(a) General requirement. Except as provided in sections 244.5 through
244.10, the sponsor of a securitization transaction must retain an
eligible vertical interest or eligible horizontal residual interest,
or any combination thereof, in accordance with the requirements of
this section.
(1) If the sponsor retains only an eligible
vertical interest as its required risk retention, the sponsor must
retain an eligible vertical interest in a percentage of not less than
5 percent.
(2) If the
sponsor retains only an eligible horizontal residual interest as its
required risk retention, the amount of the interest must equal at
least 5 percent of the fair value of all ABS interests in the issuing
entity issued as a part of the securitization transaction, determined
using a fair value measurement framework under GAAP.
(3) If the sponsor retains both an eligible
vertical interest and an eligible horizontal residual interest as
its required risk retention, the percentage of the fair value of the
eligible horizontal residual interest and the percentage of the eligible
vertical interest must equal at least five.
(4) The percentage of the eligible vertical
interest, eligible horizontal residual interest, or combination thereof
retained by the sponsor must be determined as of the closing date
of the securitization transaction.
(b) Option to hold base amount in eligible horizontal
cash reserve account. In lieu of retaining all or any part of
an eligible horizontal residual interest under paragraph (a) of this
section, the sponsor may, at closing of the securitization transaction,
cause to be established and funded, in cash, an eligible horizontal
cash reserve account in the amount equal to the fair value of such
eligible horizontal residual interest or part thereof, provided that
the account meets all of the following conditions:
(1) The account is held by the trustee
(or person performing similar functions) in the name and for the benefit
of the issuing entity;
(2) Amounts in the account are invested only in cash and cash equivalents;
and
(3) Until all ABS
interests in the issuing entity are paid in full, or the issuing entity
is dissolved:
(i) Amounts in the account shall be
released only to:
(A) Satisfy payments on ABS interests in the
issuing entity on any payment date on which the issuing entity has
insufficient funds from any source to satisfy an amount due on any
ABS interest; or
(B) Pay
critical expenses of the trust unrelated to credit risk on any payment
date on which the issuing entity has insufficient funds from any source
to pay such expenses and:
(1) Such expenses, in the absence of available funds in the
eligible horizontal cash reserve account, would be paid prior to any
payments to holders of ABS interests; and
(2) Such payments are made to parties
that are not affiliated with the sponsor; and
(ii) Interest (or other
earnings) on investments made in accordance with paragraph (b)(2)
of this section may be released once received by the account.
(c) Disclosures. A sponsor relying on this section shall provide, or cause to be
provided, to potential investors, under the caption “Credit Risk Retention”,
a reasonable period of time prior to the sale of the asset-backed
securities in the securitization transaction the following disclosures
in written form and within the time frames set forth in this paragraph
(c):
(1) Horizontal interest. With respect to any eligible horizontal
residual interest held under paragraph (a) of this section, a sponsor
must disclose:
(i) A reasonable period of time prior
to the sale of an asset-backed security issued in the same offering
of ABS interests,
(A) The fair value (expressed as a percentage
of the fair value of all of the ABS interests issued in the securitization
transaction and dollar amount (or corresponding amount in the foreign
currency in which the ABS interests are issued, as applicable)) of
the eligible horizontal residual interest that the sponsor expects
to retain at the closing of the securitization transaction. If the
specific prices, sizes, or rates of interest of each tranche of the
securitization are not available, the sponsor must disclose a range
of fair values (expressed as a percentage of the fair value of all
of the ABS interests issued in the securitization transaction and
dollar amount (or corresponding amount in the foreign currency in
which the ABS interests are issued, as applicable)) of the eligible
horizontal residual interest that the sponsor expects to retain at
the close of the securitization transaction based on a range of bona fide estimates or specified prices, sizes, or rates of interest
of each tranche of the securitization. A sponsor disclosing a range
of fair values based on a range of bona fide estimates or specified
prices, sizes or rates of interest of each tranche of the securitization
must also disclose the method by which it determined any range of
prices, tranche sizes, or rates of interest.
(B) A description of the material terms of
the eligible horizontal residual interest to be retained by the sponsor;
(C) A description of the
valuation methodology used to calculate the fair values or range of
fair values of all classes of ABS interests, including any portion
of the eligible horizontal residual interest retained by the sponsor;
(D) All key inputs and assumptions
or a comprehensive description of such key inputs and assumptions
that were used in measuring the estimated total fair value or range
of fair values of all classes of ABS interests, including the eligible
horizontal residual interest to be retained by the sponsor.
(E) To the extent applicable
to the valuation methodology used, the disclosure required in paragraph
(c)(1)(i)(D) of this section shall include, but should not be limited
to, quantitative information about each of the following:
(1) Discount rates;
(2) Loss given default (recovery);
(3) Prepayment rates;
(4) Default rates;
(5) Lag time between
default and recovery; and
(6) The basis of forward interest rates used.
(F) The disclosure required
in paragraphs (c)(1)(i)(C) and (D) of this section shall include,
at a minimum, descriptions of all inputs and assumptions that either
could have a material impact on the fair value calculation or would
be material to a prospective investor’s ability to evaluate the sponsor’s
fair value calculations. To the extent the disclosure required in
this paragraph (c)(1) includes a description of a curve or curves,
the description shall include a description of the methodology that
was used to derive each curve and a description of any aspects or
features of each curve that could materially impact the fair value
calculation or the ability of a prospective investor to evaluate the
sponsor’s fair value calculation. To the extent a sponsor uses information
about the securitized assets in its calculation of fair value, such
information shall not be as of a date more than 60 days prior to the
date of first use with investors; provided that for a subsequent issuance
of ABS interests by the same issuing entity with the same sponsor
for which the securitization transaction distributes amounts to investors
on a quarterly or less frequent basis, such information shall not
be as of a date more than 135 days prior to the date of first use
with investors; provided further, that the balance or value (in accordance
with the transaction documents) of the securitized assets may be increased
or decreased to reflect anticipated additions or removals of assets
the sponsor makes or expects to make between the cut-off date or similar
date for establishing the composition of the asset pool collateralizing
such asset-backed security and the closing date of the securitization.
(G) A summary description
of the reference data set or other historical information used to
develop the key inputs and assumptions referenced in paragraph (c)(1)(i)(D)
of this section, including loss given default and default rates;
(ii)
A reasonable time after the closing of the securitization transaction:
(A) The fair value (expressed as a percentage of the fair value of
all of the ABS interests issued in the securitization transaction
and dollar amount (or corresponding amount in the foreign currency
in which the ABS are issued, as applicable)) of the eligible horizontal
residual interest the sponsor retained at the closing of the securitization
transaction, based on actual sale prices and finalized tranche sizes;
(B) The fair value (expressed
as a percentage of the fair value of all of the ABS interests issued
in the securitization transaction and dollar amount (or corresponding
amount in the foreign currency in which the ABS are issued, as applicable))
of the eligible horizontal residual interest that the sponsor is required
to retain under this section; and
(C) To the extent the valuation methodology
or any of the key inputs and assumptions that were used in calculating
the fair value or range of fair values disclosed prior to sale and
required under paragraph (c)(1)(i) of this section materially differs
from the methodology or key inputs and assumptions used to calculate the
fair value at the time of closing, descriptions of those material
differences.
(iii) If the sponsor retains risk through
the funding of an eligible horizontal cash reserve account:
(A) The amount
to be placed (or that is placed) by the sponsor in the eligible horizontal
cash reserve account at closing, and the fair value (expressed as
a percentage of the fair value of all of the ABS interests issued
in the securitization transaction and dollar amount (or corresponding
amount in the foreign currency in which the ABS interests are issued,
as applicable)) of the eligible horizontal residual interest that
the sponsor is required to fund through the eligible horizontal cash
reserve account in order for such account, together with other retained
interests, to satisfy the sponsor’s risk retention requirement;
(B) A description of the
material terms of the eligible horizontal cash reserve account; and
(C) The disclosures required
in paragraphs (c)(1)(i) and (ii) of this section.
(2) Vertical interest. With respect to any
eligible vertical interest retained under paragraph (a) of this section,
the sponsor must disclose:
(i) A reasonable period of time prior
to the sale of an asset-backed security issued in the same offering
of ABS interests,
(A) The form of the eligible vertical interest;
(B) The percentage that the
sponsor is required to retain as a vertical interest under this section;
and
(C) A description of
the material terms of the vertical interest and the amount that the
sponsor expects to retain at the closing of the securitization transaction.
(ii)
A reasonable time after the closing of the securitization transaction,
the amount of the vertical interest the sponsor retained at closing,
if that amount is materially different from the amount disclosed under
paragraph (c)(2)(i) of this section.
(d) Record maintenance. A sponsor must retain the certifications and disclosures required
in paragraphs (a) and (c) of this section in its records and must
provide the disclosure upon request to the Commission and its appropriate
Federal banking agency, if any, until three years after all ABS interests
are no longer outstanding.
