September 4, 2013 Newsletter
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Issue Spotlight

Recent Developments



SFIG’s Residential Mortgage Committee will begin its series of Roundtables on October 16, 2013. The initial Roundtable is currently anticipated to focus on representations, warranties and enforcement mechanisms in private-label RMBS, and will explore differences between pre- and post-crisis RMBS offerings.

Panelists are expected to include representatives of investors, issuers, broker/dealers, credit rating agencies, trustees, due diligence firms, and internal and external legal counsel.

The Roundtables are designed to provide a forum for interested SFIG members to discuss in detail recent developments in private label RMBS, as well as legislative and regulatory developments affecting the residential mortgage markets. The Roundtables will also help SFIG leadership gather member feedback to help focus its advocacy efforts.

If you are interested in receiving more information concerning the Roundtable, please contact Eric Kaplan of Shellpoint at or SFIG at



SFIG’s Risk Retention Task Force is gearing up to produce a comment letter on the re-proposal (Re-proposal) of the credit risk retention regulation. The Re-proposal was released on August 28, 2013 jointly by the Securities and Exchange Commission, the federal banking agencies and the federal housing agencies. The comment period on the Re-proposal ends on October 30, 2013.

If you are interested in participating in SFIG’s advocacy efforts in connection with the credit risk retention rule, please consider joining the Risk Retention Task Force. Contact SFIG at to join the Risk Retention Task Force.

Click here for SFIG’s high-level summary of the Re-proposal.



On August 29, 2013, SFIG filed an amicus curiae brief in support of Wells Fargo National Association and Deutsche Bank National Trust Company’s motion for a preliminary injunction against the City of Richmond, California and Mortgage Resolution Partners LLC. The case, which attempts to halt the city’s proposed use of eminent domain to seize mortgage loans from private label securitization trusts, is currently proceeding in the United States District Court, Northern District of California, San Francisco Division.

In a press release accompanying the filing, SFIG Executive Director Richard Johns stated:

While SFIG recognizes the challenges currently confronting municipalities and borrowers, the use of eminent domain to seize mortgage loans is an illegitimate tactic that undermines the integrity of the entire home mortgage system. Allowing this type of practice is a short-sighted and unconstitutional idea. Not only would it do irreparable damage to the private mortgage market, undermining Congressional efforts to encourage private capital in the market but it would also actually injure the local residents these efforts are supposed to be helping.

Click here for a copy of the amicus curiae brief. Click here for SFIG’s press release. Click for an article from SFIG’s August 14, 2013 Newsletter for more information regarding the eminent domain issue.



Four of the five Commissioners of the Securities and Exchange Commission (SEC) released separate statements in connection with the re-proposal (Re-proposal) last week by six federal regulatory agencies (Joint Regulators), including the SEC, of the risk-retention regulation required under Section 941 of the Dodd-Frank Act. Only SEC Chair Mary Jo White did not issue a separate statement.

A review of these statements indicates various views with respect to the approach taken by the Joint Regulators, and may further indicate that robust and compelling industry commentary may be especially important during the comment process on the Re-proposal.

The statement indicating the deepest level of disagreement with the Re-proposal was the “dissenting statement” of Commissioner Daniel M. Gallagher (Gallagher Statement). Commissioner Gallagher focused in large part on the Re-proposal’s definition of “qualified residential mortgage” (QRM) under the risk-retention rule to be identical to the definition of the Consumer Financial Protection Bureau’s “qualified mortgage” (QM) term, and raised a number of points of concern. Commissioner Gallagher believes:

  • The Re-proposal, if adopted, would ensure that the vast majority of mortgages in the United States are insured or owned by the government, will result in a “government imprimatur” of creditworthiness into the markets, and will disincentivize proper risk management and due diligence in the mortgage markets.
  • The QM definition is “deeply flawed,” and “removes all incentive to perform meaningful borrower-level review” to determine whether a loan is likely to be repaid.
  • In proposing the QM definition for QRM, the Joint Regulators have demonstrated that they are not considering default rates or risk levels of different types of mortgage credit, and that the definition “is motivated by a desire to return to the failed federal housing policies that proved to be direct and decisive cause of the financial crisis.”
  • The “government imprimatur” aspect of QM is equivalent to the (harmful, in Commissioner Gallagher’s view) imprimatur conferred upon the credit rating agencies by the “nationally recognized statistical rating organization” designation.

In addition to his reservations regarding substantive features of the Re-proposal, Commissioner Gallagher also alleges that the process leading to the Re-proposal was “deeply flawed,” and involved the Re-proposal being presented to the SEC as a “take-it-or-leave-it” proposition, presumably by the Chairman of the Financial Stability Oversight Council (the US Secretary of the Treasury), whom Commissioner Gallagher notes was responsible for the joint rulemaking process.

In an aside, Commission Gallagher also called for a re-proposal of the “Volker Rule.”

Joining Commissioner Gallagher in opposing the Re-proposal was Commissioner Michael S. Piwowar, although the reasons given in his statement (Piwowar Statement) were somewhat different.

Commissioner Piwowar based his objections primarily on allegations that the proposal “does not contain necessary economic analysis and does not adequately consider alternatives to credit risk retention requirements.”

With respect to his economic analysis point, Commissioner Piwowar observes that, although the SEC did conduct an economic analysis of the costs and benefits of the proposed rule as required by the requirements of the Securities Exchange Act of 1934, there was no evidence that the other Joint Regulators conducted such an analysis.

Commissioner Piwowar’s second principal basis of opposition was, that, in his view, the Re-proposal does not adequately consider alternatives to credit risk retention requirements. Commissioner Piwowar pointed to disclosure requirements, subordinated performance fees, rules regarding disclosure of repurchase demands and rules requiring issuer review of securitized assets as alternatives that should have been given more attention.

Commissioner Luis A. Aguilar supported the Re-proposal, but issued a separate statement (Aguilar Statement) in which he called for the SEC to “adopt robust rules requiring loan-level disclosures in ABS offerings, which were originally proposed more than three years ago” in the form of revised Regulation AB (Reg AB2).

In addition to the enhanced disclosure requirements of Reg AB2, Commissioner Aguilar also specifically recommended the adoption of that rule’s requirement of issuers to file a computer program modeling the waterfall of a securitization, “to help investors analyze the offering and monitor ongoing performance.”

In her brief statement (Stein Statement), Commissioner Kara M. Stein, supported the Re-proposal, but added that she feels it critically important that the SEC “move forward with reforms that would increase the transparency of asset-backed securities by providing additional loan-level disclosures and sufficient time for investors to review the information.”

With three of the four statements emphasizing investor considerations as their primary concern, the industry may reasonably expect that investor input during the comment period may be of particular interest to the SEC at least, if not to the Joint Regulators generally. Commissioner Gallagher’s Statement, while not focused on investor considerations per se but rather emphasizing QRM and QM’s alleged shortcomings as well as the shortcomings of the rule-making process, raises its own macro-concerns that would appear to be of interest to investors as well as other industry participants.

SFIG released an Alert containing a high level summary of the Re-proposal on August 30, 2013. SFIG’s Risk Retention Task Force is having a conference call today to begin to discuss SFIG’s comment letter on the Re-proposal. Comments are due by October 30, 2013.

If you would like to participate in the process of commenting on the Re-proposal, please consider joining SFIG’s Risk Retention Task Force by contacting SFIG at

Click here for the Gallagher Statement. Click here for the Piwowar Statement. Click here for the Aguilar Statement. Click here for the Stein Statement. Click here for SFIG’s August 30, 2013 summary of the Re-proposal.



Standard & Poor’s Rating Services (S&P) has requested comments regarding proposed changes to its floorplan ABS rating methodology for non-diverse pools (pools representing fewer than three manufacturers). The new methodology places more emphasis on the manufacturer’s credit rating. Interested SFIG members (automotive/equipment floorplan issuers, investors, bankers, legal counsel) are invited to participate in a working group to discuss S&P’s request for comments and prepare an “industry” response by the September 27, 2013 comment deadline. If you have an interest in providing feedback, please contact SFIG at, or Dave Dickenson at Ford Credit at by September 9, 2013 to be included in a conference call to be scheduled shortly thereafter.

Click here for S&P Request for Comment. Click here for a summary of S&P’s proposed changes.



The City Council of the City of North Las Vegas, Nevada will be meeting this evening to consider again whether to proceed with the program promoted by Mortgage Resolution Partners (MRP) in which municipalities use the power of eminent domain to seize “underwater” mortgages – mortgages in which the outstanding principal amount of the related mortgage note exceeds the current fair market value of the related property – on properties located within the municipality.

Click here for the agenda item on eminent domain for the City of North Las Vegas’ September 4, 2013 City Council meeting.



On September 3, 2013, the Federal Reserve Board (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC) announced that they had released an optional model template (Resolution Template) for tailored resolution plans that certain firms will be submitting for the first time later this year.

The Dodd-Frank Act requires that bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated for enhanced prudential supervision by the Financial Stability Oversight Council to submit resolution plans to the Fed and the FDIC. The initial resolution plans for one group of firms – generally those with less than $100 billion in total nonbank assets or $100 billion in US nonbank assets if they are a foreign-based company – must be submitted to the Federal Reserve and the FDIC on or before December 31, 2013.

The resolution plan rule previously issued by the two agencies permits eligible firms, generally those that are smaller and less complex, to file a tailored resolution plan. A tailored resolution plan focuses on the nonbanking operations of the firm and on the interconnections and interdependencies between the nonbanking and banking operations. The optional template is intended to facilitate the preparation of tailored resolution plans.

Click here for the Resolution Template.



On September 2, 2013, the Basel Committee of Banking Supervision (Basel Committee) and the International Organization of Securities Commissions (IOSCO) released the final framework (Framework) for margin requirements for non-centrally cleared derivatives.

The Framework may apply to non-centrally cleared derivatives included in certain securitization transactions. The phase-in period for the margining requirements would begin in December of 2015.

Under the Framework, all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives will have to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions. The precise definition of financial firms, non-financial firms and systemically important nonfinancial firms will be determined by appropriate national regulation. According to the Basel Committee and IOSCO, the Framework has been designed to reduce systemic risks related to over-the-counter (OTC) derivatives markets, as well as to provide firms with appropriate incentives for central clearing while managing the overall liquidity impact of the requirements.

The final Framework would permit the “one-time” re-hypothecation of initial margin collateral subject to a number of strict conditions. The Basel Committee and IOSCO suggest that this should help to mitigate the liquidity impact associated with the requirements.

The requirements allow for the introduction of a universal initial margin threshold of €50 million below which a firm would have the option of not collecting initial margin, and also provide for a broad array of eligible collateral to satisfy initial margin requirements.

The requirements to collect and post initial margin on non-centrally cleared trades will be phased in over a four-year period, beginning in December of 2015, with the largest, most active and most systemically important derivatives market participants.

If you are interested in participating in SFIG’s Derivatives in Securitization Committee, please contact SFIG at

Click here for the Framework.



On August 27, 2013, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray ratified all actions taken by him during the period from his recess appointment on January 4, 2012 to July 17, 2013, when President Obama appointed him as Director following his confirmation by the US Senate.

In the notice of this action, Mr. Cordray wrote:

I believe that the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper. To avoid any possible uncertainty, however, I hereby affirm and ratify any and all actions I took during that period.

Mr. Cordray’s actions as a recess appointee (an appointment made by the President when the U.S. Senate is not in session) had been called into question by certain Republican legislators, and by a lawsuit brought against other recess appointees to the National Labor Relations Board.



On August 29, 2013, the Federal Deposit Insurance Corporation (FDIC) released its “Second Quarter 2013 Quarterly Banking Profile” (2Q Profile). The highlights of the 2Q Profile were presented by FDIC Chairman Martin J. Gruenberg.

Chairman Gruenberg noted that over the second quarter of 2013, banks’ “asset quality improved, loan balances grew, fewer institutions were unprofitable, and the number of problem banks continued to fall.”

In terms of obstacles for continued improvement, the Chairman observed that further earnings growth resulting from decreasing loss reserves was becoming difficult, and that revenue growth would need to pick up for further earnings improvement. However, continued relatively narrow net interest margins present headwinds to bank revenue growth.

Chairman Gruenberg also cited to relatively low current interest rates as driving banks’ shift to including longer-term assets in their portfolios. He observed that these longer-term assets also exposed banks to more risk, if interest rates were to rise.

Click here for Chairman Gruenberg’s presentation. Click here for the 2Q Profile.



On August 29, 2013, the UK’s Financial Stability Board (FSB) published a progress report (CRA Progress Report) on reducing reliance on, and strengthening the oversight of, credit rating agencies (CRAs). The CRA Progress Report is accompanied by the interim peer review report (Peer Review Report) on national implementation of the FSB’s “Principles for Reducing Reliance on Credit Rating Agency (CRA) Ratings.”

The CRA Progress Report includes a summary of the main findings and recommendations of the Peer Review Report, describes ongoing work by standard-setting bodies to reduce references to CRA ratings in international standards, and provides an update on work by the International Organization of Securities Commissions (IOSCO) to improve transparency and competition among CRAs.

The main points of the CRA Progress Report are as follows:

  • Authorities need to accelerate work to end the reliance of regulatory regimes and of market participants on external ratings, which can lead to herd behavior and cliff effects in market prices when downgrades occur.
  • The FSB is taking forward its roadmap to reduce reliance on CRA ratings through a peer review of national authorities’ actions to reduce reliance.
  • The Peer Report notes that jurisdictions have faced different starting positions from which to make reforms. The US has moved the furthest in removing hard-wiring of ratings, and the EU has also made significant progress. Progress in most other jurisdictions has been slower.
  • Among existing international standards, the greatest use of CRA ratings is in the Basel framework. The Basel Committee for Banking Supervision has made proposals to reduce reliance in its securitization framework and by mid-2014 will make proposals on reducing reliance within its standardized approach for capital requirements.
  • Market participants need to improve their own capacity to make their own credit assessments in order that they can safely reduce their reliance on CRA ratings.

The Peer Review Report includes an overview of references to CRA ratings in national authorities’ laws and regulations and of actions taken and underway to reduce those references.

The Peer Review Report has identified several areas where accelerated progress is needed, including that FSB jurisdictions should:

  • Provide incentives to finalize instructions to develop their own independent credit assessment processes; and
  • Encourage or continue to enhance disclosures on financial institutions’ internal credit risk assessment practices (drawing on guidance from standard-setting bodies where available).

If you are interested in joining SFIG’s Credit Reform Task Force, please contact SFIG at

Click here for the CRA Progress Report. Click here for the Peer Review Report.



On August 29, 2013, the UK’s Financial Stability Board issued a “Progress report on the oversight and governance framework for financial benchmark reform” (Progress Report). The Progress Report was delivered to the G20 finance ministers and central bank governors.

LIBOR and other benchmark rates have recently come under scrutiny amid allegations of poor governance procedures applying to the establishment of these rates. Other observers, including the US Commodity Futures Trading Commission, question whether, apart from governance issues, markets have changed enough to render LIBOR and other benchmarks essentially obsolete.

According to the Progress Report, a “Market Participants Group” (MPG) is being established to identify additional potential benchmarks as alternatives to LIBOR. The MPG is scheduled to deliver an interim report by the end of 2013 and a final report by mid-March of 2014.

A separate review of benchmark governance procedures is scheduled for completion by June of 2014.

The issues surrounding LIBOR and other benchmarks were discussed in the July 30, 2013 edition of SFIG’s Newsletter.

Click here for the Progress Report. Click for the July 30, 2013 edition of SFIG’s Newsletter.



On August 23, 2013, the United States District Court for the Northern District of Illinois ruled in favor of the Federal Housing Finance Agency (FHFA) in a lawsuit involving an ordinance (Ordinance) of the City of Chicago. The Ordinance requires a mortgagee on a vacant building located in Chicago to file a registration statement for the building with the Chicago Department of Buildings and to pay a $500 fee, all in the event that the building’s owner has not registered the building and paid the fee.

The FHFA sought a declaratory judgment rendering it, Fannie Mae and Freddie Mac exempt from the Ordinance. Fannie Mae and Freddie Mac are currently in conservatorship with the FHFA acting as their conservator.

The Court held that the Ordinance did not apply to the FHFA, Fannie Mae and Freddie Mac under a theory of “implied field preemption.” Specifically, the Court found that, under the Housing and Economic Recovery Act of 2008 (HERA), Congress conferred broad authority on the FHFA to exercise its discretion in supervising Fannie Mae and Freddie Mac’s business operations. As a consequence, the Ordinance encroached on an area of regulation – how FHFA chooses to manage the assets of Fannie Mae and Freddie Mac – that Congress reserved exclusively for the FHFA.

Although this lawsuit did not involve the “eminent domain” issue that has been the subject of increasing legal controversy during the past several months, it seems likely that the FHFA would cite the Court’s preemption holding in this case in future eminent domain lawsuits involving the FHFA.

On August 7, 2013, the FHFA issued a “General Counsel Memorandum” (GC Memorandum) relating to the eminent domain issue. Among the arguments cited in the GC Memorandum against municipal use of eminent domain to seize mortgages owned by Fannie Mae or Freddie Mac was a “federal interest” preemption argument. The GC Memorandum states that “the interest of [the FHFA] to preserve and conserve assets and to operate [Fannie Mae and Freddie Mac] in conservatorship would be superior to the interest of a locality to alter the terms of the contract…”  This agreement is similar to the FHFA’s argument which prevailed in the Chicago case.

Click here for the Court’s decision in the case involving the Chicago Ordinance.



On August 21, 2013, the Consumer Financial Protection Bureau (CFPB) issued a report (Servicing Report) detailing servicing problems at banks and nonbanks. The Servicing Report also found that many nonbanks lack robust systems for ensuring they are following federal laws, according to the accompanying CFPB press release.

Among the problems identified by the CFPB’s examiners were:

  • Sloppy account transfers. In connection with servicing transfers, the CFPB examiners found:
    • Disorganized and unlabeled paperwork, including important loss mitigation documents;
    • Failures by mortgage servicers to tell borrowers when the servicing of the loan is transferred to another company; and
    • A lack of protocols related to the handling of key documents, such as trial modification agreements.
  • Poor payment processing. In reviewing standard loan payment processing and tax and insurance escrows, the examiners found:
    • Inadequate notice to borrowers of a change in address to send payments, resulting in late payments;
    • Excessive delays in handling the cancellation of private mortgage insurance payments, resulting in late fees; and
    • Property taxes being paid later than expected, resulting in borrowers’ inability to claim a tax deduction for the year they planned.
  • Loss mitigation mistakes. With respect to following loss mitigation procedures, CFPB examiners discovered several problems, including:
    • Inconsistent communications with borrowers, giving them conflicting instructions for loss mitigation processes;
    • Inconsistent loss mitigation underwriting, waiving certain fees and interest charges for some borrowers but not others;
    • Long application review periods, making the loss mitigation process especially hard on borrowers whose accounts are also dual-tracked for foreclosure;
    • Incomplete loan files, making it challenging for borrowers to find out about their loan modification applications when they call the servicer for help;
    • Poor procedures for requesting missing or incomplete information from borrowers, making it difficult for consumers to provide the correct documentation; and
    • Deceptive communications to borrowers about the status of loan modification applications, leading some consumers to faster foreclosure.

The CFPB added that in all cases where the CFPB found mortgage servicing problems, examiners alerted the company to its concerns, specified necessary remedial measures, and, when appropriate, opened CFPB investigations for potential enforcement actions.

With respect to nonbank mortgage servicers, the CFPB examiners were said to have found that, perhaps due to a prior lack of regulation, many nonbanks are more likely than bank servicers to lack robust compliance management systems. The CFPB found that many nonbank institutions are:

  • Missing a comprehensive consumer compliance program;
  • Lacking formal policies and procedures; and
  • Forgoing independent consumer compliance audits.

Click here for the Servicing Report. Click here for the CFPB’s accompanying press release.



In an August 16, 2013 opinion (Opinion) the United States District Court for the Southern District of New York sided with the government in a case against Countrywide Financial Corporation (Countrywide), Bank of America, N.A. and Rebecca Mairone, a former employee of Countrywide.

The case was brought under the Federal Institutions Reform Recovery and Enforcement Act (FIRREA) and other federal statutes.

The underlying facts concerned the practices of Countrywide’s “Full Spectrum Lending Division” (Division). According to the Opinion, in August 2007 the Division established a loan origination program (Program) that was designed to reduce the number of days to process a mortgage loan from 45-60 to 10-15. The Opinion states that the Program “reduced effective oversight of the loans and removed most of the ‘toll gates’ that were previously set up to ensure loan quality.” The “toll gates” were procedures such as “underwriter review” and review by a “compliance specialist.” The defect rates and performance of the loans originated under the Program were quite poor.

The government alleged, notwithstanding the lack of origination standards and poor loan performance, the loans were represented to be of high-quality and sold to, among others, Fannie Mae and Freddie Mac. These two entities suffered substantial losses on the loans and the government brought the lawsuit to recover those losses.

Among the government’s legal theories was that the various alleged instances of wire and mail fraud involved in the sale of the mortgages to Fannie Mae and Freddie Mac “affected a federally insured financial institution,” that institution being Bank of America, N.A. (which had Countrywide’s conduct imputed to it). The Opinion refers to this theory as the “self-affecting” theory. The Court agreed with the government.

Put another way, the Court agreed with the theory that Bank of America’s (Countrywide’s) actions ended up harming the bank itself by subjecting it to billions of dollars in repurchase claims. Countrywide had argued that the “affected” parties in this case were the parties that suffered the harm in the first instance, Fannie Mae and Freddie Mac, neither of which is a “federally insured financial institution.”

The Court also agreed with the government that the FIRREA claims could be brought against Ms. Mairone in her capacity as a senior executive overseeing the Division.

The case has been remarked upon by numerous legal commenters as providing a new – but perhaps not unexpected – theory of liability for banks and their officers and employees for fraudulent actions which may appear at first blush to harm a bank’s non-bank counterparts, but which also adversely affect the bank.

Click here for the Opinion.



Residential Mortgage Roundtable – October 16, 2013, New York City, New York, 2pm – 6pm. Further details to follow.

ABS Vegas 2014 – January 21-24, Las Vegas, Nevada. Click here for more information.

SFIG is now accepting sponsorship contracts for this conference. Please contact us if you are interested.



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.


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