UPDATE Securitization Regulatory Scorecard. Securitization. It s All Tied Up and We re in Double Overtime. January 11, 2012

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1 Securitization UPDATE 2011 Securitization Regulatory Scorecard It s All Tied Up and We re in Double Overtime January 11, 2012 Although it has been almost 18 months since the passage of the Dodd-Frank Act, many if not most of the critical rule-making actions that are needed to implement the Dodd-Frank Act in the securitization arena are still in flux. Rules that truly have the potential to change the pricing, efficiency, structure, and even availability of securitization are yet to be finalized. Critical issues such as risk retention, prohibition on certain conflicts of interest, the Volcker Rule, and revised risk-based capital guidelines are unresolved. Given the intense level of public comment received on the key proposals and the colossal burden on regulators due to the sheer weight of mandated rulemakings, the implementation process is tied up in both senses tied up in knots and tied up in that there is no clear winner as between the proponents and opponents of the new rules. The process is a drawn-out one; many deadlines have been missed or extended, and there is still no certainty as to when the process will be completed we are not just in overtime, we re in double overtime. So 2011 has ended without providing many concrete answers on the most far-reaching proposals. Yet numerous other rule-making efforts have continued and some have indeed brought new regulations into effect. As 2012 gets under way, below is a quick reference guide to what has happened and where we are on a select number of regulatory actions affecting securitization. Accredited Investor Amendment Background: Section 413 of the Dodd-Frank Act required the SEC to revise its definition of accredited investor to exclude the value of a primary residence for purposes of determining whether a natural person, either individually or jointly with their spouse, has a net worth in excess of $1 million. Status: On December 21, 2011, the SEC amended its rules to implement Section 413 of the Dodd-Frank Act. The amended net worth standard becomes effective on February 27, Due Diligence Final Rule Background: Section 945 of the Dodd-Frank Act added Section 7(d) to the Securities Act which requires the SEC to adopt rules that require any issuer of asset-backed securities in a registered public offering to (i) perform a review of the assets underlying the asset-backed security and (ii) disclose the nature of such review. Attorney Advertising 2012 Kramer Levin Naftalis & Frankel LLP

2 Securitization Update 2 Status: On January 20, 2011, the SEC issued Rule 193 requiring an issuer of a registered asset-backed security to conduct a review of the pool assets underlying such asset-backed security. Such review must be designed and effected to provide reasonable assurance that the disclosure regarding the pool assets in the prospectus is accurate in all material respects. The issuer may employ third parties to conduct the review but if the findings and conclusions are attributed to the third party, the third party must be named in the prospectus and must consent to being named an expert in accordance with Rule 436 of the Securities Act. Rule 193 came into effect on March 28, 2011 and any registered offerings of asset-backed securities that are the subject of an initial bona fide offer after December 31, 2011 must be in compliance. In connection with Rule 193, Item 1111(a)(7) and Item 1111(a)(8) were added to Regulation AB. Item 1111(a)(7) requires disclosure in the prospectus of the review conducted in connection with Rule 193 and Item 1111(a)(8) requires disclosure concerning assets in the pool that deviate from disclosed underwriting criteria or other benchmarks. Representations and Warranties and Repurchase Requests Final Rules Background: Section 943 of the Dodd-Frank Act required the SEC to promulgate rules related to the use of representations and warranties in the asset-backed securities market requiring (1) rating agencies to include in any report accompanying a credit rating for an asset-backed security, a description of the representations, warranties and enforcement mechanisms available to investors and how they are different from the representations, warranties and enforcement mechanisms in issuances of similar securities, and (2) securitizers to disclose fulfilled and unfulfilled repurchase requests for breaches of representations and warranties so that investors may identify originators with clear underwriting deficiencies. Status: On January 20, 2011, the SEC enacted Rule 15Ga-1 and Rule 17g-7, amended certain provisions of Regulation AB and created a new Form ABS-15G to implement the requirements of Section 943 of the Dodd-Frank Act. Under Rule 15Ga-1, securitizers of both private and public assetbacked securities may, subject to the circumstances described in the rule, have to report information about fulfilled, unfulfilled and pending repurchase demands, on Form ABS-15G, by February 14, 2012 and/or within 45 days after the end of each calendar quarter. For registered offerings of asset-backed securities, amendments to Item 1104 and Item 1121 of Regulation AB will require any prospectus that is the subject of an initial bona fide offer on or after February 14, 2012 and any Form 10-Ds required to be filed after December 31, 2011, to contain information required by Rule 15Ga-1. Under Rule 17g-7, as of September 26, 2011, rating agencies must include in any report accompanying a credit rating for an asset-backed security, a description of the representations, warranties and enforcement mechanisms available to investors and how they are different from issuances of similar securities. Suspension of Duty of ABS Issuers to File Exchange Act Reports Final Rules Background: Section 942(a) of the Dodd-Frank Act eliminated the automatic suspension of the duty to file under Section 15(d) of the Securities Exchange Act for asset-backed securities and granted the SEC the authority to issue rules providing for the suspension or termination of such duty. Status: The SEC adopted Exchange Act Rule 15d-22(b) to provide certain thresholds for suspension of the ongoing reporting obligations for asset-backed securities issuers. Under the rule, the duty to file annual and other reports under Section 15(d) is suspended for any class of asset-backed securities (1) as to any semi-annual fiscal period, if at the beginning of such period, other than a period in the fiscal

3 Securitization Update 3 year within which the registration statement became effective or, for shelf offerings, the takedown occurred, there are no ABS of such class that were sold in a registered transaction held by non-affiliates of the depositor and a certification on Form 15 has been filed, or (2) when there are no asset-backed securities of such class that were sold in a registered transaction still outstanding, immediately upon the filing with the SEC of a certification on Form 15 if the issuer has filed all required reports for the most recent three fiscal years. Form 15 was also amended to add a checkbox for issuers to indicate that they are relying on Rule 15d-22(b) to suspend their reporting obligation. Rule 15d-22(b) became effective September 22, Proposed Risk Retention Rules Background: Section 941 of the Dodd-Frank Act added Section 15G to the Securities Exchange Act which requires the OCC, the Federal Reserve, the FDIC, the SEC, the Department of Housing and Urban Development and the Federal Housing Finance Agency (collectively, the Agencies ) to prescribe regulations to require any securitizer to retain not less than 5% of the credit risk of any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party, subject to certain specified exceptions. Status: On March 29, 2011, the Agencies jointly issued a notice of proposed rulemaking in respect of risk retention. The proposed rules provide for five basic options: (i) a vertical slice option, (ii) a horizontal slice option, (iii) horizontal cash reserve fund option, (iv) an L shaped option (which combines the vertical and horizontal options) and (v) a representative sample option. In order to accommodate structuring and other considerations, CMBS, ABCP and transactions involving revolving asset master trusts have additional proposed options to satisfy the risk retention requirements. One of the more controversial provisions contained in the proposed rules is the requirement that securitizers be subject to additional risk retention in the form of a premium capture cash reserve account, if they seek to monetize excess spread. Other critical issues that are subject to intense debate are the definitions for assets that qualify for exemption from the risk retention requirements. The proposed rules provide for exemptions for residential mortgage loans, commercial mortgage loans, commercial loans and auto loans that meet specified underwriting criteria, but most market participants and many members of Congress argue that the exemptions, particularly the definition of qualified residential mortgage ( QRM ), are so narrow as to provide very little relief to securitizers of high-quality assets. In addition, many members of Congress have objected to the proposed rules exemption of assetbacked securities guaranteed by Fannie Mae and Freddie Mac. Towards the end of 2011, a number of draft bills have been introduced in Congress which would, among other things, wind down Fannie Mae and Freddie Mac, create a new agency called the Mortgage Finance Agency, develop a new QRM definition, and even effect the repeal of the risk retention provisions of Section 941 of the Dodd- Frank Act. The deadline for comment on the proposed rules passed on August 1, Given the vast dissatisfaction with the proposed rules, numerous market participants have encouraged the Agencies to issue a re-proposal. At this stage it is unclear when or if the final rules relating to risk retention will be enacted. To the extent final rules are enacted, sponsors of asset-backed securities backed by residential mortgages will have to comply with such rules on the date that is one year after the date such rules are published and sponsors of asset-backed securities backed by assets other than residential

4 Securitization Update 4 mortgages will have to comply with such rules on the date that is two years after the date such rules are published. Proposed Conflicts of Interest Rules Background: Section 621 of the Dodd-Frank Act added Section 27B to the Securities Act which requires the SEC to implement rules to prohibit, subject to certain exceptions, an underwriter, placement agent, initial purchaser, or sponsor, or any affiliate or subsidiary of any such entity, of an asset-backed security, from engaging in a transaction during the period ending on the date that is one year after the date of the first closing of the sale of such asset-backed security, involving or resulting in any material conflict of interest with respect to any investor in such asset-backed security. Status: In September 2011, the SEC proposed for comment, a new Rule 127B, to implement the requirements of Section 621 of the Dodd-Frank Act. The original deadline for comments was December 19, 2011, but was extended to February 13, 2012 to give the public a better opportunity to consider any potential interplay between the proposed rules and the Volcker Rule and to facilitate coordination between the various agencies. Proposed Volcker Rule Background: Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, added a new Section 13 to the Bank Holding Company Act and generally prohibits and restricts the ability of a banking entity and nonbank financial company supervised by the Federal Reserve to engage in proprietary trading and have certain interests in, and relationships with, covered funds, subject to certain exemptions. The Volcker Rule requires that the FRB, the FDIC, the OCC, the SEC and the CFTC implement regulations that are coordinated and consistent. As the definition of covered funds references any entity that relies on Section 3(c)(1) or (7) for an exemption from the definition of investment company under the Investment Company Act, many securitization vehicles would be caught up in the rule, particularly bank-sponsored asset-backed commercial paper conduits. Status: On October 11, 2011, certain of the relevant agencies jointly issued a notice of proposed rule-making for the Volcker Rule entitled Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds The original deadline for comments was January 13, 2012, but was extended to February 13, The Volcker Rule will become effective on July 21, 2012, whether or not any implementing regulations are approved; however, banks will be given until July 21, 2014, to comply with the Volcker Rule. The FRB has additional discretion to extend the implementation period. The CFTC has yet to sign off on the existing proposal and may issue its own proposal in On January 11, 2012, the CFTC issued a substantively similar rule as that proposed in October by the other agencies tasked with implementing the Volcker Rule. Proposed Amendment to Rule 3a-7 Background: Rule 3a-7 provides asset backed securities issuers with a conditional exclusion from the definition of investment company under the Investment Company Act. One condition of the exclusion is that the securities are rated in one of the four highest categories assigned to long-term debt

5 Securitization Update 5 (or an equivalent for short-term debt) by at least one rating agency. Section 939A of the Dodd-Frank Act generally requires the SEC to replace requirements linked to credit ratings with other standards of credit-worthiness. Status: On August 31, 2011, the SEC issued an advanced notice of proposed rulemaking on possible amendments to Rule 3a-7 replacing requirements referencing credit ratings with other requirements to address investor protection. The Rule 3a-7 ANPR solicited comment regarding rating requirements, possible new conditions for Rule 3a-7 (independent party review and meeting shelf-eligibility criteria) and standards for acquisition and disposition of assets. Comments to the Rule 3a-7 ANPR were due on November 7, Proposed Risk Based Capital Guidelines Background: As noted above, Section 939A of the Dodd-Frank Act requires federal agencies to review any regulation that references the use of credit ratings, and to remove and substitute such references as each agency determines to be appropriate. One vital area of bank regulation where Section 939A may have a drastic effect is in the calculation of risk-weighting factors applicable to securitization positions. If the effect of the new risk-based capital guidelines is ultimately to require higher risk weightings for securitizations than have been applied in the past, the new guidelines will increase the cost of capital to issuers of securitizations or shrink demand or both. In addition, as efforts in Europe to adopt revised risk-based capital guidelines still include the use of credit ratings in determining risk-weighting factors, the newly-mandated approach in the U.S. is likely to result in inconsistent approaches being taken by banks operating in the same global marketplace. Lack of a uniform set of principles guiding the world s leading banks could lead to concerns regarding relative competitiveness, increased costs of compliance, and simply confusion. Status: On December 21, 2011, the FRB, OCC and FDIC issued a notice of proposed rule-making entitled Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions. This NPR is an amendment to the NPR issued on market risk capital rules back in January Given the far-reaching impact of the proposed new market risk capital rules, rule-making and implementation are moving slowly. It is likely that the final rules will be amended further and that applicable comment periods may be extended further. The market risk NPR represents only a section of the risk-based capital guidelines to be issued pursuant to Section 939A. Broader rules under Section 939A will be proposed by the bank regulators at a later date. Proposed Third Party Due Diligence Rules Background: Section 15E(s)(4)(A) to the Securities Exchange Act, which was added by Section 932 of the Dodd-Frank Act, requires issuers or underwriters of any public or private asset-backed security to make publicly available the findings and conclusions of any third-party due diligence report the issuer or underwriter obtains. As described above, Section 945 of the Dodd-Frank Act also relates to due diligence requirements of issuers of asset-backed securities. In October 2010, the SEC proposed rules for comment to implement Section 945 as well as part of Section 932 of the Dodd-Frank Act. In enacting Rule 193 in January 2011, the SEC clarified that it was only implementing the requirements of Section 945 and was postponing consideration of rules relating to third party due diligence required by Section 932 and Section 15E(s)(4)(A).

6 Securitization Update 6 Status: On June 8, 2011 the SEC issued a release seeking comment on a proposed Rule 15Ga-2 and amendments to Form ABS-15G to implement the portion of Section 932 of the Dodd-Frank Act relating to third-party due diligence. The proposed rule would apply to all issuers or underwriters of all offerings of asset-backed securities (whether or not registered) which are rated by a rating agency and requires the issuer or underwriter to furnish Form ABS-15G disclosing the identity of the securitizer and the findings and conclusions of the third-party due diligence report obtained. A due diligence report is proposed to mean a report resulting from due diligence services which is proposed to be a review of assets for the purpose of making findings with respect to (i) the quality or integrity of the information or data about the assets provided, (ii) whether the origination of underlying assets conform to disclosed underwriting standards, (iii) the value of the collateral securing such assets, (iv) whether the originator of the assets complied with applicable law and (v) any other factor or characteristic of such asset that would be material to the likelihood that that issuer will pay interest and principal on the asset-backed security. An issuer or underwriter would not be required to furnish Form ABS-15G if the rating agency represents that it will publicly disclose such information in connection with its publication of the credit rating. As part of the proposal to implement Section 932, the SEC also proposed a new Rule 17g-10 and Form ABS Due Diligence-15E which requires third party due diligence providers to provide rating agencies with a written certification that includes a summary of the findings and conclusions of such provider s due diligence. Comments to the proposed rules were due on August 8, Re-Proposal of Regulation AB II Background: On April 7, 2010, the SEC released for public comment, proposed rules (the Original Reg AB II Proposals ) that would substantially revise Regulation AB and other rules governing the offering process, increase disclosure and reporting for publicly offered asset-backed securities, and impose a new disclosure regime for privately placed asset-backed securities. In light of the passage of the Dodd-Frank Act and comments to the Original Reg AB II Proposals, on July 26, 2011, the SEC re-proposed rules (the Reg AB II Re-Proposals ). Status: While the Reg AB II Re-Proposals address some of the public comments and resolve a number of the discrepancies between the Dodd-Frank Act and the Original Reg AB II Proposals, there still remains a substantial number of concerns for market participants. It is expected that there will be continued heated discussion over (i) the requirements that a depositor s CEO certify as to the accuracy of disclosure and the anticipated performance of the underlying assets and the offered asset-backed securities, (ii) levels of asset-level and pool-level data, (iii) the use of independent parties to review and report on breaches of representations and warranties and repurchase remedies, and (iv) other shelf eligibility requirements. The Original Reg AB II Proposals would also have required the use and filing of a waterfall computer program. The SEC has indicated that it will re-propose that requirement at a later time. Finally, the Original Reg AB II Proposals highly controversial proposal to require publicstyle disclosure in private offerings that rely on exemptions from the registration requirements of the Securities Act of 1933 (such as Rule 144A and Regulation D) will certainly be continue to be heavily debated in 2012.

7 Securitization Update 7 Proposed Swap Clearing Rules Background: Section 723 of the Dodd-Frank Act requires that a swap must be submitted to a clearinghouse for clearing (the clearing requirement ) if the CFTC determines that the applicable swap must be cleared (the clearing determination ), unless an exception applies. Status: On September 20, 2011, the CFTC published a proposed rule that would establish a schedule to phase-in compliance with the clearing requirement. The phase in schedule is based on the identity of the counterparties to a swap, resulting in staggered compliance deadlines for the three different categories of entities. Category 1 Entities (swap dealers, major swap participants, active funds) engaging in swaps with other Category 1 Entities would have 90 days to comply with the clearing requirement once the CFTC has made a clearing determination. Category 2 Entities (commodity pools, employee benefit plans, entities engaged in banking or financial activities, other private funds) engaging in swaps with Category 1 Entities or other Category 2 Entities would have 180 days. Lastly, Category 3 Entities (all other market participants) would have 270 days after the clearing determination to comply with the clearing requirement regardless of the identity of the other party to the trade. It should be noted that the phase-in would only commence once the CFTC has satisfied certain conditions precedent, including adopting final rules regarding further definitions of terms such as swap, swap dealer, and major swap participant and a final rule relating to the protection of cleared swaps customer contracts and collateral. Since the CFTC now aims to satisfy the conditions precedent in the first or second quarter of 2012, the clearing requirement will likely not become effective until the third and fourth quarters of Foreign Account Tax Compliance Act Background: The Foreign Account Tax Compliance Act ( FATCA ) was enacted to combat tax evasion by U.S. persons holding investments in offshore accounts. FATCA requires Foreign Financial Institutions ( FFI ) to report to the IRS certain information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. If an FFI does not enter into an agreement with the IRS to report such information, the FFI will be a deemed a non-participating FFI. U.S. persons making payments to a non-participating FFI will be required to deduct and withhold 30% of the payment and pay such amount to the IRS. Despite numerous comment letters to the IRS, the law as currently constituted, likely includes an offshore CLO or CDO issuer as an FFI subject to FATCA. Status: FATCA goes into effect for all obligations entered into after March 18, 2012, but due to the numerous comments the IRS has received concerning the practical difficulties of implementing the new FATCA rules, the IRS has issued a number of notices extending various implementation guidelines. The requirements for timing and application of the FATCA rules will likely be clarified in As a general matter and unless the grandfather provision described below applies, starting on January 1, 2014, U.S. persons making payments to an FFI will be required to withhold unless such FFI has an agreement in place with the IRS qualifying it as a Participating FFI. FFI s may begin applying to the IRS for Participating FFI status as of January 1, An FFI must enter into an FFI agreement with the IRS by June 30, 2013 to ensure that it will be identified as a Participating FFI by the IRS

8 Securitization Update 8 in sufficient time to allow U.S. withholding agents to verify the Participating FFI s status and refrain from withholding beginning on January 1, An FFI that enters into an FFI agreement after June 30, 2013 might not be identified as a Participating FFI by the IRS in time to prevent withholding by U.S. payors beginning on January 1, The FATCA rules do contain a grandfathering provision which, subject to certain exceptions, provides that the new withholding requirements do not apply to any payment made under an obligation that is outstanding as of March 18, Franken Amendment Background: The so-called Franken Amendment is, or would be, comprised of Section 15(E)(w) of the Securities Exchange Act, as such Section would have been added by Section 939D of H.R (111th Congress), as passed by the Senate on May 20, The Franken Amendment would require the SEC to set up the Credit Rating Agency Board, whose main function would be to assign Qualified NRSROs to provide the initial credit rating on structured finance products. Perhaps it is a result of Senator Franken s prior career in comedy that the acronym for this board would be the CRAB? Under the Franken Amendment, an NRSRO that wishes to be able to provide the initial rating on a certain category of structured finance products would apply to the CRAB, and, if approved, the applicant would then be deemed a Qualified NRSRO with respect to such category of structured finance products. A structured finance product would include any asset-backed security under the Securities Exchange Act and any structured product based on an asset-backed security (as the SEC may further refine by rule). An issuer seeking an initial rating for a structured finance product would then apply to the CRAB, which would select one of the Qualified NRSROs to issue the initial rating. Status: The Franken Amendment was not passed in the final version of the Dodd-Frank Act. Instead, under Section 939F of the Dodd-Frank Act, the SEC is required to carry out a study to determine whether the CRAB, or something else like it, is feasible. The study is due within two years of the passage of Dodd-Frank, i.e., July However, the study is not the end of the story. After the study has been submitted by the SEC, Section 939F requires the SEC to proceed by rule-making to establish a system for the assignment of NRSROs to provide the initial ratings for structured finance products (defined the same way the Franken Amendment would have defined them) in a manner that prevents the issuer, sponsor, or underwriter of the structured finance product from selecting the NRSRO that will issue the initial rating. In such rule-making, Section 939F requires the SEC to give thorough consideration to the provisions of the Franken Amendment and requires the SEC to implement the measures set out in the Franken Amendment unless the SEC determines that an alternative system would better serve the public interest and the protection of investors. On May 16, 2011, the SEC solicited public comment in order to assist it in carrying out the study. Among those submitting comments in response to this request were the ASF and Senator Franken. The comment deadline was September 13, 2011; the SEC is now engaged in further work on the study. * * *

9 Securitization Update 9 If you have any questions or need additional information, please feel free to contact any of the following members of our Securitization Group: Gilbert K.S. Liu Partner gliu@kramerlevin.com Laurence Pettit Partner lpettit@kramerlevin.com Richard D. Rudder Partner rrudder@kramerlevin.com Jamie D. Kocis Associate jkocis@kramerlevin.com Fabien Carruzzo Associate fcarruzzo@kramerlevin.com This memorandum provides general information on legal issues and developments of interest to our clients and friends. It is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters we discuss here. Should you have any questions or wish to discuss any of the issues raised in this memorandum, please call your Kramer Levin contact. Kramer Levin Naftalis & Frankel LLP NEW YORK 1177 Avenue of the Americas New York, NY SILICON VALLEY 990 Marsh Road Menlo Park, CA PARIS 47, Avenue Hoche Paris (33-1)