirms that differences in modelling choices are the most significant drivers of variation in market risk RWAs across banks and supports the type of policy recommendations that were identified in the earlier report to reduce the level of variability in market risk RWAs:

(i) improving public disclosure and the collection of regulatory data to aid the understanding of market risk RWAs;

(ii) narrowing the range of modelling choices for banks; and

(iii) further harmonizing supervisory practices with regard to model approvals.

Click here for a copy of the report.



SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry.  Please visit our website for more information, including how to join.


SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community.  To ensure that you receive future editions of the newsletter, please visit our website ( to learn about membership opportunities.


Contact Information

Richard Johns for all matters

Kristi Leo for Investor related matters

Sairah Burki for ABS Policy related matters

Sonny Abbasi for MBS Policy related matters

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