Federal Register, Volume 85 Issue 243 (Thursday, December 17, 2020)

[Federal Register Volume 85, Number 243 (Thursday, December 17, 2020)]
[Rules and Regulations]
[Pages 82150-82258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25814]

[[Page 82149]]

Vol. 85

Thursday,

No. 243

December 17, 2020

Part III

Federal Housing Finance Agency

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Department of Housing and Urban Development

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Office of Federal Housing Enterprise Oversight

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12 CFR Parts 1206, 1225, 1240, et al.

Enterprise Regulatory Capital Framework; Final Rule

Federal Register / Vol. 85, No. 243 / Thursday, December 17, 2020 /
Rules and Regulations

[[Page 82150]]

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FEDERAL HOUSING FINANCE AGENCY

12 CFR Parts 1206, 1225, and 1240

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1750

RIN 2590-AA95

Enterprise Regulatory Capital Framework

AGENCY: Federal Housing Finance Agency; Office of Federal Housing
Enterprise Oversight.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA or the Agency) is
adopting a final rule (final rule) that establishes risk-based and
leverage capital requirements for the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac, and with Fannie Mae, each an Enterprise). The final rule
also makes conforming amendments to definitions in FHFA's regulations
governing assessments and minimum capital and removes the Office of
Federal Housing Enterprise Oversight's (OFHEO) regulation on capital
for the Enterprises.

DATES: This rule is effective February 16, 2021.

FOR FURTHER INFORMATION CONTACT: Naa Awaa Tagoe, Principal Associate
Director, Office of Capital Policy, (202) 649-3140,
NaaAwaa.Tagoe@fhfa.gov; Andrew Varrieur, Associate Director, Office of
Capital Policy, (202) 649-3141, Andrew.Varrieur@fhfa.gov; or Mark
Laponsky, Deputy General Counsel, Office of General Counsel, (202) 649-
3054, Mark.Laponsky@fhfa.gov. These are not toll-free numbers. The
telephone number for the Telecommunications Device for the Deaf is
(800) 877-8339.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. The Proposed Rule
III. Overview of the Final Rule
A. Key Modifications to the Proposed Rule
B. Modifications to the 2018 Proposal
C. Regulatory Capital Requirements
D. Capital Buffers
E. Transition Period
IV. FSOC Review of the Secondary Mortgage Market
V. General Comments on the Proposed Rule
A. Access and Affordability and Other Aggregate Impacts
B. Similarities to the U.S. Banking Framework
C. Differences Between the Enterprises and Banks
D. Mortgage-Risk Sensitive Framework
E. Housing Finance Reform
VI. Definitions of Regulatory Capital
A. Guarantee Fees
B. Reserves
C. Subordinated Debt
VII. Capital Requirements
A. Risk-Based Capital Requirements
B. Leverage Ratio Requirements
1. Adjusted Total Assets
2. Sizing of the Requirements
C. Enforcement
VIII. Capital Buffers
A. Prescribed Capital Conservation Buffer Amount
1. Comments Applicable to Each Component Buffer
2. Stress Capital Buffer
3. Countercyclical Capital Buffer
4. Stability Capital Buffer
B. Prescribed Leverage Buffer Amount
C. Payout Restrictions
IX. Credit Risk Capital: Standardized Approach
A. Single-Family Mortgage Exposures
1. Base Risk Weights
2. Countercyclical Adjustment
3. Risk Multipliers
4. Credit Enhancement Multipliers
5. Minimum Adjusted Risk Weight
B. Multifamily Mortgage Exposures
1. Calibration Framework
2. Base Risk Weights
3. Countercyclical Adjustment
4. Risk Multipliers
5. Minimum Adjusted Risk Weight
C. PLS and Other Non-CRT Securitization Exposures
D. Retained CRT Exposures
1. Proposed Rule's Enhancements
2. Risk Weight Floor
3. Risk Weight Determination
4. Overall Effectiveness Adjustment
5. Loss-Timing Adjustment
6. Loss-Sharing Adjustment
7. Eligible CRT Structures
8. Other Comments and Issues
E. Other Exposures
X. Credit Risk Capital: Advanced Approach
XI. Market Risk Capital
XII. Operational Risk Capital
XIII. Impact of the Enterprise Capital Rule
XIV. Key Differences From the U.S. Banking Framework
XV. Transition Period
XVI. Temporary Increases of Minimum Capital Requirements
XVII. Administrative Law Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Congressional Review Act

Introduction

On June 30, 2020, FHFA published in the Federal Register a notice
of proposed rulemaking (proposed rule) seeking comment on a new
regulatory capital framework for the Enterprises.\1\ The proposed rule
was a re-proposal of the regulatory capital framework set forth in the
notice of proposed rulemaking published in the Federal Register on July
17, 2018 (2018 proposal).\2\ While the 2018 proposal remained the
foundation of the proposed rule, the proposed rule contemplated
enhancements to establish a post-conservatorship regulatory capital
framework that would ensure that each Enterprise operates in a safe and
sound manner and is positioned to fulfill its statutory mission to
provide stability and ongoing assistance to the secondary mortgage
market across the economic cycle, in particular during periods of
financial stress. FHFA is now adopting in this final rule the proposed
regulatory capital framework, with certain changes to the proposed rule
described below.
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\1\ 85 FR 39274.
\2\ 83 FR 33312.
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The Proposed Rule

Pursuant to the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 \3\ (Safety and Soundness Act), as amended by the
Housing and Economic Recovery Act of 2008 \4\ (HERA), the FHFA
Director's principal duties include, among other duties, ensuring that
each Enterprise operates in a safe and sound manner, that the
operations and activities of each Enterprise foster liquid, efficient,
competitive, and resilient national housing finance markets, and that
each Enterprise carries out its statutory mission only through
activities that are authorized under and consistent with the Safety and
Soundness Act and its charter.\5\ Pursuant to their charters, the
statutory purposes of the Enterprises are, among other purposes, to
provide stability in, and ongoing assistance to, the secondary market
for residential mortgages.\6\
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\3\ Public Law 102-550, 106 Stat. 3941 (1992).
\4\ Public Law 110-289, 122 Stat. 2654 (2008).
\5\ 12 U.S.C. 4513(a)(1).
\6\ 12 U.S.C. 1451 note, 1716.
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Consistent with these statutory duties and purposes, FHFA re-
proposed the regulatory capital framework for the Enterprises for three
key reasons. First, FHFA has begun the process to responsibly end the
conservatorships of the Enterprises. This policy is a departure from
the expectations of interested parties at the time of the 2018 proposal
when the prospects for indefinite conservatorships informed comments
and perhaps even the decision whether to comment at all.
Second, FHFA proposed to increase the quantity and quality of
regulatory capital to ensure that each Enterprise operates in a safe
and sound manner

[[Page 82151]]

and is positioned to fulfill its statutory mission to provide stability
and ongoing assistance to the secondary mortgage market across the
economic cycle, in particular during periods of financial stress. To
achieve this objective, each Enterprise must be capitalized to be
regarded as a viable going concern by creditors and counterparties both
during and after a severe economic downturn. The importance of this
going-concern standard was made clear by the Enterprises' funding
difficulties and near failure during the 2008 financial crisis. The
Enterprises fund themselves with a significant amount of short-term
unsecured debt that must be regularly refinanced. Each Enterprise's
funding needs are very likely to increase during an economic downturn,
all else equal, as the Enterprise funds purchases of non-performing
loans (NPLs) out of securitization pools and lenders increase their
reliance on the Enterprise's cash window. These ordinary course and
procyclical funding needs can be met only if the Enterprise continues
to be regarded as a viable going concern by creditors throughout the
duration of an economic downturn. Indeed, it was the increase in the
Enterprises' borrowing costs and the associated difficulties that the
Enterprises faced in refinancing their debt that were among the most
immediate grounds for FHFA placing the Enterprises into
conservatorship.\7\
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\7\ See Memorandum dated September 6, 2008 re: Proposed
Appointment of the Federal Housing Finance Agency as Conservator for
the Fannie Mae at 29 (``The Enterprise's practice of relying upon
repo financing of its agency collateral to raise cash in the current
credit and liquidity environment is an unsafe or unsound practice
that has led to an unsafe or unsound condition, given the
unavailability of willing lenders to provide secured financing in
significant size to reduce pressure on its discount notes
borrowings.''); and Memorandum dated September 6, 2008 re: Proposed
Appointment of the Federal Housing Finance Agency as Conservator for
the Freddie Mac at 28 (``The Enterprise's prolonged reliance almost
exclusively on 30-day discount notes is an untenable long-term
source of funding and an unsafe or unsound practice that poses
abnormal risk to the viability of the Enterprise. Operating without
an adequate liquidity funding contingency plan is an unsafe or
unsound condition to transact business.''); and Fin. Crisis Inquiry
Comm'n, The Financial Crisis Inquiry Report: Final Report of the
National Commission on the Causes of the Financial and Economic
Crisis in the United States at 316 (2011) (the FCIC Report),
available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; (``In July and August 2008, Fannie suffered a liquidity
squeeze, because it was unable to borrow against its own securities
to raise sufficient cash in the repo market.''); see id. at 316
(``By June 2008, the spread [between the yield on the GSEs' long-
term bonds and rates on Treasuries] had risen 65 percent over the
2007 level; by September 5, just before regulators parachuted in,
the spread had nearly doubled from its 2007 level to just under 1
percent, making it more difficult and costly for the GSEs to fund
their operations.'').
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The 2008 financial crisis also established that credit, market, and
other losses can be incurred quickly during a stress and that an
Enterprise's capacity to absorb those losses as incurred while still
timely performing its financial obligations defines creditors' and
other counterparties' views as to whether the Enterprise remains a
viable going concern. During a stress, creditors are unlikely to give
much consideration to future revenue prospects in assessing whether an
Enterprise can timely perform its financial obligations. Market
confidence in the Enterprises waned in mid-2008 when Fannie Mae and
Freddie Mac had total capital of, respectively, $55.6 billion and $42.9
billion, notwithstanding their rights to future guarantee fees.
It was in this historical context that HERA amended the Safety and
Soundness Act to give FHFA greater authority to establish regulatory
capital requirements for the Enterprises. OFHEO had previously been
bound by the Safety and Soundness Act's prescriptive restrictions on
the stress scenario used to calibrate the risk-based capital
requirements. Under HERA's expanded authority, FHFA is required to
prescribe by regulation risk-based capital requirements ``to ensure
that the enterprises operate in a safe and sound manner, maintaining
sufficient capital and reserves to support the risks that arise in the
operations and management of the enterprises.'' \8\ Importantly, the
requirement that each Enterprise ``maintain[] sufficient capital and
reserves'' applies before, during, and after a severe economic
downturn, codifying in statute a going-concern standard.
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\8\ 12 U.S.C. 4611.
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For the reasons given in Section IV.B.2 and elsewhere of the
proposed rule, FHFA determined that the 2018 proposal's credit risk
capital requirements were insufficient to ensure each Enterprise would
continue to be regarded as a viable going concern during and after a
severe economic downturn. Had the 2018 proposal been in effect at the
end of 2007, Fannie Mae's and Freddie Mac's peak cumulative capital
exhaustion would have left, respectively, capital equal to only 0.1
percent and 0.5 percent of their total assets and off-balance sheet
guarantees. These amounts would not have sustained the market
confidence necessary for the Enterprises to continue as going concerns,
particularly given the prevailing stress in the financial markets at
that time and given the uncertainty as to the potential for other
write-downs and the adequacy of the Enterprises' allowances for loan
and lease losses (ALLL).\9\
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\9\ Indeed, in October 2010, FHFA projected $90 billion in
additional draws under the Senior Preferred Stock Purchase
Agreements through 2013 under the baseline scenario. Only $34
billion in additional draws proved necessary. See Fed. Hous. Fin.
Agency, Projections of the Enterprises' Financial Performance at 10
(Oct. 2010), available at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2010-10_Projections_508.pdf.
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Reinforcing that point, the Enterprises' crisis-era cumulative
capital losses, while significant, could have been greater. The
Enterprises' losses were likely mitigated by unprecedented federal
government support of the housing market and the economy during the
crisis, including through the Home Affordable Modification Program, the
Troubled Asset Relief Program, the 2009 stimulus package,\10\ and the
Federal Reserve System's purchases of more than $1.2 trillion of the
Enterprises' debt and mortgage-backed securities (MBS) from January
2009 to March 2010. The Enterprises' losses also were likely dampened
by the declining interest rate environment of the period, when the
interest rates on 30-year fixed-rate mortgage loans declined by
approximately 200 basis points through the end of 2011, facilitating
refinancings and loss mitigation programs.
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\10\ American Recovery and Reinvestment Act of 2009, Public Law
111-5, 123 Stat. 115 (2009).
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In addition to ensuring each Enterprise would continue to be
regarded as a viable going concern during and after a repeat of the
2008 financial crisis, FHFA also determined that enhancements to the
quantity and quality of regulatory capital at the Enterprises were
necessary to mitigate certain risks and limitations associated with the
underlying historical data and models used to calibrate the 2018
proposal's credit risk capital requirements. Mitigation of model risk
figured prominently in FHFA's design of the proposed rule. As discussed
in Section IV.B.2 of the proposed rule, the calibration of the 2018
proposal's credit risk capital requirements attributed a significant
portion of the Enterprises' crisis-era losses to the product
characteristics of mortgage loans that are no longer eligible for
acquisition.\11\ The statistical methods used to allocate losses
between borrower-related risk attributes and product-related risk

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attributes pose significant model risk.\12\ To ensure safety and
soundness, the capital requirements should be sized to mitigate the
risk of potential underestimation of credit losses that would be
incurred in an economic downturn with national housing price declines
similar to those observed in the 2008 financial crisis, even absent
those ineligible loan types and even assuming a repeat of federal
support of the economy and a declining interest rate environment. There
also were some material risks to the Enterprises that were not assigned
a risk-based capital requirement under either the 2018 proposal or the
proposed rule--for example, risks relating to uninsured or underinsured
losses from flooding, earthquakes, or other natural disasters or
radiological or biological hazards. There also was no risk-based
capital requirement for the risks that climate change could pose to
property values in some localities.
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\11\ These ineligible mortgage loan products included ``Alt-A,''
negative amortization, interest-only, and low or no documentation
loans, as well as loans with debt-to-income ratio at origination
greater than 50 percent, cash out refinances with total loan-to-
value ratios (LTV) greater than 85 percent, and investor loans with
LTV greater than or equal to 90 percent.
\12\ Reliance on static look-up grids and multipliers might also
introduce additional model risk as borrower behavior, mortgage
products, underwriting and collateral valuation practices, or the
national housing markets continue to evolve.
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The third reason FHFA re-proposed the Enterprises' regulatory
capital framework was to make changes to mitigate the procyclicality of
the aggregate risk-based capital requirements of the 2018 proposal.
FHFA agreed with many of the commenters on the 2018 proposal that
mitigating the procyclicality of the 2018 proposal's risk-based capital
requirements would facilitate capital management and enhance the safety
and soundness of the Enterprises. Mitigating that procyclicality was
also critical, in FHFA's view, to position each Enterprise to fulfill
its statutory mission to provide stability and ongoing assistance to
the secondary mortgage market across the economic cycle.
The enhancements contemplated by the proposed rule, while
important, preserved the 2018 proposal as the foundation of the
Enterprises' regulatory capital framework. FHFA nonetheless determined
to solicit comments on the revised framework in its entirety in light
of the changed policy environment, the extent and nature of the
enhancements, the technical nature of the underlying issues, the
diverse range of interested parties, and the critical importance of the
Enterprises' regulatory capital framework to the national housing
finance markets.

Overview of the Final Rule

Key Modifications to the Proposed Rule

After carefully considering the comments on the proposed rule, and
as described in this preamble, FHFA has determined to make a number of
changes to the proposed rule to ensure that each Enterprise operates in
a safe and sound manner and is positioned to fulfill its statutory
mission across the economic cycle, in particular during periods of
financial stress. Key modifications to the proposed rule include, among
others:
Changes to the approach to credit risk transfers (CRT)
will better tailor the risk-based capital requirements to the risk
retained by an Enterprise on its CRT. These enhancements include a
change to the overall effectiveness adjustment for a CRT on a pool of
mortgage exposures that has a relatively lower aggregate credit risk
capital requirement, a change to the method for assigning a risk weight
to a retained CRT exposure so as to increase the risk sensitivity of
the risk weight, and a modification to the loss-timing adjustment for a
CRT on multifamily mortgage exposures to better tailor the adjustment
to the contractual term of the CRT and the loan terms of the underlying
exposures. These changes will together generally increase the dollar
amount of the capital relief for certain CRT structures commonly
entered into by the Enterprises.
The floor on the adjusted risk weight assigned to mortgage
exposures will be 20 percent instead of 15 percent. This adjustment may
increase to some extent the dollar amount of the capital relief
provided by a CRT on a pool of mortgage exposures that, absent the 20
percent risk weight floor, would have had a smaller aggregate net
credit risk capital requirement.
The credit risk capital requirement for a single-family
mortgage exposure that is or was in forbearance pursuant to the
Coronavirus Aid, Relief, and Economic Security (CARES) Act or a program
established by FHFA to provide forbearance for COVID-19-impacted
borrowers will be assigned under an approach that is specifically
tailored to these exposures. This approach will significantly reduce
the credit risk capital requirement for a non-performing loan that is
subject to a COVID-19-related forbearance and, following a
reinstatement, will then disregard that period of non-performance.
The framework for determining credit risk capital
requirements will permit a modified re-performing loan to transition to
a performing loan after a 5-year period of performance, treat a single-
family mortgage exposure in a repayment plan (including following a
COVID-19-related forbearance) as a non-modified re-performing loan
instead of a modified re-performing loan, and apply a more risk-
sensitive approach to single-family mortgage exposures with marked-to-
market loan-to-value ratios between 30 and 60 percent.
The combined risk multiplier for a single-family mortgage
exposure will be capped at 3.0, as contemplated by the 2018 proposal.
The countercyclical adjustment to the standardized credit
risk capital requirement for a single-family mortgage exposure will be
based on the national, not-seasonally adjusted expanded-data FHFA House
Price Index[supreg] (expanded-data FHFA HPI) instead of the all-
transaction FHFA HPI. The long-term HPI trend line will be subject to
re-estimation according to a mechanism specified in the final rule. As
of June 30, 2020, house prices were moderately greater than the 5
percent collar. As a result, the adjusted marked-to-market loan-to-
value ratios of single-family mortgage exposures would be increased by
the countercyclical adjustment, increasing the aggregate risk-based
capital requirements for these exposures.
The stress capital buffer will be periodically re-sized to
the extent that FHFA's eventual program for supervisory stress tests
determines that an Enterprise's peak capital exhaustion under a
severely adverse stress would exceed 0.75 percent of adjusted total
assets.
The advanced approaches requirements will have a delayed
effective date of the later of January 1, 2025 and any later compliance
date provided by a transition order applicable to the Enterprise.
During that interim period, an Enterprise's operational risk capital
requirement will be 15 basis points of its adjusted total assets.

B. Modifications to the 2018 Proposal

With these modifications to the proposed rule, the final rule
adopts most of the proposed rule's contemplated enhancements to the
2018 proposal, including:
Simplifications and refinements of the grids and risk
multipliers for the credit risk capital requirements for single-family
mortgage exposures, including removal of the single-family risk
multipliers for loan balance and the number of borrowers.
A stability capital buffer tailored to the risk that an
Enterprise's default or

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other financial distress could pose to the liquidity, efficiency,
competitiveness, and resiliency of national housing finance markets.
A stress capital buffer that would, among other things,
enhance the resiliency of the Enterprises, help ensure that each
Enterprise would continue to be regarded as a viable going concern by
creditors and other counterparties after a severe economic downturn,
and dampen the procyclicality of the regulatory capital framework by
encouraging each Enterprise to retain capital during periods of
economic expansion while remaining able to provide stability and
ongoing assistance to the secondary mortgage market during a period of
financial stress by utilizing capital buffers to absorb losses as
incurred.
A countercyclical adjustment for single-family credit risk
that would result in greater capital retention when housing markets may
be vulnerable to correction, while better enabling the Enterprises to
continue to support the secondary mortgage market during a period of
financial stress.
A prudential floor on the credit risk capital requirement
assigned to mortgage exposures to mitigate the model and other risks
associated with the methodology for calibrating the credit risk capital
requirements and also provide further stability in the aggregate risk-
based capital requirements through the economic cycle.
A credit risk capital requirement on senior tranches of
CRT held by an Enterprise to capitalize the retained credit risk, an
adjustment to the CRT capital treatment to reflect that CRT is not
equivalent in loss-absorbing capacity to equity financing, and
operational criteria for CRT structures that together would help
mitigate certain structuring, recourse, and other risks associated with
these securitizations.
Risk-based capital requirements for a number of exposures
not expressly addressed by the 2018 proposal, including credit risk on
commitments to acquire mortgage loans, counterparty risk on interest
rate and other derivatives, and credit risk on an Enterprise's holdings
or guarantees of the other Enterprise's MBS or debt.
A revised method for determining operational risk capital
requirements, as well as a higher floor.
A requirement that each Enterprise maintain internal
models for determining its own risk-based capital requirements that is
intended to prompt each Enterprise to develop its own view of credit
and other risks and not rely solely on the risk assessments underlying
the standardized risk weights assigned under the regulatory capital
framework.
A 2.5 percent leverage ratio requirement and a 1.5 percent
leverage buffer that together would serve as a credible backstop to the
risk-based capital requirements and mitigate the inherent risks and
limitations of any methodology for calibrating granular credit risk
capital requirements.

C. Regulatory Capital Requirements

As implemented by this final rule, the regulatory capital framework
will require each Enterprise to maintain the following risk-based
capital:
Total capital not less than 8.0 percent of risk-weighted
assets, determined as discussed below;
Adjusted total capital not less than 8.0 percent of risk-
weighted assets;
Tier 1 capital not less than 6.0 percent of risk-weighted
assets; and
Common equity tier 1 (CET1) capital not less than 4.5
percent of risk-weighted assets.
Each Enterprise also will be required to satisfy the following
leverage ratios:
Core capital not less than 2.5 percent of adjusted total
assets; and
Tier 1 capital not less than 2.5 percent of adjusted total
assets.
Adjusted total assets will be defined as total assets under
generally accepted accounting principles (GAAP), with adjustments to
include certain off-balance sheet exposures. Total capital and core
capital will have the meaning given in the Safety and Soundness Act.
Adjusted total capital, tier 1 capital, and CET1 capital will be
defined based on the definitions of total capital, tier 1 capital, and
CET1 capital set forth in the regulatory capital framework (the Basel
framework) developed by the Basel Committee on Bank Supervision (BCBS)
that is the basis for the United States banking regulators' regulatory
capital framework (U.S. banking framework). These supplemental
regulatory capital definitions will fill certain gaps in the statutory
definitions of core capital and total capital by making customary
deductions and other adjustments for certain deferred tax assets (DTAs)
and other assets that tend to have less loss-absorbing capacity during
a financial stress.
To calculate its risk-based capital requirements, an Enterprise
will determine its risk-weighted assets under two approaches--a
standardized approach and an advanced approach--with the greater of the
two used to determine its risk-based capital requirements. Under both
approaches, an Enterprise's risk-weighted assets will equal the sum of
its credit risk-weighted assets, market risk-weighted assets, and
operational risk-weighted assets.
Under the standardized approach, the credit risk-weighted assets
for mortgage loans secured by one-to-four residential units (single-
family mortgage exposures) and mortgage loans secured by five or more
residential units (multifamily mortgage exposures) will be determined
using lookup grids and multipliers that assign an exposure-specific
risk weight based on the risk characteristics of the mortgage exposure.
These lookup grids and multipliers generally are similar to those of
the 2018 proposal, with some simplifications and refinements.\13\
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\13\ This base risk weight would be equal to the adjusted total
capital requirement for the mortgage exposure expressed in basis
points and divided by 800, which is the 8.0 percent adjusted total
capital requirement also expressed in basis points. For example, the
credit risk capital requirement for a mortgage exposure with a base
risk weight of 50 percent would be 400 basis points (800 multiplied
by 50 percent).
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Like the 2018 proposal, the base risk weight will be a function of
the mortgage exposure's loan-to-value ratio with the property value
generally marked to market (MTMLTV). For single-family mortgage
exposures, the MTMLTV will be subject to a countercyclical adjustment
to the extent that national house prices are 5.0 percent greater than
or less than an inflation-adjusted long-term trend. For both single-
family and multifamily mortgage exposures, this base risk weight will
then be adjusted to reflect additional risk attributes of the mortgage
exposure and any loan-level credit enhancement. To ensure an
appropriate level of capital, this adjusted risk weight will be subject
to a minimum floor of 20 percent.
As of June 30, 2020, under the final rule's standardized approach,
the Enterprises' average risk weight for single-family mortgage
exposures would have been 37 percent, and the Enterprises' average risk
weight for multifamily mortgage exposures would have been 49
percent.\14\
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\14\ These average risk weights are determined based on the
credit risk capital requirement for single-family and multifamily
mortgage exposures after adjustments for mortgage insurance and
other loan-level credit enhancement but before any adjustment for
CRT.
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While the standardized approach will utilize FHFA-prescribed lookup
grids and risk multipliers, the advanced approach for determining
credit risk-weighted assets will rely on each Enterprise's internal
models. The advanced approach requirements will require each Enterprise
to maintain its own processes for identifying and assessing credit
risk, market risk, and operational risk. These requirements are

[[Page 82154]]

intended to ensure that each Enterprise continues to enhance its risk
management system and also that neither Enterprise relies solely on the
standardized approach's lookup grids and multipliers to define credit
risk tolerances, measure its credit risk, or allocate capital. In the
course of FHFA's supervision of each Enterprise's internal models for
credit risk, FHFA also could identify opportunities to update or
otherwise enhance the standardized approach's lookup grids and
multipliers through a future rulemaking.
Under both the standardized and advanced approaches, an Enterprise
will determine the capital treatment for eligible CRT by assigning risk
weights to retained CRT exposures. Under the standardized approach,
tranche-specific risk weights will be subject to a 10 percent floor.
The risk-weighted assets of a retained CRT exposure will be subject to
adjustments to reflect loss-sharing effectiveness, loss-timing
effectiveness, and the differences between CRT and regulatory capital,
ensuring that the capital relief afforded by the CRT appropriately
reflects the credit risk retained by the Enterprise.
Each Enterprise also will determine a market risk capital
requirement for spread risk. Market risks other than spread risk will
not be assigned a market risk capital requirement, but FHFA continues
to consider more comprehensive approaches for future rulemakings. Under
the standardized approach, an Enterprise will determine its market
risk-weighted assets using FHFA-specified formulas for some covered
positions and its own models for other covered positions. An Enterprise
will separately determine its market risk-weighted assets under an
advanced approach that relies only on its own internal models for all
covered positions.
The final rule also will require each Enterprise to determine its
operational risk capital requirement utilizing the U.S. banking
framework's advanced measurement approach, subject to a floor equal to
15 basis points of the Enterprise's adjusted total assets.
Each of these regulatory capital requirements will be enforceable
by FHFA under its general authority to order an Enterprise to cease and
desist from a violation of law, which would include the final rule and
its regulatory capital requirements. Pursuant to that authority, FHFA
may require an Enterprise to develop and implement a capital
restoration plan or take other appropriate corrective action. FHFA also
could elect to enforce the risk-based and leverage ratio requirements
pursuant to its authority to require an Enterprise to develop a plan to
achieve compliance with prescribed prudential management and
operational standards, and FHFA also could enforce the core capital
leverage ratio requirement or the risk-based total capital requirement
pursuant to its separate authority to require prompt corrective action
if an Enterprise fails to maintain certain prescribed regulatory
levels.

D. Capital Buffers

To avoid limits on capital distributions and discretionary bonus
payments, an Enterprise must maintain CET1 capital that exceeds its
risk-based capital requirements by at least the amount of its
prescribed capital conservation buffer amount (PCCBA). That PCCBA will
consist of three separate component buffers--a stress capital buffer, a
countercyclical capital buffer, and a stability capital buffer.
The stress capital buffer will be at least 0.75 percent of
an Enterprise's adjusted total assets. FHFA will periodically re-size
the stress capital buffer to the extent that FHFA's eventual program
for supervisory stress tests determines that an Enterprise's peak
capital exhaustion under a severely adverse stress would exceed 0.75
percent of adjusted total assets.
The countercyclical capital buffer amount initially will
be set at 0 percent of an Enterprise's adjusted total assets. FHFA does
not expect to adjust this buffer in the place of, or to supplement, the
countercyclical adjustment to the risk-based capital requirements.
Instead, as under the Basel and U.S. banking frameworks, FHFA will
adjust the countercyclical capital buffer taking into account the
macro-financial environment in which the Enterprises operate, such that
the buffer would be deployed only when excess aggregate credit growth
is judged to be associated with a build-up of system-wide risk. This
focus on excess aggregate credit growth means the countercyclical
buffer likely will be deployed on an infrequent basis, and generally
only when similar buffers are deployed by the U.S. banking regulators.
An Enterprise's stability capital buffer will be tailored
to the risk that an Enterprise's default or other financial distress
could pose to the liquidity, efficiency, competitiveness, or resiliency
of national housing finance markets. The stability capital buffer will
be based on an Enterprise's share of residential mortgage debt
outstanding. As of June 30, 2020, Fannie Mae's and Freddie Mac's
stability capital buffers would have been, respectively, 1.07 and 0.66
percent of adjusted total assets.
Finally, to avoid limits on capital distributions and discretionary
bonus payments, the Enterprise also will be required to maintain tier 1
capital in excess of the amount required under its tier 1 leverage
ratio requirement by at least the amount of its prescribed leverage
buffer amount (PLBA). The PLBA will equal 1.5 percent of the
Enterprise's adjusted total assets, such that the PLBA-adjusted
leverage ratio requirement would function as a credible backstop to the
PCCBA-adjusted risk-based capital requirements.

E. Transition Period

An Enterprise will not be subject to any requirement under the
final rule until the compliance date for the requirement under the
final rule. The compliance date for the regulatory capital requirements
(distinct from the PCCBA or the PLBA) will be the later of the date of
the termination of the conservatorship of the Enterprise (or, if later,
the effective date of the final rule, which would be 60 days after
publication in the Federal Register) and any later compliance date
provided in a consent order or other transition order applicable to the
Enterprise. In contrast, FHFA contemplates that the compliance dates
for the PCCBA and the PLBA will be the date of the termination of the
conservatorship of the Enterprise (or, if later, the effective date of
the final rule), so as to provide additional authority to FHFA to
restrict dividends and other capital distributions during the period in
which the Enterprise raises regulatory capital to achieve compliance
with the regulatory capital requirements. FHFA expects that this
interim period could be governed by a capital restoration plan that
would be binding on the Enterprise pursuant to a consent order or other
transition order.
The final rule's advanced approaches requirements will be delayed
until the later of January 1, 2025 and any later compliance date
specific to those requirements provided in a consent order or other
transition order applicable to the Enterprise. Regardless of the date
of the termination of the conservatorship of an Enterprise, the
Enterprise will be required to report its regulatory capital, PCCBA,
PLBA, standardized total risk-weighted assets, and adjusted total
assets beginning January 1, 2022.

IV. FSOC Review of the Secondary Mortgage Market

On September 25, 2020, the Financial Stability Oversight Council
(FSOC) released a statement on its activities-based review of the
secondary mortgage

[[Page 82155]]

market (FSOC Secondary Market Statement). FSOC found that any distress
at the Enterprises that affected their secondary mortgage market
activities could pose a risk to financial stability, if risks are not
properly mitigated. Much of FSOC's analysis centered on the extent to
which the proposed rule would adequately mitigate the potential
stability risk of the Enterprises.
The FSOC Secondary Market Statement affirmed the overall quantity
and quality of the regulatory capital required by the proposed rule.
The FSOC Secondary Market Statement also indicated that greater capital
requirements might be appropriate for some exposures. Notably, FSOC's
analysis suggested that ``risk-based capital requirements and leverage
ratio requirements that are materially less than those contemplated by
the proposed rule would likely not adequately mitigate the potential
stability risk posed by the Enterprises.'' FSOC also found that ``it is
possible that additional capital could be required for the Enterprises
to remain viable concerns in the event of a severely adverse stress . .
. .''
The FSOC Secondary Market Statement included other findings and
recommendations that generally endorsed the objectives, rationales, and
approaches of the proposed rule.
Going-concern standard. Consistent with the proposed
rule's objectives, FSOC ``encourage[d] FHFA to require the Enterprises
to be sufficiently capitalized to remain viable as going concerns
during and after a severe economic downturn.'' This recommendation
should preclude a ``claims-paying capacity'' or similar framework that
seeks only to ensure that an Enterprise has the ability to perform its
guarantee and other financial obligations over time, perhaps subject to
a stay or other pause in the payment of claims and other financial
obligations during a resolution proceeding. Instead, each Enterprise
should be capitalized not only to absorb losses as they are incurred in
a severely adverse stress, but also so that the Enterprise would have
sufficient regulatory capital after that stress to continue to be
regarded as a viable going concern by creditors and other
counterparties.
Enterprise-specific stability buffer. In a significant
departure from the 2018 proposal, the proposed rule contemplated an
Enterprise-specific stability capital buffer tailored to the risk that
an Enterprise's default or other financial distress could pose to the
liquidity, efficiency, competitiveness, or resiliency of national
housing finance markets. FSOC affirmed that ``[a] stability capital
buffer would mitigate risks to financial stability by reducing the
expected impact of an Enterprise's distress on financial markets or
other financial market participants and by addressing the potential for
decreased market discipline due to an Enterprise's size and
importance.'' FSOC also recommended that ``[t]he capital buffers should
be tailored to mitigate the potential risks to financial stability.''
Quality of capital. FSOC endorsed the proposed rule's use
of the U.S. banking framework's definitions of regulatory capital to
prescribe supplemental capital requirements. Specifically, FSOC
``encourage[d] FHFA to ensure high-quality capital by implementing
regulatory capital definitions that are similar to those in the U.S.
banking framework.'' This recommendation supports FHFA's determination
in the proposed rule and in the 2018 proposal, consistent with the U.S.
banking framework, not to include a measure of guarantee fees or other
future revenues as an element of regulatory capital.
U.S. banking framework comparisons. FSOC found that
``[t]he Enterprises' credit risk requirements . . . likely would be
lower than other credit providers across significant portions of the
risk spectrum and during much of the credit cycle, which would create
an advantage that could maintain significant concentration of risk with
the Enterprises.'' This finding is consistent with FHFA's determination
in the proposed rule that, as of September 30, 2019, the proposed
rule's average credit risk capital requirements for the Enterprises'
mortgage exposures generally were roughly half those of similar
exposures under the U.S. banking framework. Those lower average credit
risk capital requirements were before any adjustment for the capital
relief afforded through CRT.
The FSOC Secondary Market Statement also identified potential
opportunities to enhance the proposed rule and FHFA's regulatory
framework more generally.
Buffer calibration. FSOC ``encourage[d] FHFA to consider
the relative merits of alternative approaches for more dynamically
calibrating the capital buffers.'' The proposed rule contemplated a
stress capital buffer sized as a fixed percent of an Enterprise's
adjusted total assets, and FHFA sought comment on whether to adopt an
alternative approach under which FHFA would periodically re-size the
stress capital buffer, similar to the approach recently adopted by the
U.S. banking regulators, to the extent that FHFA's eventual program for
supervisory stress tests determines that an Enterprise's peak capital
exhaustion under a severely adverse stress would exceed 0.75 percent of
adjusted total assets. FHFA has adopted that alternative approach in
this final rule.
Level playing field. FSOC ``encourage[d] FHFA and other
regulatory agencies to coordinate and take other appropriate action to
avoid market distortions that could increase risks to financial
stability by generally taking consistent approaches to the capital
requirements and other regulation of similar risks across market
participants, consistent with the business models and missions of their
regulated entities.'' In the final rule, FHFA has adopted a risk weight
floor on mortgage exposures that is equal to the smallest risk weight
contemplated by the Basel framework for residential real estate
exposures.\15\
---------------------------------------------------------------------------

\15\ BCBS, Basel III: Finalising post-crisis reforms ]] 59-68
(Dec. 2017).
---------------------------------------------------------------------------

Other regulatory requirements. FSOC noted that FHFA's
``efforts to strengthen Enterprise liquidity regulation, stress
testing, supervision, and resolution planning would help mitigate the
potential risk to financial stability.'' FSOC stated that it
``support[ed] FHFA's commitment to developing its broader prudential
regulatory framework for the Enterprises and encourage[d] FHFA to
continue those efforts.''
FSOC also committed to continue to monitor the secondary mortgage
market activities of the Enterprises and FHFA's implementation of the
regulatory framework to ensure potential risks to financial stability
are adequately addressed. Significantly, if FSOC later determines that
such risks to financial stability are not adequately addressed by
FHFA's capital and other regulatory requirements or other risk
mitigants, FSOC may consider more formal recommendations or other
actions, consistent with the interpretive guidance on nonbank financial
company determinations issued by FSOC in December 2019.
If the activities-based approach contemplated by that guidance does
not adequately address a potential threat to financial stability, FHFA
understands that FSOC could consider a nonbank financial company,
including an Enterprise, for potential designation for supervision and
regulation by the Board of Governors of the Federal Reserve System
(Federal Reserve Board).

[[Page 82156]]

V. General Comments on the Proposed Rule

FHFA received 128 public comment letters on the proposed rule from
the Enterprises, trade associations, consumer advocacy groups, private
individuals, and other interested parties.\16\ Overall, most commenters
supported FHFA's effort to establish a post-conservatorship regulatory
capital framework that would ensure that each Enterprise operates in a
safe and sound manner and is positioned to fulfill its statutory
mission across the economic cycle. However, many commenters also
expressed concern about the potential impacts, costs, and burdens of
various aspects of the proposed rule.
---------------------------------------------------------------------------

\16\ See comments on Enterprise Regulatory Capital Framework,
available at https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=674. The comment period for the proposed
rule closed on August 31, 2020.
---------------------------------------------------------------------------

A. Access and Affordability and Other Aggregate Impacts

Many commenters expressed concern about the potential aggregate
impacts of the proposed rule, such as: Higher borrowing costs,
including for first-time and low- and moderate-income borrowers and
minority and rural communities; implications for the Enterprises'
ability to satisfy their affordable housing goals or their duty to
serve mandates or perform their countercyclical mission; greater cost
of home ownership; an increased racial wealth gap; impacts on the
affordability of multifamily housing; different pricing impacts on
specific mortgage products; lower Enterprise returns on equity; reduced
investor demand for the Enterprises' equity; shifts in market share
from the Enterprises to banks, private-label securitization (PLS), or
the Federal Housing Administration; limits on the ability of credit
unions to serve their customers; incentives for the Enterprises to
increase risk taking, retain mortgage credit risk, or engage in risk-
based pricing of their guarantee fees; disincentives to engage in CRT;
and greater compliance costs.
Some commenters urged that the Enterprises' charter mandate to
serve the public interest should inform changes to the proposed rule.
Other commenters challenged the perceived complexity of the proposed
rule. Still other commenters requested that FHFA perform additional
studies on the impact of all or parts of the proposed rule, while
certain other commenters sought withdrawal or re-proposal of the
proposed rule. Other commenters urged that any future changes to the
Enterprises' guarantee fees should wait until there is additional
clarity about the future regulatory and market structure.
Some commenters questioned whether the regulatory capital framework
might impede an Enterprise's ability to raise capital, while some
commenters thought that the Enterprises would still have an attractive
return on equity under the proposed rule. A few commenters urged FHFA
to consider that each Enterprise's existing books of businesses might
have been priced assuming smaller required quantities of regulatory
capital, which might be particularly relevant to the extent that recent
refinancing volumes extend the expected life of the portfolio.
Many commenters generally supported FHFA's objective to establish a
post-conservatorship regulatory capital framework that would ensure
that each Enterprise operates in a safe and sound manner and is
positioned to fulfill its statutory mission across the economic cycle.
Some commenters argued that the interests of low- and moderate-income
borrowers would be best served by capitalizing the Enterprises to
support the secondary market during a period of financial stress,
especially as these borrowers' access to credit tends to be most
adversely affected by financial stress. Also, some commenters stated
that appropriately capitalizing each Enterprise would mitigate risk to
financial stability. A few commenters advocated that FHFA should
protect taxpayers against future bailouts by requiring adequate loss-
absorbing capacity.
FHFA carefully considered these comments in identifying and
assessing potential changes to the proposed rule. As context for that
discussion elsewhere in this preamble, FHFA notes that the Safety and
Soundness Act requires FHFA to establish by regulation risk-based
capital requirements for the Enterprises to ensure that each Enterprise
operates in a safe and sound manner, maintaining sufficient capital and
reserves to support the risks that arise in the operations and
management of the Enterprise.\17\ While FHFA has other mission-related
mandates, this particular statutory mandate focuses only on safety and
soundness.
---------------------------------------------------------------------------

\17\ 12 U.S.C. 4611(a)(1). Safety and soundness is also the
standard governing FHFA's authority to set a leverage ratio higher
than the minimum prescribed by the statute. 12 U.S.C. 4612(c).
---------------------------------------------------------------------------

In addition to ensuring the Enterprises' safety and soundness, the
proposed rule did still seek to ensure that each Enterprise will be
positioned to fulfill its statutory mission across the economic cycle.
This objective led to changes to the 2018 proposal to reduce the
regulatory capital framework's procyclicality. The proposed rule also
took specific steps to mitigate the potential impacts on higher risk
exposures. These steps included setting the PCCBA as a fixed percent of
adjusted total assets (not risk-weighted assets), removing the single-
family risk multipliers for loan balance and number of borrowers, and
reducing the risk-based capital requirements for low down-payment loans
with private mortgage insurance. More generally, FHFA continues to
believe that appropriately capitalizing each Enterprise is critical to
ensuring that the secondary mortgage market supports access to
affordable mortgage credit for low- and moderate-income borrowers and
minority borrowers during periods of financial stress, when these
borrowers are potentially most vulnerable to loss of access to
affordable mortgage credit.
In FHFA's view, predictions of a material increase in mortgage
credit borrowing costs as a result of the proposed rule are subject to
scrutiny and significant uncertainty. Some economic theory and
empirical evidence suggest that an increase in an Enterprise's equity
financing would lead to some decrease in the Enterprise's cost of
equity capital, mooting some, or perhaps much, of any such potential
impact of increased regulatory capital requirements.\18\ Evidencing
that point, the significant increase in the U.S. banking framework's
regulatory capital requirements following the 2008 financial crisis
generally did not lead to significant increases in borrowing costs,
contrary to the predictions of market participants at the time.\19\ The
Enterprises' cost of capital also might be affected by the pricing and
availability of CRT over time. Further complicating the analysis, the
Enterprises' pricing decisions will be influenced by a variety of
regulatory and market considerations. The Enterprises' housing goals
set by FHFA will be a particularly important consideration in each
Enterprise's pricing decisions with respect to low- and moderate-income
borrowers. As

[[Page 82157]]

discussed in Section V.D, an Enterprise's pricing decisions should be
increasingly based on its own risk assessment as the Enterprise retains
capital. An Enterprise's pricing decisions will also inevitably take
into account the pricing and other economic decisions of the other
Enterprise, with pricing equilibriums under a duopoly difficult to
model and predict. To the extent that the Enterprises compete with
other market participants, the cost of mortgage credit will depend on
the pricing decisions of those competitors, with those competitors
outside the scope of FHFA's regulatory capital framework. Finally, the
proposed rule was intended to ensure each Enterprise could support the
secondary market during a period of financial stress, and any
assessment of the regulatory capital framework's impact on borrowing
costs should evaluate borrowing costs over the course of the economic
cycle. Commentary on the proposed rule generally did not address these
complicating factors and should be considered in the context of similar
concerns that post-crisis enhancements to the U.S. banking framework
would significantly and adversely affect the cost of and access to
credit.
---------------------------------------------------------------------------

\18\ Modigliani, F., and Miller, M.H. (1958), The Cost of
Capital, Corporation Finance and the Theory of Investment, The
American Economic Review, 48:3 (1958); BCBS, The costs and benefits
of bank capital--a review of the literature (June 2019) at section
2.3; Jihad Dagher et al., IMF Staff Discussion Note: Benefits and
Costs of Bank Capital (March 2016) at Table 4.A; Federal Reserve
Bank of Minneapolis, The Minneapolis Plan to End Too Big to Fail
(November 2016).
\19\ See, e.g., Simon Firestone, Amy Lorenc, and Ben Ranish, An
Empirical Economic Assessment of the Costs and Benefits of Bank
Capital in the US (March 31, 2017).
---------------------------------------------------------------------------

B. Similarities to the U.S. Banking Framework

Some commenters supported the proposed rule's use of the Basel
framework's regulatory capital definitions to prescribe supplemental
capital requirements. Some commenters also supported the use of risk
weights to define each mortgage exposure's risk-based capital
requirement, the inclusion of the stress capital buffer, and the
incorporation of other concepts from the Basel and U.S. banking
frameworks. Some commenters advocated a general alignment of the credit
risk capital requirements for similar mortgage exposures across the
Enterprises and other market participants, which also was a
recommendation in the FSOC Secondary Market Statement.
Other commenters criticized the extent to which the proposed rule
incorporated concepts from the Basel and U.S. banking frameworks. Some
commenters argued that the proposed rule inappropriately treated the
Enterprises as banks and that ``bank-like'' quantities of required
capital would be inappropriate for the Enterprises.
As discussed in Sections VIII.A.7 and VIII.B.6 of the proposed
rule, as of September 30, 2019, and before adjusting for CRT or the
buffers, the average credit risk capital requirements for the
Enterprises' mortgage exposures generally were roughly half those of
similar exposures under the U.S. banking framework.\20\ The Enterprises
together would have been required under the proposed rule's risk-based
capital requirements to maintain $234 billion in risk-based adjusted
total capital as of September 30, 2019 to avoid restrictions on capital
distributions and discretionary bonuses. Had they been instead subject
to the U.S. banking framework, the Enterprises would have been required
to maintain approximately $450 billion, perhaps significantly more, in
risk-based total capital (not including market risk and operational
risk capital) to avoid similar restrictions.\21\ In light of these
facts, FHFA reiterates that the proposed rule would not have subjected
the Enterprises to the same capital requirements that apply to U.S.
banking organizations.
---------------------------------------------------------------------------

\20\ FHFA's mortgage risk-sensitive framework results in a more
granular calibration of credit risk capital requirements for
mortgage exposures, and some meaningful portion of the gap between
the credit risk capital requirements of the Enterprises and large
banking organizations under the proposed rule was due to the
proposed rule's use of MTMLTV instead of OLTV, as under the U.S.
banking framework, to assign credit risk capital requirements.
Adjusting for the appreciation in the value of the underlying real
property generally led to lower actual credit risk capital
requirements at the Enterprises, and some of the gap between the
credit risk capital requirements of the Enterprises and large U.S.
banking organizations perhaps might be expected to narrow somewhat
were real property prices to move toward their long-term trend.
\21\ These estimates are complicated and sensitive to important
assumptions. There were several key drivers of the gap between the
aggregate risk-based capital requirements under the proposed rule
and under the U.S. banking framework. The lower underlying credit
risk capital requirements contributed significantly to this gap.
Different approaches to the capital relief for private mortgage
insurance and CRT also contributed to some of the gap. The risk-
weighted assets-based buffers of the U.S. banking framework also
could increase the gap, depending on the assumptions made as to each
Enterprise's buffer requirement. Some of the gap perhaps might be
expected to narrow somewhat were real property prices to move toward
their long-term trend.
---------------------------------------------------------------------------

C. Differences Between the Enterprises and Banks

Prompted in some cases perhaps by the comparisons in the proposed
rule to the Basel and U.S. banking frameworks, many commenters
emphasized the differences in the business models, statutory mandates,
and risk profiles of the Enterprises and banking organizations. FHFA
agrees with these commenters that there are important differences
between the Enterprises and banking organizations. The proposed rule
discussed those differences in several places, including Sections
IV.B.2, VI.B.3, and XIII of the proposed rule, noting, for example,
that while the Enterprises transfer much of the interest rate and
funding risk on their mortgage exposures through their sales of
guaranteed MBS, banking organizations generally fund themselves through
customer deposits and other sources. The different interest rate risk
profile of the Enterprises is one reason that the proposed rule's
market risk capital requirements constituted a relatively small share
of the aggregate risk-based capital requirement.
The differences between the business models, statutory mandates,
and risk profiles of the Enterprises and banking organizations,
however, should not preclude the proposed rule's comparison of the
credit risk capital requirement of a large U.S. banking organization
for a specific mortgage exposure to the credit risk capital requirement
of an Enterprise for a similar mortgage exposure.\22\ The different
interest rate risk profiles do not preclude this comparison because the
Basel and U.S. banking frameworks generally do not contemplate an
explicit capital requirement for interest rate risk on banking book
exposures, instead leaving interest rate risk capital requirements to
bank-specific tailoring through the supervisory process.\23\ Related to
this comparison, the monoline nature of the Enterprises' mortgage-
focused businesses suggests that the concentration risk of an
Enterprise is generally greater than that of a diversified banking
organization with a similar amount of mortgage credit risk. That
heightened concentration risk would tend to suggest that greater credit
risk capital requirements, relative to banking organizations, could be
appropriate for the Enterprises for similar exposures, all else equal.
---------------------------------------------------------------------------

\22\ Comparisons of credit risk capital requirements can further
safety and soundness by helping to identify and mitigate model and
related risks relating to the calibration of the requirements.
Comparisons of credit risk capital requirements can also further
financial stability by identifying undue differences in regulatory
requirements that might distort the market structure, as
acknowledged by the FSOC Secondary Market Statement. According to
the FSOC Secondary Market Statement, ``[t]he alignment of market
participants' credit risk capital requirements across similar credit
risk exposures would mitigate risk to financial stability by
minimizing market structure distortions.''
\23\ See BCBS, Interest Rate Risk in the Banking Book, ] 1
(April 2016), available at https://www.bis.org/bcbs/publ/d368.pdf;
(``Interest rate risk in the banking book (IRRBB) is part of the
Basel capital framework's Pillar 2 (Supervisory Review Process) and
subject to the Committee's guidance set out in the 2004 Principles
for the management and supervision of interest rate risk
(henceforth, the IRR Principles).'').
---------------------------------------------------------------------------

The differences between the business models, statutory mandates,
and risk profiles of the Enterprises and banking

[[Page 82158]]

organizations also should not be understood as inconsistent with
capitalizing each Enterprise to remain a viable going concern both
during and after a severe economic downturn. As discussed in Section
II, each Enterprise has considerable funding risk even if it does not
rely on customer deposits, and an Enterprise's ordinary course and
procyclical funding needs can be met only if the Enterprise continues
to be regarded as a viable going concern by creditors throughout the
duration of a financial stress.

D. Mortgage-Risk Sensitive Framework

Many commenters expressed concern that those aspects of the
proposed rule that tended to decrease the risk sensitivity of the
regulatory capital framework could distort the pricing, risk transfer,
or other economic decisions of the Enterprises. FHFA agrees with
commenters that there are significant benefits to a mortgage risk-
sensitive framework. There are, however, trade-offs associated with
risk sensitivity. A more risk-sensitive framework tends to amplify the
model and related risks associated with any methodology for calibrating
a granular assessment of credit risk, which poses significant risk to
safety and soundness. A more risk-sensitive framework can be
significantly more procyclical, which was a concern of many commenters
on the 2018 proposal. A more risk-sensitive framework also can
adversely affect an Enterprise's ability to support access to
affordable mortgage credit for higher risk borrowers, perhaps
excessively so to the extent that the historical performance of these
borrowers, which was used to determine the credit risk capital
requirements, might not be predictive of future performance. FHFA
believes that it has struck an appropriate balance between these
competing policy considerations by preserving risk sensitivity while
ensuring that each Enterprise operates in a safe and sound manner and
is positioned to fulfill its statutory mission across the economic
cycle.
FHFA also believes that those aspects of the final rule that might
tend to decrease the regulatory capital framework's risk sensitivity
will not unduly distort each Enterprise's pricing, credit, CRT, and
other economic decisions. FHFA expects that each Enterprise, like other
regulated financial institutions, will base its decisions on its own
risk assessments, not solely or even primarily on the regulatory
capital requirements. By capitalizing each Enterprise to remain a
viable going concern without government support, the final rule will
incentivize an Enterprise to continually enhance its own risk
assessments so as to effectively manage its now-internalized risk. That
incentive will be supplemented by the final rule's advanced approaches
requirements, which will require each Enterprise to continually enhance
its internal models. FHFA also anticipates that each Enterprise's
decisions will be informed by other considerations, in particular the
decisions of the other Enterprise and other market participants and
also the statutory requirement to satisfy FHFA's housing goals.
Evidencing this view that the regulatory capital framework generally
will not define pricing decisions, the U.S. banking framework's
standardized credit risk capital requirements for residential mortgage
exposures have very limited risk sensitivity, and yet the pricing of
mortgage credit risk varies widely across U.S. banking organizations
and especially across borrowers. Mortgage insurers are subject to
aligned Enterprise requirements to maintain minimum levels of financial
strength, and yet the pricing of mortgage credit risk varies across
mortgage insurers.
More generally, the regulatory capital framework should encourage
decisions based on nuanced, dynamic, and diverse understandings of
risk. A significant and perhaps underappreciated benefit of
capitalizing each Enterprise so that its risks are internalized, rather
than borne by taxpayers, is that each Enterprise will face market
discipline and strong incentives to base its decisions more on its own
understanding of the costs and benefits and less on that of its
regulator. This is important because FHFA's risk-based capital
requirements should not be regarded as the last or best view on risk.
Other modeling approaches might consider the loss experiences of other
market participants during the 2008 financial crisis, incorporate data
from other economic downturns, both in the United States and abroad,
take a different approach to the significant portion of the
Enterprises' crisis-era losses that were attributed to product features
that are no longer eligible for acquisition (approximately $108
billion), or employ different regularization techniques. The now
apparent shortcomings of OFHEO's and the Enterprises' pre-crisis credit
models, and other well-known failures of analytical models to
accurately predict risk, reinforce the need for a meaningful degree of
regulatory caution regarding any modeled estimate of risk. Reform
should therefore provide incentives for each Enterprise to develop and
act on its own view of risk.

Housing Finance Reform

Commenters raised a variety of issues relating to housing finance
reform proposals. Some commenters urged FHFA to wait to finalize a
regulatory capital framework for the Enterprises until Congress enacts
housing reform legislation clarifying the extent of any federal
government support of the Enterprises or their successors. Similarly,
some commenters argued that the conservatorships should continue until
Congress acts. Some commenters advocated for regulating the
Enterprises' pricing or otherwise subjecting the Enterprises to
utility-like regulation, while other commenters suggested other
administrative or legislative reforms, for example, steps to ensure
equitable access to the secondary market by lenders of all sizes and
charter types.
Commenters also offered views on issues relating to the
Enterprises' conservatorships, including the Enterprises' consent to
conservatorship in 2008, subsequent actions by FHFA or the U.S.
Department of the Treasury (Treasury), and FHFA's policy to responsibly
end the conservatorships. Many commenters urged FHFA to end the
conservatorships and recommended certain steps toward that end. Some
commenters argued in favor of a resolution of the claims made by the
Enterprises' legacy shareholders or that the liquidation preference of
Treasury's senior preferred shares should be extinguished. Commenters
advocated that FHFA should consider Treasury's commitment under the
Senior Preferred Stock Purchase Agreements (PSPA) in designing the
regulatory capital framework.
FHFA continues to believe that the regulatory capital framework
should not assume extraordinary government support, whether under the
PSPAs or otherwise. A central tenet of the reforms following the 2008
financial crisis is that the post-crisis regulatory framework should
prevent future taxpayer rescues of financial institutions.\24\
Expectations of government support increase risk to the Enterprises'
safety and soundness and the stability of the national housing finance
markets by undermining market discipline and encouraging excessive

[[Page 82159]]

risk taking.\25\ Other regulatory capital frameworks generally would
not treat a line of credit or similar arrangement, even one with a
governmental actor, as a form of regulatory capital. Moreover, to the
extent that there are existing arrangements under which the federal
government could be exposed to the losses of a financial institution--
for example, the Federal Deposit Insurance Corporation's Deposit
Insurance Fund or its Orderly Liquidation Fund--those arrangements have
motivated greater regulatory capital requirements to mitigate the risk
to safety and soundness and to protect taxpayers. More practically,
Treasury's commitment under the PSPAs is finite and cannot be
replenished, and that commitment could be inadequate to ensure each
Enterprise would remain a viable going concern during and after a
severe economic downturn, particularly to the extent that an
Enterprise's liabilities and other obligations were to grow relative to
that fixed commitment.
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\24\ The Dodd-Frank Act is an Act ``[t]o promote the financial
stability of the United States by improving accountability and
transparency in the financial system, to end `too big to fail', to
protect the American taxpayer by ending bailouts, to protect
consumers from abusive financial services practices, and for other
purposes.''
\25\ See BCBS, Global systemically important banks: revised
assessment methodology and the higher loss absorbency requirement ]
3 (``[T]he moral hazard costs associated with implicit guarantees
derived from the perceived expectation of government support may
amplify risk-taking, reduce market discipline and create competitive
distortions, and further increase the probability of distress in the
future. As a result, the costs associated with moral hazard add to
any direct costs of support that may be borne by taxpayers.'');
Federal Reserve Board, Calibrating the GSIB Surcharge (2015) at 1
(``The experience of the crisis made clear that the failure of a
SIFI during a period of stress can do great damage to financial
stability, that SIFIs themselves lack sufficient incentives to take
precautions against their own failures, that reliance on
extraordinary government interventions going forward would invite
moral hazard and lead to competitive distortions, and that the pre-
crisis regulatory focus on microprudential risks to individual
financial firms needed to be broadened to include threats to the
overall stability of the financial system.'').
---------------------------------------------------------------------------

FHFA continues to support legislation to reform the flaws in the
structure of the housing finance system that were at the root of the
2008 financial crisis and that continue to pose risk to taxpayers and
financial stability. To that end, FHFA recommended specific legislative
reforms in its last Annual Report to Congress. FHFA reiterates its
recommendation that Congress authorize FHFA to charter competitors to
the Enterprises and remove unnecessary statutory exemptions and other
special treatments afforded the Enterprises. Chartering competitors to
the Enterprises could reduce the size and importance of any single
Enterprise, which could lead to a smaller stability capital buffer and
therefore smaller aggregate capital requirements.
Pending legislation, FHFA, as conservator of each Enterprise, is
required by statute to act ``for the purpose of reorganizing,
rehabilitating, or winding up the affairs of [the Enterprise].''\26\
That definite and limited statutory purpose does not authorize an
indefinite conservatorship. FHFA is in the process of preparing each
Enterprise to responsibly exit conservatorship consistent with its
statutory mandate and the FHFA Director's other duties. Finalization of
the Enterprises' regulatory capital framework is a key step in that
effort.
---------------------------------------------------------------------------

\26\ 12 U.S.C. 4617(a)(2).
---------------------------------------------------------------------------

Finalization of the Enterprise's regulatory capital framework is
also required by law. The Safety and Soundness Act not only authorizes,
but affirmatively requires, FHFA to prescribe risk-based capital
requirements by regulation.\27\ FHFA has been subject to this statutory
mandate for more than 12 years, and in FHFA's view, this final rule is
long overdue.
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\27\ 12 U.S.C. 4611(a)(1) (``The Director shall, by regulation,
establish risk-based capital requirements for the enterprises to
ensure that the enterprises operate in a safe and sound manner,
maintaining sufficient capital and reserves to support the risks
that arise in the operations and management of the enterprises.'')
(emphasis added). FHFA's predecessor agency, OFHEO, adopted a risk-
based capital rule (12 CFR part 1750) that will not have been
formally rescinded until the effective date of this final rule. That
rule was suspended by FHFA at the inception of the conservatorships
in 2008. That rule clearly failed to ensure the safety and soundness
of each Enterprise.
---------------------------------------------------------------------------

VI. Definitions of Regulatory Capital

As discussed in Section VII, the proposed rule would have required
each Enterprise to maintain specified amounts of core capital and total
capital, as defined in the Safety and Soundness Act. The proposed rule
would have supplemented the core capital and total capital requirements
with risk-based and leverage ratio requirements based on the Basel
framework's definitions of total capital, tier 1 capital, and CET1
capital. The supplemental definitions of regulatory capital would have
made deductions and other adjustments for certain DTAs, ALLL, goodwill,
intangibles, and other assets that might tend to have less loss-
absorbing capacity during a financial stress. The tier 1 and CET1
capital requirements also would have ensured that retained earnings and
other high-quality capital are the predominant form of regulatory
capital.
Some commenters supported the proposed rule's use of the Basel
framework's regulatory capital definitions to prescribe supplemental
capital requirements, potentially as a means to better align credit
risk capital requirements across market participants and also to
facilitate comparability across regulatory capital frameworks. Some
commenters suggested that CRT should be treated as an element of
regulatory capital, while a few commenters argued that tier 1 capital
was the best basis for both leverage ratio and risk-based capital
requirements. Commenters otherwise generally focused on the proposed
rule's treatment of guarantee fees, reserves, and subordinated debt.

A. Guarantee Fees

Consistent with the 2018 proposal, neither the statutory
definitions nor the supplemental definitions of regulatory capital in
the proposed rule would have included a measure of future guarantee
fees or other future revenues. FHFA instead gave consideration to the
loss-absorbing capacity of future revenues in calibrating the stress
capital buffer.
Many commenters argued that a measure of guarantee fees should be
included in one or more of the definitions of regulatory capital. That
measure, for example, could be limited to guarantee fees that have been
received by an Enterprise but not yet recognized as revenue for
accounting purposes. These commenters generally contended that future
revenues are available to absorb future losses or pay future claims, as
reflected in the estimates of capital exhaustion produced by the
Enterprises' annual stress tests. A few commenters noted that the
proposed rule could incentivize an Enterprise to create interest-only
strips of guarantee fee revenue to recognize assets that could count
toward regulatory capital. Commenters also suggested that the proposed
rule's approach could have a relatively greater impact on higher risk
mortgage exposures.
After considering these comments, FHFA has determined to not
include a measure of future revenues in any of the final rule's
definitions of regulatory capital. Future revenues instead would
continue to be considered in sizing the stress capital buffer, as
discussed in Section VIII.A.2. Like the proposed rule, the final rule
seeks to ensure that each Enterprise would be capitalized to remain a
viable going concern both during and after a severe economic downturn.
The 2008 financial crisis established that credit, market, and other
losses can be incurred quickly during a stress, and it is an
Enterprise's capacity to absorb those losses as incurred while still
timely performing its financial obligations that defines creditors' and
other counterparties' views as to whether the Enterprise is a viable
going concern. During a stress, creditors are unlikely to give much

[[Page 82160]]

consideration to future revenue prospects in assessing whether an
Enterprise can timely perform its financial obligations. Market
confidence in the Enterprises waned in mid-2008 when Fannie Mae and
Freddie Mac had total capital of, respectively, $55.6 billion and $42.9
billion, notwithstanding their right to future guarantee fees.
Moreover, as discussed in Section IV, the FSOC Secondary Market
Statement endorsed the proposed rule's use of the U.S. banking
framework's definitions of regulatory capital to prescribe supplemental
capital requirements, and these definitions do not include a measure of
future revenues.

B. Reserves

The statutory definition of total capital includes a general
allowance for foreclosure losses. As for advanced approaches banking
organizations under the U.S. banking framework, the proposed rule would
have permitted an Enterprise to include in the supplemental definition
of tier 2 capital only the excess of its eligible credit reserves over
its total expected credit loss, provided the amount does not exceed 0.6
percent of its credit risk-weighted assets. A few commenters suggested
that it might be appropriate to include some portion of ALLL in the
supplemental definitions of regulatory capital, particularly if the
U.S. banking regulators were in the future to adjust their approach to
ALLL after considering the implications of the current expected credit
losses methodology (CECL) for estimating allowances for credit losses.
The final rule adopts the proposed rule's approach to ALLL. The
limited inclusion of ALLL in tier 2 capital was an outgrowth of FHFA's
calibration methodology for mortgage exposures under which the base
risk weights and risk multipliers are intended to require credit risk
capital sufficient to absorb the lifetime unexpected losses incurred on
mortgage exposures experiencing a shock to house prices similar to that
observed during the 2008 financial crisis. The same is also true for
non-mortgage exposures. FHFA will continue to monitor the implications
of CECL implementation for this issue and could consider adjustments in
the future.

C. Subordinated Debt

The proposed rule would have treated some subordinated debt
instruments as tier 2 capital. Some commenters supported the proposed
rule's approach. One commenter thought that each Enterprise should be
financed primarily through term unsecured debt rather than equity
because debt can lock in a structured schedule of funding to meet
liquidity needs. Other commenters urged FHFA not to treat subordinated
debt instruments as a capital element. In the view of some commenters,
the historical record has led to a market expectation that subordinated
debt is not actually at risk of absorbing losses. A few commenters
expressed concern that, unlike equity instruments, an Enterprise would
not be able to suspend debt service on subordinated debt.
FHFA has adopted the proposed rule's approach to subordinated debt
in the final rule, and certain subordinated debt instruments will
continue to be treated as tier 2 capital. To ensure tier 2 capital
actually provides loss-absorbing capacity, an Enterprise would be
permitted to include an instrument in its tier 2 capital only if FHFA
has determined that the Enterprise has made appropriate provision,
including in any resolution plan of the Enterprise, to ensure that the
instrument would not pose a material impediment to the ability of an
Enterprise to issue common stock instruments following any future
appointment of FHFA as conservator or receiver under the Safety and
Soundness Act.

VII. Capital Requirements

A. Risk-Based Capital Requirements

The proposed rule would have required each Enterprise to maintain
the following risk-based capital:
Total capital not less than 8.0 percent of risk-weighted
assets;
Adjusted total capital not less than 8.0 percent of risk-
weighted assets;
Tier 1 capital not less than 6.0 percent of risk-weighted
assets; and
CET1 capital not less than 4.5 percent of risk-weighted
assets.
As discussed in Section III.B.3 of the proposed rule, a lesson of
the 2008 financial crisis is that the Enterprises' safety and soundness
depends not only on the quantity but also on the quality of their
capital. To that end, FHFA proposed to supplement the risk-based
capital requirement based on statutorily defined total capital with
additional risk-based capital requirements based on the Basel
framework's definitions of total capital, tier 1 capital, and CET1
capital.
FHFA noted in the 2018 proposal and the proposed rule that the
Enterprises' DTAs, which are included in total capital and core capital
by statute, may provide minimal to no loss-absorbing capability during
a period of financial stress as recoverability (via taxable income) may
become uncertain. The 2018 proposal addressed this issue by
establishing a risk-based capital requirement for DTAs. However, the
2018 proposal did not include adjustments for other capital elements
that tend to have less loss-absorbing capacity during a financial
stress (e.g., ALLL, goodwill, and intangibles), although FHFA did
request comment on how best to compensate for the loss-absorbing
deficiencies of ALLL and preferred stock within the framework of the
2018 proposal. The 2018 proposal also requested comment on, but did not
adjust for, accumulated other comprehensive income (AOCI), leaving open
the possibility that an Enterprise could have positive total capital
and core capital despite being insolvent under GAAP. By incorporating
deductions and other adjustments, the supplemental risk-based capital
requirements for adjusted total capital, tier 1 capital, and CET1
capital would have addressed these safety and soundness issues. The
supplemental risk-based capital requirements also would have ensured
that retained earnings and other high-quality capital would be the
predominant form of regulatory capital.
The shift to a terminology of risk-weighted assets in the proposed
rule was a change from the 2018 proposal. The addition of three new
risk-based capital requirements raised the need for a straightforward
mechanism to specify the aggregate regulatory capital required for
each. Also, this approach and its associated terminology are well-
understood by those familiar with the U.S. banking framework.
Expressing the risk-based capital requirement for an exposure as a
risk-weight would facilitate transparency and comparability with the
U.S. banking framework and other regulatory capital frameworks. Because
these concepts are well-understood, this approach also should
facilitate market discipline over each Enterprise's risk-taking by its
creditors and other counterparties.
As discussed in Section V.A, many commenters expressed concern
about the potential impacts of the proposed rule's regulatory capital
requirements on borrowing costs, the Enterprises' ability to satisfy
their affordable housing goals or other statutory mandates, the
incentives for the Enterprises to increase risk taking or engage in
CRT, among other concerns. As discussed in Sections VII.B and VIII.B,
many commenters contended that the PLBA-adjusted leverage ratio
requirement (i.e., the sum of the leverage ratio requirement and the
PLBA) likely would often exceed the PCCBA-adjusted risk-based capital
requirements.

[[Page 82161]]

Commenters also offered related views on the definitions of regulatory
capital and the risk weights and other approaches to assigning risk-
based capital requirements for the purpose of determining compliance
with these required ratios, as discussed in Sections VI and IX.
Specifically, with respect to the required ratios of risk-based
capital, commenters offered views on the relative mix of capital
instruments contemplated by the risk-based capital requirements. A few
commenters argued that tier 1 capital was the best basis for both
leverage ratio and risk-based capital requirements. Some commenters
urged FHFA to not treat subordinated debt instruments as a capital
element because, in their view, the historical record has led to a
market expectation that subordinated debt is not actually at risk of
absorbing losses.
After considering these comments, FHFA has determined to adopt each
of the required risk-based capital ratios as proposed. FHFA continues
to believe it is important to supplement the risk-based capital
requirement based on statutorily defined total capital with additional
risk-based capital requirements based on the Basel framework's
definitions of total capital, tier 1 capital, and CET1 capital. The
supplemental risk-based capital requirements will reflect customary
deductions and other adjustments for assets that might tend to have
less loss-absorbing capacity during a financial stress. The tier 1 and
CET1 capital requirements will ensure that retained earnings and other
high-quality capital are the predominant form of regulatory capital.
The use of the U.S. banking framework's required ratios of risk-based
capital will foster comparability and enhance market discipline. As
discussed in Section IV, the FSOC Secondary Market Statement endorsed
the proposed rule's use of the U.S. banking framework's definitions of
regulatory capital to prescribe supplemental capital requirements.
While the final rule adopts required ratios of risk-based capital
based on the U.S. banking framework, FHFA reiterates that this approach
does not result in each Enterprise having the same risk-based capital
requirements as U.S. banking organizations. Under the final rule, the
credit risk capital requirement for an exposure is determined by
multiplying the risk weight assigned to the exposure by 8 percent. The
risk weight of an exposure is the key driver of its credit risk capital
requirement, and as of June 30, 2020, the risk weight assigned to
single-family mortgage exposures under the final rule would have been
roughly three-quarters that of similar exposures under the U.S. banking
framework. The Enterprises together would have been required under the
final rule's risk-based capital requirements to maintain $283 billion
in risk-based adjusted total capital as of June 30, 2020 to avoid
restrictions on capital distributions and discretionary bonuses. Had
they been instead subject to the U.S. banking framework, the
Enterprises would have been required to maintain approximately $450
billion, perhaps significantly more, in risk-based total capital (not
including market risk and operational risk capital) to avoid similar
restrictions.

B. Leverage Ratio Requirements

1. Adjusted Total Assets
The proposed rule's leverage ratio requirements would have been
based on an Enterprise's adjusted total assets. Adjusted total assets
would have been defined as total assets under GAAP, with adjustments to
include many of the off-balance sheet and other exposures that are
included in the supplemental leverage ratio requirements of the U.S.
banking framework.
Commenters generally supported basing the supplemental leverage
ratio requirement on tier 1 capital. Commenters also generally
supported basing the leverage ratio requirements on adjusted total
assets, although a few preferred total assets as defined under GAAP.
Some commenters suggested the leverage ratio should be adjusted to
exclude credit risk that had been transferred to third parties through
mortgage insurance or CRT. Another commenter advocated including CRT as
an element of capital for purposes of calculating the leverage ratio.
FHFA is adopting the definition of adjusted total assets as
proposed.
2. Sizing of the Requirements
The primary purpose of the proposed rule's leverage ratio
requirements was to provide a credible, non-risk-based backstop to the
risk-based capital requirements to safeguard against model risk and
measurement error with a simple, transparent, independent measure of
risk. From a safety-and-soundness perspective, each type of requirement
offsets potential weaknesses of the other, and well-calibrated risk-
based capital requirements working with a credible leverage ratio
requirement is more effective than either would be in isolation. The
proposed rule's leverage ratio requirements would have had the added
benefit of dampening some of the procyclicality inherent in the
aggregate risk-based capital requirements.
Under the proposed rule, each Enterprise would have been required
to maintain capital sufficient to satisfy two leverage ratio
requirements:
Core capital not less than 2.5 percent of adjusted total
assets; and
Tier 1 capital not less than 2.5 percent of adjusted total
assets.
As discussed in Section V.A, many commenters expressed concern
about the potential impacts of the proposed rule's regulatory capital
requirements on borrowing costs, the Enterprises' ability to satisfy
their affordable housing goals or other statutory mandates, the
incentives for the Enterprises to increase risk taking or engage in
CRT, among other concerns. Commenters also offered related views on the
definitions of regulatory capital for the purpose of determining
compliance with the leverage ratio requirements, as discussed in
Sections VI and IX.
Commenters criticized FHFA's method for sizing the proposed rule's
two leverage ratio requirements, with many focusing on FHFA's
consideration of the Enterprises' historical loss experience. Some
commenters urged FHFA to adopt the 2018 proposal's bifurcated
alternative that would have prescribed different leverage ratio
requirements for trust and non-trust assets. Other commenters described
rationales for lower leverage ratio requirements or for not adopting a
leverage ratio requirement at all. Some commenters contended that the
model risk, measurement error, and related risks mitigated by the
leverage ratio requirements were already mitigated by other aspects of
the proposed rule. Other commenters indicated that they did not have
sufficient information to assess the relationship between the proposed
rule's risk-based capital requirements and the leverage ratio
requirements and urged FHFA to make additional information available to
the public.
Commenters also offered related views on the proposed rule's PLBA-
adjusted leverage ratio requirement, and some of those comments have
implications for these leverage ratio requirements. The PLBA-adjusted
leverage ratio requirement prescribed the tier 1 capital necessary to
avoid restrictions on capital distributions and discretionary bonuses.
Many of these commenters contended that the PLBA-adjusted leverage
ratio requirement likely would often exceed the PCCBA-adjusted risk-
based capital requirements. A binding PLBA-adjusted leverage ratio
requirement, in the view of many of these commenters, could

[[Page 82162]]

reduce the risk sensitivity of the regulatory capital framework,
decrease an Enterprise's incentive to engage in CRT, incentivize an
Enterprise to increase risk taking, or reduce an Enterprise's ability
to offset lower returns on higher risk exposures with higher returns on
lower risk exposures. Some commenters, on the other hand, argued that
the PLBA-adjusted leverage ratio requirement was inadequate given the
Enterprises' historical loss experience and the risk that each
Enterprise poses to financial stability. One commenter thought that the
PLBA-adjusted leverage ratio requirement should be the primary measure
for setting the Enterprises' regulatory capital requirements because
the risk-based capital requirements are complex, less transparent, and
perhaps subject to manipulation. Some commenters suggested sizing the
PLBA-adjusted leverage ratio requirement based on the pre-CRT risk-
based capital requirements. Commenters' views specific to the PLBA are
further discussed in Section VIII.B.
FHFA has determined to finalize the leverage ratio requirements as
proposed. FHFA continues to believe that the proposed rule's
calibration methodology for the leverage ratio requirements was
fundamentally sound. First, the leverage ratio requirements are
generally aligned with the analogous leverage ratio requirements of
U.S. banking organizations, after adjusting for the difference in the
average risk weight on their exposures.\28\ The monoline nature of the
Enterprises' mortgage-focused businesses suggests that the
concentration risk of an Enterprise is greater than that of a
diversified banking organization with a similar amount of mortgage
credit risk, perhaps meriting a leverage ratio requirement greater than
2.5 percent, all else equal. Related to that concentration risk, the
leverage ratio requirements are roughly aligned with, if not below, the
4 percent total leverage ratio requirement of the Federal Home Loan
Banks, which also have mortgage-focused businesses.\29\ Second, the
leverage ratio requirements are broadly consistent with the
Enterprises' historical loss experiences. The Enterprises' crisis-era
cumulative capital losses peaked at the end of 2011 at $265 billion,
approximately 4.8 percent of their adjusted total assets as of December
31, 2007.\30\ Third, the risks and limitations associated with the
underlying historical data and models used to calibrate the credit risk
capital requirements reinforce the importance of leverage ratio
requirements that safeguard against model risk and measurement
error.\31\
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\28\ The U.S. banking framework's leverage ratio requirement
requires banking organizations to maintain tier 1 capital no less
than 4.0 percent of total assets. Insured depository institutions
subsidiaries of certain large U.S. bank holding companies also must
maintain tier 1 capital no less than 6.0 percent of total assets to
be ``well capitalized.'' Using data for the 18 bank holding
companies subject to the Federal Reserve Board's supervisory stress
testing program in 2018, FHFA determined that the average risk
weight on the assets of these banks was 61 percent in the fourth
quarter of 2018. Under the U.S. banking framework, the Enterprises'
mortgage assets generally would be assigned a 50 percent risk weight
under the standardized approach. This suggests that the average risk
weight on the assets of the Enterprises would have been
approximately 81 percent (50 percent divided by 61 percent) of that
of these large bank holding companies. That in turn implies a risk-
adjusted analogous leverage ratio requirement for the Enterprises of
3.3 percent (81 percent of the 4.0 percent leverage ratio
requirement for U.S. banking organizations).
\29\ That 4.0 percent leverage ratio requirement should be
considered in the context of the safety and soundness benefits of
the statutory requirement that each Federal Home Loan Bank advance
be fully secured. Related to that, the safety and soundness benefits
of that collateral might be furthered by law, as any security
interest granted to a Federal Home Loan Bank by a member (or
affiliate of a member) is entitled to special protections under the
Federal Home Loan Bank Act.
\30\ FHFA's view is that substantially all of each Enterprise's
valuation allowances on its DTAs should not be deducted from the
estimate of peak capital exhaustion. First, a substantial portion of
the Enterprises' DTA valuation allowances were on DTAs first
recognized under GAAP during the stress period. As such, these
valuation allowances had no net impact on adjusted total capital
exhaustion during the stress period because the initial GAAP
recognition was offset by the subsequent valuation allowance.
Second, had the Enterprises been more appropriately capitalized as
of December 31, 2007, much of the DTAs that were already recognized
under GAAP at the beginning of the stress period would not have been
deducted from adjusted total capital, with the effect that the
valuation allowance during the stress period would have contributed
to adjusted total capital exhaustion. In other words, there was only
a relatively small amount of DTAs that (i) was recognized under GAAP
as of the beginning of the stress period, (ii) would have already
been deducted from adjusted total capital at the time of the
beginning of the stress period, and (iii) were subject to a
valuation allowance during the stress period. Despite this, given
the complexity of the issue, the considerable attention to the issue
by interested parties, and the somewhat different impacts of DTA
valuation allowances on different measures of regulatory capital,
the proposed rule also noted that the sizing of the regulatory
capital requirements was consistent with historical loss experiences
even if all of the DTA valuation allowances were deducted from the
estimate of peak capital exhaustion.
\31\ As discussed in Section IV.B.2 of the proposed rule, a
disproportionate share of the Enterprises' crisis-era losses arose
from certain single-family mortgage exposures that are no longer
eligible for acquisition by the Enterprises. The calibration of the
credit risk capital requirements attributed a significant portion of
the Enterprises' crisis-era losses (approximately $108 billion) to
these products. The statistical methods used to allocate losses
between borrower-related risk attributes and product-related risk
attributes pose significant model risk. It is possible that the
calibration understates the credit losses that would be incurred in
an economic downturn with national housing price declines of similar
magnitude, even assuming a repeat of crisis-era federal support of
the economy and the declining interest rate environment.
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The FSOC Secondary Market Statement affirmed the sizing of these
leverage ratio requirements. FSOC's analysis suggested that ``leverage
ratio requirements that are materially less than those contemplated by
the proposed rule would likely not adequately mitigate the potential
stability risk posed by the Enterprises.'' FSOC also found that ``it is
possible that additional capital could be required for the Enterprises
to remain viable concerns in the event of a severely adverse stress . .
. .''
FHFA has considered commenters' views that the Enterprises'
historical loss experience was an inappropriate consideration in
calibrating the proposed rule's leverage ratio requirements because it
did not reflect the changes to the Enterprises' acquisition criteria
since the 2008 financial crisis. Some commenters suggested that the
Enterprises' historical loss experiences should be adjusted to remove
the Enterprises' valuation allowances on DTAs, the dividends paid to
Treasury, and other deductions from capital that were subsequently
reversed.
As discussed in the proposed rule, a portion of the crisis-era
losses arose from single-family loans that are no longer eligible for
acquisition by the Enterprises. However, the sizing of the leverage
ratio requirements must guard against potential future relaxation of
underwriting standards and regulatory oversight over those underwriting
standards. The sizing of leverage ratio requirements also must take
into account the model risk posed by the attribution of such losses to
specific product characteristics.
The Enterprises' historical loss experience actually might tend to
understate the regulatory capital that would be necessary to remain a
viable going concern. The Enterprises' crisis-era losses likely were
mitigated to at least some extent by the unprecedented support by the
federal government of the housing market and the economy and also by
the declining interest rate environment of the period. The calibration
of the leverage ratio requirements cannot assume a repeat of those loss
mitigants. Also, there are some material risks to the Enterprises that
are not assigned a risk-based capital requirement--for example, risks
relating to uninsured or underinsured losses from flooding,
earthquakes, or other natural disasters or radiological or biological
hazards. There also is no risk-

[[Page 82163]]

based capital requirement for the risks that climate change could pose
to property values in some localities.
FHFA also considered commenters' views that the proposed rule's
leverage ratio requirements were disproportionate to the capital
exhaustion estimated by the Enterprises' annual stress tests. FHFA
believes that the Enterprises' stress tests are not an appropriate
consideration in calibrating the leverage ratio requirements. The
leverage ratio requirements are calibrated to be a credible backstop to
the risk-based capital requirements, which are themselves calibrated to
absorb the lifetime unexpected losses incurred in a shock similar to
that observed during the 2008 financial crisis. The capital exhaustion
projected by the Enterprises' past stress tests is different in key
respects from the projected lifetime unexpected losses in a severely
adverse stress. The Enterprises' stress tests use a nine-quarter loss
horizon, whereas much of the projected lifetime unexpected losses would
be recognized after the end of that horizon. The Enterprises' stress
tests then offset those limited losses with the revenues recognized in
the horizon, yielding a projection of capital exhaustion considerably
lower than lifetime unexpected losses. Furthermore, the capital
exhaustion projected by an Enterprise's stress test results could
change significantly across the economic cycle, with projected capital
exhaustion following a long period of house price appreciation being
considerably less than the projections produced by a stress test at a
different point in the economic cycle.
FHFA agrees with commenters that the risk-based capital
requirements should, as a general rule, exceed the regulatory capital
required under the leverage ratio requirements. At the same time, if
the leverage ratio requirements are to be an independently meaningful
and credible backstop, there will inevitably be some exceptions in
which the leverage ratio requirements exceed the risk-based capital
requirements. In FHFA's view, the measurement period of September 30,
2019 was, in fact, consistent with the circumstances under which a
credible leverage ratio would be binding, given the exceptional single-
family house price appreciation since 2012, the strong credit
performance of both single-family and multifamily mortgage exposures,
the significant progress by the Enterprises to materially reduce legacy
exposure to NPLs and re-performing loans, robust CRT market access
enabling substantial risk transfer, and the generally strong condition
of key counterparties, such as mortgage insurers.
Some commenters' analysis suggested that the leverage ratio
requirements generally would exceed the risk-based capital requirements
over most of the economic cycle. That could evidence flaws in FHFA's
method for calibrating the leverage ratio requirements, the risk-based
capital requirements, or both. After taking into account the views of
commenters, and also after considering the FSOC Secondary Market
Statement's affirmation of the sizing of the leverage ratio
requirements and its suggestion that additional capital could be
required, FHFA has adopted adjustments to the risk-based capital
requirements that generally should reduce the likelihood that the
leverage ratio requirements would exceed the risk-based capital
requirements.

C. Enforcement

Under the proposed rule, FHFA stated that it may draw upon several
authorities to address potential Enterprise failures to meet the risk-
based capital requirements and leverage ratio requirements. An
Enterprise failure to meet a capital threshold that is required by
regulation may be addressed through enforcement mechanisms for
regulatory violations including procedures for cease and desist and
consent orders.\32\ FHFA may also use the enforcement tools available
under its authority to prescribe and enforce prudential management and
operations standards (PMOS).\33\ The prompt corrective action (PCA)
framework set out in the Safety and Soundness Act \34\ also provides
for enforcement tools when a shortfall occurs in capital requirements
that are set forth in the statute, using the statute's prescribed
capital concepts.
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\32\ 12 U.S.C. 4581, 12 CFR part 1209.
\33\ 12 U.S.C. 4513b; 12 CFR part 1236.
\34\ 12 U.S.C. 4614 et seq.
---------------------------------------------------------------------------

Commenters generally did not comment on the proposed rule's
enforcement framework for the risk-based capital requirements and
leverage ratio requirements. After taking into account any implications
posed by the changes adopted in the final rule, FHFA is adopting the
proposed rule's enforcement framework as proposed.

VIII. Capital Buffers

A. Prescribed Capital Conservation Buffer Amount

Under the proposed rule, to avoid limits on capital distributions
and discretionary bonus payments, an Enterprise would have had to
maintain regulatory capital that exceeds each of its adjusted total
capital, tier 1 capital, and CET1 capital requirements by at least the
amount of its PCCBA. The proposed rule's PCCBA would consist of three
separate component buffers--a stress capital buffer, a countercyclical
capital buffer, and a stability capital buffer.
1. Comments Applicable to Each Component Buffer
Each component buffer of the proposed rule's PCCBA was tailored to
achieve its own policy objective and had its own rationale and sizing
considerations. Many commenters, however, offered criticisms and other
views on the PCCBA as a whole or that could be relevant to one or more
of the component buffers. FHFA considered these cross-cutting comments
in identifying and assessing potential changes to each of these
buffers.
Commenters generally supported the flexibility that the PCCBA
afforded the Enterprises in their capital planning and to continue to
support the secondary market during a period of financial stress. Many
commenters criticized the overall size of the proposed rule's PCCBA,
particularly its sizing relative to the risk-based capital
requirements. These commenters expressed concern that the PCCBA could
adversely affect the availability of mortgage credit or the
Enterprises' ability to fulfill their statutory mission. Some
commenters recommended eliminating the PCCBA, capping the PCCBA as a
share of the underlying risk-based capital requirements, or otherwise
reducing the PCCBA. A few commenters thought that the PCCBA added
unnecessary complexity. Other commenters offered alternatives to the
PCCBA based on the PSPA or reinsurance arrangements. A few commenters
thought that the PCCBA should not have to be composed solely of CET1
capital.
Some commenters noted that even with the PCCBA, the Enterprises
likely would need support from the federal government to remain viable
during a severe economic downturn. Some commenters observed that the
PCCBA would mitigate the procyclicality of the aggregate risk-based
capital requirements. A few commenters argued that the PCCBA could be
replaced with a stress testing program that informs regulatory
approvals of capital distributions and bonuses. At least one commenter
suggested that FHFA should periodically reassess and solicit public
comment on the sizing of the PCCBA or its component buffers.
A recurring comment related to the risk sensitivity of the PCCBA.
Each of the PCCBA component buffers would

[[Page 82164]]

have been determined as a percent of an Enterprise's adjusted total
assets. While some commenters supported this approach, many commenters
advocated assessing the PCCBA or one or more of its component buffers
as a percent of an Enterprise's risk-weighted assets. Related to this
concern, the FSOC Secondary Market Statement found that, ``[b]ecause
the proposed buffers change based on adjusted total asset size and
market share, an Enterprise's capital buffers could decline on a risk-
adjusted basis in response to deteriorating Enterprise asset quality or
during periods of stress.'' While acknowledging that a more risk-
sensitive approach could increase the procyclicality of the aggregate
risk-based requirements, FSOC ``encourage[d] FHFA to consider the
relative merits of alternative approaches for more dynamically
calibrating the capital buffers.''
The final rule adopts the proposed rule's approach to assess each
of the PCCBA component buffers as a specified percent of an
Enterprise's adjusted total assets. This is a notable departure from
the Basel and U.S. banking frameworks, and it is a departure that does
reduce the risk-sensitivity of the framework. FHFA continues to believe
that the balance of considerations weighs in favor of this approach. In
FHFA's view, a fixed-percent PCCBA is important, among other reasons,
to reduce the impact that the PCCBA potentially could have on higher
risk exposures, avoid amplifying the secondary effects of any model or
similar risks inherent to the calibration of granular risk weights for
mortgage exposures, and further mitigate the procyclicality of the
aggregate risk-based capital requirements. While the Basel and U.S.
banking framework assess the analogous buffers against risk-weighted
assets, FHFA's underlying credit risk capital requirements for mortgage
exposures are considerably more risk sensitive than the analogous
requirements of those frameworks. As discussed in Section V.D, that
heightened risk sensitivity engenders more procyclicality than the
Basel and U.S. banking frameworks, at least with respect to the
aggregate risk-based capital required on mortgage exposures, and that
procyclicality is in tension with FHFA's objective to ensure the safety
and soundness of each Enterprise and that each Enterprise can fulfill
its statutory mission to provide stability and ongoing assistance to
the secondary mortgage market across the economic cycle. This tension
is heightened by the concentration risk associated with the monoline
nature of the Enterprises' mortgage-focused businesses. Notwithstanding
the final rule's approach, however, FHFA has taken steps to enhance the
risk sensitivity of the stress capital buffer.
2. Stress Capital Buffer
Under the proposed rule, an Enterprise's stress capital buffer
would have equaled 0.75 percent of the Enterprise's adjusted total
assets. The proposed stress capital buffer was similar in amount and
rationale to the 0.75 percent going-concern buffer contemplated by the
2018 proposal. For the reasons elaborated in Section III.B.2 of the
proposed rule, and as also contemplated by the Basel and U.S. banking
frameworks,\35\ FHFA continues to believe that each Enterprise should
be capitalized to remain a viable going concern both during and after a
severe economic downturn. While the regulatory capital requirements are
sized to ensure an Enterprise would be regarded as a viable going
concern by creditors and other counterparties, the stress capital
buffer is sized to ensure that the Enterprise would, in ordinary times,
maintain regulatory capital that could be drawn down during a financial
stress and still maintain regulatory capital sufficient to satisfy the
regulatory capital requirements after that stress.
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\35\ 78 FR at 51105 (``In calibrating the revised risk-based
capital framework, the BCBS identified those elements of regulatory
capital that would be available to absorb unexpected losses on a
going-concern basis. The BCBS agreed that an appropriate regulatory
minimum level for the risk-based capital requirements should force
banking organizations to hold enough loss-absorbing capital to
provide market participants a high level of confidence in their
viability. The BCBS also determined that a buffer above the minimum
risk-based capital requirements would enhance stability, and that
such a buffer should be calibrated to allow banking organizations to
absorb a severe level of loss, while still remaining above the
regulatory minimum requirements.'').
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Some commenters thought that the stress capital buffer was
appropriately sized at 0.75 percent of an Enterprise's adjusted total
assets. Other commenters argued that the stress capital buffer was
excessive or should be eliminated. Some commenters suggested that each
Enterprise needs to be capitalized only to absorb losses incurred in a
severely adverse stress, not to be regarded as a viable going concern
by creditors and other counterparties after that stress. One commenter
suggested that FHFA consider calibrating a buffer based on an actuarial
model for minimum capital, perhaps after considering the Federal
Housing Administration's process for determining the minimum economic
net worth and soundness of its Mutual Mortgage Insurance Fund.
Many commenters advocated increasing the risk sensitivity of the
stress capital buffer. Some of these commenters suggested that the
stress capital buffer should be assessed against risk-weighted assets,
not adjusted total assets. A few commenters suggested that it was
inappropriate to assess the same stress capital buffer on each
Enterprise because each has a different risk profile. Some commenters
urged FHFA to adopt the proposed rule's alternative that would rely on
FHFA's eventual program for supervisory stress tests, although one
commenter thought that should be implemented only after FHFA's
supervisory stress testing capabilities have been developed.
After considering these comments, FHFA has determined to adopt the
proposed rule's alternative approach under which FHFA would
periodically re-size the stress capital buffer to the extent that
FHFA's eventual program for supervisory stress tests determines that an
Enterprise's peak capital exhaustion under a severely adverse stress
would exceed 0.75 percent of adjusted total assets. Pending FHFA's
implementation of its supervisory stress testing program, or in any
year in which FHFA does not assign a greater stress capital buffer, an
Enterprise's stress capital buffer would be 0.75 percent of its
adjusted total assets.
FHFA is adopting the alternative approach because a dynamically re-
sized stress capital buffer would be more risk-sensitive than a fixed-
percent stress capital buffer, potentially varying in amount across the
economic cycle and also varying in response to changes in the risk of
the Enterprise's mortgage exposures. By leveraging a supervisory stress
test, this approach could also incorporate nuanced assumptions, such as
with respect to the continued availability and pricing of CRT during a
period of financial stress. The final rule's approach is also
consistent with the FSOC Secondary Market Statement's recommendation
that ``encourage[d] FHFA to consider the relative merits of alternative
approaches for more dynamically calibrating the capital buffers.''
3. Countercyclical Capital Buffer
Under the proposed rule, the countercyclical capital buffer for the
Enterprises would have initially been set at 0 percent of adjusted
total assets. The proposed rule's countercyclical capital buffer was
similar in purpose and rationale to the analogous buffer of the U.S.
banking framework.
Many commenters argued that FHFA should not adopt a countercyclical
capital buffer. One commenter thought

[[Page 82165]]

the value of the countercyclical capital buffer was unclear, as the
concept was still theoretical and yet to be modeled and vetted. One
commenter argued the countercyclical capital buffer should be more
predictable and have a phase-in period and time limitation. Another
commenter suggested that FHFA should include a buffer that was
triggered when home prices moved a specified amount above the long-term
trend. Other commenters suggested that FHFA should clarify the degree
of alignment with the U.S. banking framework. Some commenters noted
that the U.S. banking regulators have been reluctant to adjust the
countercyclical capital buffer. A few commenters advocated adjusting
the countercyclical capital buffer based on excessive credit growth in
the national housing finance markets. Some commenters were concerned
that the method for sizing the countercyclical capital buffer was
overly subjective. Several commenters suggested that the
countercyclical capital buffer was unnecessary because of stress
testing or because the Safety and Soundness Act already authorizes FHFA
to temporarily increase regulatory capital requirements.
The final rule adopts the countercyclical capital buffer as
proposed. FHFA continues to believe that the countercyclical capital
buffer serves an important purpose to the extent that it facilitates
FHFA's exercise of its existing authorities to temporarily increase
regulatory capital requirements when excess aggregate credit growth
poses heightened risk to the safety and soundness of the Enterprises.
As discussed in the proposed rule, FHFA does not expect to adjust this
buffer as a means to replace or supplement the countercyclical
adjustment to the risk-based capital requirements for single-family
mortgage exposures. Instead, as under the Basel and U.S. banking
frameworks, FHFA would adjust the countercyclical capital buffer taking
into account the macro-financial environment in which the Enterprises
operate, such that it would be deployed only when excess aggregate
credit growth is judged to be associated with a build-up of system-wide
risk. This focus on excess aggregate credit growth would have meant
that the countercyclical capital buffer likely would be deployed on an
infrequent basis and generally only when similar buffers are deployed
by the U.S. banking regulators. FHFA also affirms that any adjustment
to the countercyclical capital buffer would be made in accordance with
applicable law and after appropriate notice to the Enterprises.
4. Stability Capital Buffer
a. Proposed Rule's Approach
As discussed in Section III.B.4 of the proposed rule, the lessons
of the 2008 financial crisis have established that the failure of an
Enterprise could result in significant harm to the national housing
finance markets, as well as the U.S. economy more generally. The
Enterprises remain the dominant participants in the housing finance
system, owning or guaranteeing 45 percent of residential mortgage debt
outstanding as of June 30, 2020. The Enterprises also continue to
control critical infrastructure for securitizing and administering $5.8
trillion of single-family and multifamily MBS. Because of the
interconnectedness between the Enterprises, distress at one Enterprise
could cause distress at the other Enterprise. The Enterprises'
imprudent risk-taking and inadequate capitalization led to their near
collapse and were among the proximate causes of the 2008 financial
crisis. The precipitous financial decline of the Enterprises was also
among the most destabilizing events of the 2008 financial crisis,
leading to their taxpayer-backed rescue in September 2008. Even today,
a perception persists that the Enterprises are ``too big to fail.''
This perception reduces the incentives of creditors and other
counterparties to discipline risk-taking by the Enterprises. This
perception also produces competitive distortions to the extent that it
enables the Enterprises to fund themselves at a lower cost than other
market participants.
Pursuant to the Safety and Soundness Act, as amended by HERA, the
FHFA Director's principal duties are, among other duties, to ensure
that each Enterprise operates in a safe and sound manner and that the
operations and activities of each Enterprise foster liquid, efficient,
competitive, and resilient national housing finance markets.\36\ FHFA
proposed to incorporate into each Enterprise's PCCBA an Enterprise-
specific stability capital buffer that would be tailored to the risk
that the Enterprise's default or other financial distress could have on
the liquidity, efficiency, competitiveness, or resiliency of the
national housing finance markets (housing finance market stability
risk).\37\ FHFA cited several reasons for the proposed rule's stability
capital buffer.
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\36\ 12 U.S.C. 4513(a)(1).
\37\ FHFA's proposed stability capital buffer should not be
construed to imply or otherwise suggest that a similar capital
surcharge would necessarily be appropriate for the Enterprises'
counterparties or other market participants in the housing finance
system. Some of these market participants do not pose much, if any,
risk to the liquidity, efficiency, competitiveness, or resiliency of
national housing finance markets.
---------------------------------------------------------------------------

First, an Enterprise-specific stability capital buffer would foster
liquid, efficient, competitive, and resilient national housing finance
markets by reducing the expected impact of the Enterprise's failure on
the national housing finance markets. Under a regulatory capital
framework in which each Enterprise is subject to the same capital
requirements and has the same probability of default, a larger
Enterprise's default would nonetheless still pose a greater expected
impact due to the greater magnitude of the effects of its default on
the national housing finance markets. As a result, a probability of
default that might be acceptable for a smaller Enterprise might be
unacceptably high for a larger Enterprise. By subjecting a larger
Enterprise to a larger capital surcharge, an Enterprise-specific
stability capital buffer would reduce the probability of a larger
Enterprise's default, aligning the expected impact of its default with
that of a smaller Enterprise.
Second, an Enterprise-specific stability capital buffer also would
foster liquid, efficient, competitive, and resilient national housing
finance markets by creating incentives for each Enterprise to reduce
its housing finance market stability risk by curbing its market share
and growth in ordinary times, with the possibility of an expanded role
during a period of financial stress.
Third, an Enterprise-specific stability capital buffer could offset
any funding advantage that an Enterprise might have on account of being
perceived as ``too big to fail.'' That, in turn, would remove the
incentive for counterparties to shift risk to the Enterprise, where
that incentive not only increases the housing finance market stability
risk posed by the Enterprise but also undermines the competitiveness of
the national housing finance markets.
Fourth, a larger capital cushion at an Enterprise could afford the
Enterprise and FHFA more time to address emerging weaknesses at the
Enterprise that could adversely impact the national housing finance
markets. In addition to mitigating national housing finance market
risk, the additional time afforded by a larger capital cushion could
help FHFA ensure that each Enterprise operates in a safe and sound
manner.
Finally, with respect to safety and soundness, any perception that
an

[[Page 82166]]

Enterprise is ``too big to fail'' leads to moral hazard that undermines
market discipline by creditors and other counterparties over the risk
taking at an Enterprise. By increasing the regulatory capital at an
Enterprise, the stability capital buffer would shift more tail risk
back to the Enterprise's shareholders, which should have the added
benefit of offsetting any ``too big to fail'' funding advantage arising
from unpriced tail risk. The resulting enhanced market discipline
should enhance safety and soundness by increasing each Enterprise's
incentives to effectively manage its risks.
FHFA proposed a stability capital buffer based on a market share
approach. Under FHFA's market share approach, an Enterprise's stability
capital buffer would have depended on an Enterprise's share of total
residential mortgage debt outstanding that exceeds a threshold of 5.0
percent market share. The stability capital buffer, expressed as a
percent of adjusted total assets, would have increased by 5 basis
points for each percentage point of market share exceeding that
threshold. FHFA also solicited comment on an alternative approach that
would have the Enterprises compute their stability capital buffer in a
manner analogous to the U.S. banking approach for determining the
surcharge for global systemically important bank holding companies
(GSIB).
b. FSOC Secondary Market Statement
The proposed rule's stability capital buffer was a significant
departure from the 2018 proposal. That proposal did not contemplate an
Enterprise-specific capital surcharge or other buffer that was tailored
to the Enterprise's size or importance, any funding advantage that the
Enterprise might have on account of being perceived as ``too big to
fail,'' or the risk that the Enterprise's default could pose to the
national housing finance markets. The FSOC Secondary Market Statement
generally affirmed the merit of this enhancement to the 2018 proposal,
and in particular the importance of a separate capital buffer that is
expressly intended to mitigate an Enterprise's stability risk.
FSOC found that any distress at the Enterprises that affected their
secondary mortgage market activities could pose a risk to financial
stability, if risks are not properly mitigated. This important, if
perhaps obvious, finding was echoed by the statements made by several
of the FSOC principals in connection with FSOC Secondary Market
Statement.\38\ This finding also confirmed a premise of the proposed
rule's stability capital buffer.
---------------------------------------------------------------------------

\38\ See Statement of CFTC Chairman Heath P. Tarbert on FSOC's
Activities-Based Review of Secondary Mortgage Market Activities,
available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement092520 (``The good news is that for the first time,
the FSOC is formally acknowledging that any distress that affects
the secondary market activities of the GSEs could pose a risk to the
financial stability of the United States if not properly
mitigated.''); Statement by FDIC Chairman Jelena McWilliams on FSOC
Activities-Based Review of Secondary Mortgage Market Activities,
available at: https://www.fdic.gov/news/speeches/spsep2520.html
(``Prior to the global financial crisis, Fannie Mae and Freddie Mac
were two of the largest, most highly leveraged financial companies
in the world. Since being placed into conservatorship in September
of 2008, their role in the mortgage market has only grown.'');
Statement by the Acting Comptroller of the Currency Regarding FSOC's
Consideration of Secondary Mortgage Market Activities, available at:
https://www.occ.gov/news-issuances/news-releases/2020/nr-occ-2020-128.html (``I support the FSOC's activities-based review of the
secondary mortgage market and the thoughtful analysis of the
Government Sponsored Enterprises' contribution to financial
stability risks as well as of the efforts to address them, . . .
.''); CFPB Director Kraninger's Remarks at the Financial Stability
Oversight Council Meeting, available at: https://www.consumerfinance.gov/about-us/newsroom/director-kraningers-remarks-financial-stability-oversight-council-meeting/ (``As the
dominant participants in the secondary mortgage market, [the GSEs]
provide the liquidity needed by lenders to provide affordable
housing options to consumers. Financial stability and access to
credit may be imperiled if the GSEs cannot perform this role
effectively. It therefore is critical that we take steps to mitigate
that risk.'').
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FSOC recommended that the regulatory capital requirements should be
an important mitigant of the Enterprises' potential stability risk.
Specifically, the FSOC Secondary Market Statement stated that ``[a]
stability capital buffer would mitigate risks to financial stability by
reducing the expected impact of an Enterprise's distress on financial
markets or other financial market participants and by addressing the
potential for decreased market discipline due to an Enterprise's size
and importance.'' Even more importantly, FSOC also recommended that the
capital buffers should be intentionally tailored to that potential
stability risk, stating ``[t]he capital buffers should be tailored to
mitigate the potential risks to financial stability.''
After the FSOC Secondary Market Statement, and given the historical
record as to the significant harm an Enterprise's failure could have on
the financial system and the economy more generally, it is clear that
not only FHFA, but also the other federal regulators, expect that a
meaningful stability capital buffer that is specific to each
Enterprise's stability risk is a critical feature of the Enterprises'
regulatory capital framework.
c. Comments on the Proposed Rule
Many commenters criticized the overall size of each Enterprise's
stability capital buffer. Some commenters thought that the stability
capital buffer was excessive or even unnecessary given the sizing of
the risk-based capital requirements or because of Treasury's commitment
under the PSPA. One commenter suggested capping the stability capital
buffer at a fixed percent. Other commenters urged eliminating the
stability capital buffer because, in their view, it conflicts with the
Enterprises' countercyclical mission, while others questioned its
applicability because the Enterprises transfer much of the interest
rate risk and funding risk on the mortgage exposures that secure their
guaranteed MBS. One commenter remarked that the Enterprises' failures
in the 2008 financial crisis were due to their underwriting practices,
not their market shares.
A few commenters thought that the Enterprises' stability capital
buffers were insufficient. Some commenters emphasized the necessity of
the stability capital buffer in light of Treasury's rescue of the
Enterprises during the 2008 financial crisis. One commenter thought
that the stability capital buffer reflects the lessons learned from
past crises and the Enterprises' effects on the economy.
Many commenters criticized the proposed rule's market share
approach. Some commenters were concerned that the market share approach
would be procyclical, increasing an Enterprise's stability capital
buffer during a period of financial stress as the Enterprise increased
its acquisition share. Some commenters thought that the market share
approach might not be well-tailored to an Enterprise's housing finance
market stability risk. Many commenters expressed support for either or
both of the U.S. banking framework's GSIB surcharge methods, perhaps
with adjustments. Other commenters viewed each of the U.S. banking
framework's GSIB surcharge methods as inapplicable to the Enterprises
due to the different business models.
d. Final Rule's Approach
FHFA is adopting the stability capital buffer as proposed.
Consistent with the findings and recommendations of the FSOC Secondary
Market Statement, FHFA continues to believe that the stability capital
buffer is a critical feature of the Enterprises' regulatory capital
framework. An Enterprise-specific stability capital buffer will foster
liquid, efficient, competitive, and

[[Page 82167]]

resilient national housing finance markets by reducing the expected
impact of the Enterprise's failure on the national housing finance
markets. It also will create incentives for each Enterprise to reduce
its housing finance market stability risk by curbing its market share
and growth in ordinary times, preserving room for a larger role during
a period of financial stress. An Enterprise-specific stability capital
buffer could offset any funding advantage that an Enterprise might have
on account of being perceived as ``too big to fail,'' which would
remove the incentive for counterparties to shift risk to the Enterprise
and thereby increase the housing finance market stability risk posed by
the Enterprise. A larger capital cushion at an Enterprise could afford
the Enterprise and FHFA more time to address emerging weaknesses at the
Enterprise that could adversely impact the national housing finance
markets. By increasing the regulatory capital at an Enterprise, the
stability capital buffer also will shift more tail risk back to the
Enterprise's shareholders, which should have the added benefit of
offsetting any ``too big to fail'' funding advantage arising from
unpriced tail risk and thereby enhance market discipline over excessive
risk taking.
As urged by many commenters, FHFA carefully considered the proposed
rule's alternative that would have had each Enterprise compute its
stability capital buffer in a manner analogous to the U.S. banking
approach for determining the GSIB surcharge. However, limits on
available data preclude, at least at this time, the adjustments that
would be necessary to ensure that a modified U.S. banking framework
approach yields an Enterprise-specific stability capital buffer that is
reasonably tailored to each Enterprise's housing finance market
stability risk.
While the U.S. banking framework's GSIB surcharge methods might
appear adaptable to financial institutions other than banking
organizations, adopting an analogous approach for calibrating the
Enterprises' stability capital buffer is not practicable for at least
two reasons. First, the U.S. banking framework determines some of the
systemic risk indicators using data specific to banking organizations,
which presents data limitations that would need to be overcome. For
example, each of the U.S. banking framework's systemic indicators is a
relative measure determined by dividing the banking organization's
applicable measure by the aggregate measure for a set of large banking
organizations. The Enterprises' measures are not included in such
aggregate measures, and the GSIB surcharge tiers were calibrated based
on the bank-only aggregate measure. Therefore, each Enterprise's
measure cannot simply be added to that aggregate measure.
Second, FHFA has not identified reliable alternative systemic risk
indicators for the Enterprises. For example, the U.S. banking
framework's systemic indicators for substitutability relate to measures
of payments activity, assets under custody, and underwritten
transactions in debt and equity markets. Using the data inputs
specified by the U.S. banking framework, the systemic indicator for
substitutability would have produced an exceedingly small measure for
each Enterprise, perhaps even zero. That measure is clearly
inconsistent with any reasonable understanding of the substitutability
of the Enterprises, which currently have a near absence of private-
sector market participants that could quickly fill the role of the
Enterprises in supporting the secondary market.
Without considerable adjustments that are not practicable with
existing data, applying the U.S. banking framework's GSIB surcharge
methods to the Enterprises would produce results having little, if any,
correspondence with a commonsense understanding of each Enterprise's
housing finance market stability risk. Consistent with this conclusion,
the U.S. banking framework's GSIB framework does not apply to any
nonbank financial companies supervised by the Federal Reserve Board,
and instead the Federal Reserve Board contemplates a tailored approach
to these financial institutions.\39\
---------------------------------------------------------------------------

\39\ 80 FR 49084.
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With respect to the market share approach, FHFA continues to
believe that the sizing of each Enterprise's stability capital buffer
is reasonably tailored to the Enterprise's housing finance market
stability risk. As of June 30, 2020, Fannie Mae and Freddie Mac would
have had stability capital buffers of, respectively, 1.07 and 0.66
percent of adjusted total assets. Under the 33 percent average risk
weight on their exposures at that time, Fannie Mae and Freddie Mac's
stability capital buffers would have been 3.3 and 2.0 percent of risk-
weighted assets, respectively, which would have been a somewhat less
than U.S. GSIBs of similar size. Notably, were the average risk weight
on the Enterprises' exposures to increase to 35 percent, Fannie Mae's
and Freddie Mac's stability capital buffers would be equivalent to 3.1
and 1.9 percent of risk-weighted assets, respectively, considerably
below the capital surcharges of U.S. GSIBs of similar size.
FHFA acknowledges that the market share approach could increase the
procyclicality of the aggregate risk-based capital requirements. There
is inherently some tension between tailoring the stability capital
buffer to an Enterprise's housing finance market stability risk, which
generally would increase when it expands its role, and mitigating the
procyclicality of the regulatory capital framework. To strike an
appropriate balance, the final rule adopts the approach of the proposed
rule, which provided that an increase in an Enterprise's stability
capital buffer would in effect apply two years after an increase in the
Enterprise's market share.

B. Prescribed Leverage Buffer Amount

Under the proposed rule, to avoid limits on capital distributions
and discretionary bonus payments, an Enterprise would have been
required to maintain tier 1 capital in excess of the amount required
under the tier 1 leverage ratio requirement by at least the amount of a
PLBA equal to 1.5 percent of the Enterprise's adjusted total assets.
The primary purpose of the PLBA was to serve as a non-risk-based
supplementary measure that provides a credible backstop to the combined
PCCBA and risk-based capital requirements. From a safety-and-soundness
perspective, each of the risk-based and leverage ratio requirements
offsets potential weaknesses of the other. Taken together, well-
calibrated risk-based capital requirements working with a credible
leverage ratio requirement are more effective than either would be in
isolation. FHFA deemed it important that the buffer-adjusted risk-based
and leverage ratio requirements are also closely calibrated to each
other so that they have an effective complementary relationship.
Many commenters criticized the sizing of the PLBA. Some of these
commenters suggested reducing the PLBA to 0.5 percent or 0.75 percent
of adjusted total assets. Some commenters argued the PLBA should be
removed entirely. A few commenters did support the proposed rule's PLBA
of 1.5 percent of adjusted total assets. Other commenters suggested
that payout restrictions should be based only on the PCCBA-adjusted
risk-based capital requirements.
As discussed in Section VII.B.2, commenters also offered related
views on the proposed rule's PLBA-adjusted leverage ratio requirement,
and those comments have some implications for the PLBA itself. The
PLBA-adjusted

[[Page 82168]]

leverage ratio requirement prescribed the tier 1 capital necessary to
avoid restrictions on capital distributions and discretionary bonuses.
Many of these commenters contended that the PLBA-adjusted leverage
ratio requirement likely would often exceed the PCCBA-adjusted risk-
based capital requirements. A binding PLBA-adjusted leverage ratio
requirement, in the view of many of these commenters, could reduce the
risk sensitivity of the regulatory capital framework, decrease an
Enterprise's incentive to engage in CRT, incentivize an Enterprise to
increase risk taking, or reduce an Enterprise's ability to offset lower
returns on some exposures with higher returns on other exposures. Some
commenters, on the other hand, argued that the PLBA-adjusted leverage
ratio requirement was inadequate given the Enterprises' historical loss
experience and the risk that each Enterprise poses to financial
stability. Some commenters suggested sizing the PLBA-adjusted leverage
ratio requirement based on the pre-CRT risk-based capital requirements.
After considering these comments, FHFA has determined to adopt the
PLBA as proposed. FHFA continues to believe that the proposed rule's
calibration methodology for the PLBA was fundamentally sound. The 1.5
percent PLBA is calibrated to ensure that the PCCBA and PLBA have an
effective complementary relationship such that each is independently
meaningful. The PLBA for Fannie Mae and Freddie Mac would have been,
respectively, $53 billion and $38 billion as of September 30, 2019 and
would have been $58 billion and $41 billion as of June 30, 2020. For
Fannie Mae, the PLBA would have been less than its PCCBA, while for
Freddie Mac the reverse would have been true. Moreover, the relative
sizing of the PLBA is generally consistent with the relative sizing of
similar buffers under the U.S. banking framework. A 1.5 percent PLBA
for the Enterprises is 37.5 percent of the 4.0 percent PLBA-adjusted
leverage ratio requirement to avoid payout restrictions. The 2.0
percent supplementary leverage ratio requirement of the U.S. banking
framework is 40 percent of the 5.0 percent buffer-adjusted leverage
ratio requirement to avoid payout restrictions. Finally, FHFA notes
that the Federal Home Loan Banks are subject to a 4.0 percent total
leverage ratio requirement. While the Federal Home Loan Banks might
have greater interest rate risk profiles than the Enterprises, the
Federal Home Loan Banks also have the safety and soundness benefits of
the statutory requirement that each advance be fully secured, and that
security interest has special protection under the Federal Home Loan
Bank Act.
FHFA agrees with commenters that the PCCBA-adjusted risk-based
capital requirements should, as a general rule, exceed the regulatory
capital required under the PLBA-adjusted leverage ratio requirement.
Some commenters' analysis suggested that the PLBA-adjusted leverage
ratio requirement generally would exceed the PCCBA-adjusted risk-based
capital requirements over most of the economic cycle. That could
evidence flaws in FHFA's method for calibrating the PLBA-adjusted
leverage ratio requirements, the PCCBA-adjusted risk-based capital
requirements, or both. After taking into account the views of
commenters, and also after considering the FSOC Secondary Market
Statement's affirmation of the sizing of the leverage ratio
requirements and its suggestion that additional capital could be
required, FHFA has adopted adjustments to the risk-based capital
requirements that generally should reduce the likelihood that the PLBA-
adjusted leverage ratio requirements would exceed the PCCBA-adjusted
risk-based capital requirements.

C. Payout Restrictions

Under the proposed rule, an Enterprise would have been subject to
limits on its capital distributions and discretionary bonus payments if
either its capital conservation buffer was less than its PCCBA or its
leverage buffer was less than its PLBA. An Enterprise's maximum payout
ratio would have determined the extent to which it is subject to limits
on capital distributions and discretionary bonuses. An Enterprise also
would not have been permitted to make distributions or discretionary
bonus payments during the current calendar quarter if, as of the end of
the previous calendar quarter: (i) The eligible retained income of the
Enterprise was negative; and (ii) either (A) the capital conservation
buffer of the Enterprise was less than its stress capital buffer, or
(B) the leverage buffer of the Enterprise was less than its PLBA.
Some commenters supported the payout restrictions as proposed. A
few commenters suggested that restrictions on discretionary bonuses
would be unfair to employees. Other commenters argued against payout
restrictions when an Enterprise is profitable. Some contended that an
Enterprise should not be permitted to make any capital distribution at
all if it maintained regulatory capital less than its PCCBA-adjusted
risk-based capital requirements or its PLBA-adjusted leverage ratio
requirements. Other commenters sought clarification as to the
circumstances under which an Enterprise would be subject to enforcement
action for maintaining regulatory capital less than its PCCBA-adjusted
risk-based capital requirements or its PLBA-adjusted leverage ratio
requirements. A few commenters suggested changes to the proposed rule's
maximum payout ratios.
The final rule adopts the payout restrictions as proposed. FHFA
continues to believe that the payout restrictions are appropriately
tailored to ensure each Enterprise will maintain safe and sound levels
of regulatory capital in the ordinary course while also being able to
draw down its regulatory capital during a period of financial stress.
With respect to commenters' suggested clarifications, FHFA
continues to expect that each Enterprise generally will seek to avoid
any payout restriction by maintaining regulatory capital in excess of
its buffer-adjusted risk-based and leverage ratio requirements during
ordinary times. FHFA also expects that, consistent with its statutory
mission to provide stability and ongoing assistance to the secondary
mortgage market across the economic cycle, each Enterprise might draw
down its buffers during a period of financial stress. However, it would
not be consistent with the safe and sound operation of an Enterprise
for the Enterprise to maintain regulatory capital less than its buffer-
adjusted requirements in the ordinary course except for some reasonable
period after a financial stress, pending the Enterprise's efforts to
raise and retain regulatory capital.
Nothing in the final rule limits the authority of FHFA to take
action to address unsafe or unsound practices or violations of law,
including actions inconsistent with an Enterprise's charter. FHFA
could, depending on the facts and circumstances, determine that it is
an unsafe or unsound practice, or that it is inconsistent with the
Enterprise's statutory mission, for an Enterprise to maintain
regulatory capital that is less than its buffer-adjusted requirements
during ordinary times. If FHFA were to make that determination, FHFA
would have all of its enforcement and other authorities, including its
authority to issue a cease-and-desist order, to require the Enterprise
to remediate that unsafe or unsound practice--for example, by
developing and implementing a plan to raise additional regulatory
capital.

[[Page 82169]]

IX. Credit Risk Capital: Standardized Approach

A. Single-Family Mortgage Exposures

Much like the proposed rule, the standardized credit risk-weighted
assets for each single-family mortgage exposure will be determined
under the final rule using grids and risk multipliers that together
will assign an exposure-specific risk weight based on the risk
characteristics of the single-family mortgage exposure. The base risk
weight will be a function of the single-family mortgage exposure's
MTMLTV, among other things. The MTMLTV will be subject to a
countercyclical adjustment to the extent that national house prices are
5.0 percent greater or less than an inflation-adjusted long-term trend.
This base risk weight will then be adjusted based on other risk
attributes, including any mortgage insurance or other loan-level credit
enhancement and the counterparty strength on that enhancement. Finally,
this adjusted risk weight will be subject to a floor.
1. Base Risk Weights
In general, FHFA calibrated the proposed rule's base risk weights
and risk multipliers for single-family mortgage exposures to require
credit risk capital sufficient to absorb the lifetime unexpected losses
incurred on single-family mortgage exposures experiencing a shock to
house prices similar to that observed during the 2008 financial crisis.
Lifetime unexpected losses are the difference between lifetime credit
losses in such conditions (also known as stress losses) and expected
losses. The proposed rule would have required an Enterprise to
determine a base risk weight for each single-family mortgage exposure
using one of four single-family grids (each, a single-family grid)
based on performance history:
Non-performing loan (NPL): A single-family mortgage
exposure that is 60 days or more past due.
Modified re-performing loan (modified RPL): A single-
family mortgage exposure that is not an NPL and has previously been
modified or entered a repayment plan.
Non-modified re-performing loan (non-modified RPL): A
single-family mortgage exposure that is not an NPL, has not been
previously modified or entered a repayment plan, and has been an NPL at
any time in the last 48 calendar months.
Performing loan: A single-family mortgage exposure that is
not an NPL, a modified RPL, or a non-modified RPL. A non-modified RPL
generally would have transitioned to a performing loan after not being
an NPL at any time in the prior 48 calendar months.
Many commenters generally supported the proposed rule's base risk
weights, which resulted in exposure-specific credit risk capital
requirements generally similar to those of the 2018 proposal, subject
to some simplifications and refinements. Several commenters suggested
that FHFA should establish a process for reviewing the base risk
weights every few years that includes soliciting public input from
interested parties.
FHFA also received comments on the framework for calibrating the
proposed rule's base risk weights. Some commenters advocated greater
transparency into, and justification of, the calibration framework,
particularly the increase in base risk weights relative to the 2018
proposal.\40\ One commenter argued that the house price shock and
recovery assumptions underlying the calibration framework were
inappropriate given the changes in the national housing finance markets
since the 2008 financial crisis, including the enhanced consumer
protections and greater capital requirements for mortgage insurers and
other market participants. Another commenter recommended a separate
capital requirement of 50 basis points of adjusted total assets to
mitigate the model risk associated with the calibration framework.
Several commenters argued that FHFA should acknowledge that accounting
losses comprised a substantial portion of the Enterprises' crisis-era
loss experience. Some commenters suggested that the credit risk capital
requirements were motivated by an intent to drive changes to the
structure of the national housing finance markets. Commenters also
suggested that the final rule should permit flexibility to allow the
Enterprises to adapt to an evolving market and for their partners to
innovate.
---------------------------------------------------------------------------

\40\ FHFA previously published a white paper on its calibration
framework available at https://www.fhfa.gov/PolicyProgramsResearch/Research/Pages/FHFA-Mortgage-Analytics-Platform-Whitepaper-V2.aspx.
---------------------------------------------------------------------------

Commenters suggested that the base risk weights for high MTMLTV
loans were excessive and could adversely impact lending by state
housing finance agencies. Some commenters argued that the base risk
weight should be assigned based on original loan-to-value (OLTV)
instead of MTMLTV for the first few years because, among other things,
the change would reduce procyclicality. One commenter recommended
splitting each single-family grid's band for single-family mortgage
exposures with MTMLTV between 30 percent and 60 percent into three
equally sized bands to increase the risk sensitivity of the base risk
weights. Some commenters argued that the base risk weights for some
higher MTMLTV single-family mortgage exposures were excessive. One
commenter suggested using a national house price index instead of
state-level house prices to calculate the MTMLTV for a single-family
mortgage exposure.
A few commenters advocated the use of a borrower's original credit
score instead of the refreshed credit score because the refreshed
credit score could materially impact a borrower's access to credit and
might increase procyclicality.
Commenters urged changes to the proposed rule's treatment of
modified RPLs and non-modified RPLs. Some commenters suggested
permitting a modified RPL to transition to a performing loan after
several years of performance because these modified RPLs perform much
like single-family mortgage exposures that had never been delinquent.
One commenter proposed that single-family mortgage exposures subject to
repayment plans and other loss mitigation programs that do not modify
the required payments should be treated as non-modified RPLs so as to
not discourage use of these plans and programs.
Many commenters advocated changes for single-family mortgage
exposures in COVID-19-related forbearance. Commenters argued that these
exposures (and other single-family mortgage exposures in similar
disaster-related forbearance programs) should not be treated as NPLs or
modified RPLs for purposes of assigning a basis risk weight and instead
generally should be assigned a lower base risk weight. Commenters also
suggested that these exposures should be assigned a different
performance classification only after the forbearance period ends.
After considering these comments, FHFA has adopted the following
changes to the proposed rule's base risk weights.
The final rule adopts a revised definition of modified RPL
that provides that a modified RPL will become a performing loan after
60 calendar months of performance. This treatment is similar to the
treatment afforded to non-modified RPLs. In its analysis supporting the
proposed rule, FHFA found a material difference in loan performance for
modified RPLs that re-performed for four years and performing loans
that were never modified. However, FHFA also found this difference
began to diminish after five years of re-performance. In light of the
commenters' recommendation and upon

[[Page 82170]]

re-examining the available information, the final rule allows for
modified RPLs that perform for five years to be reclassified as
performing loans.
Each single-family grid's band for single-family mortgage
exposures with an MTMLTV between 30 percent and 60 percent has been
divided into three separate, equally-sized bands. This change will
moderately enhance the regulatory capital framework's risk sensitivity
without materially increasing its complexity.
A single-family mortgage exposure in a repayment plan will
be treated as a non-modified RPL instead of a modified RPL. This change
will avoid discouraging the use of these programs, which are important
means of mitigating the Enterprises' losses. If after the forbearance
the borrower elects a payment deferral instead of a reinstatement or a
repayment plan, the single-family mortgage exposure will still be
treated as a modified RPL.
The final rule also implements a tailored approach to any single-
family mortgage exposure that is in a forbearance pursuant to the CARES
Act or a forbearance program for COVID-19-impacted borrowers. During
the forbearance (and pending negotiations or other steps reasonably
expected to result in a modification), the base risk weight for an NPL
will be equal to the product of 0.45 and the base risk weight that
would otherwise be assigned to the NPL. After the forbearance, any
period of time during which the single-family mortgage exposure was
past due will be disregarded for the purpose of assigning a risk weight
if the entire amount past due was repaid upon the termination of the
forbearance. In effect, a single-family mortgage exposure will, after a
reinstatement, return to the classification it had before the COVID-19-
related forbearance. As discussed above, because a repayment plan will
not be treated as a modification, a single-family mortgage exposure
that is subject to a repayment plan after a COVID-19-related
forbearance will be treated as a non-modified RPL instead of a modified
RPL.
With respect to commenters' concerns about the perceived increase
in the base risk weights, FHFA notes that, while the proposed rule's
base risk weights generally were greater than the base risk weights
implicit in the single-family grids of the 2018 proposal, that change
generally would not result in greater aggregate credit risk capital
requirements after taking into account offsetting changes to the risk
multipliers. The proposed rule eliminated the 2018 proposal's risk
multipliers for number of borrowers and loan size, and reallocated the
associated unexpected losses across the base risk weights. The
practical effect of this change was that the base risk weights in the
single-family grids are greater than they otherwise would have been if
the two risk multipliers had not been eliminated.
2. Countercyclical Adjustment
Under the proposed rule, the MTMLTV used to assign a base risk
weight to a single-family mortgage exposure would have been subject to
a countercyclical adjustment that an Enterprise would have been
required to make when national house prices increased or decreased by
more than 5.0 percent from an estimated inflation-adjusted long-term
trend (MTMLTV adjustment). The proposed rule's MTMLTV adjustment would
have been based on FHFA's U.S. all-transactions FHFA HPI.
Several commenters generally supported the MTMLTV adjustment as an
effective means of mitigating the procyclicality of the aggregate risk-
based capital requirements. One commenter suggested that the MTMLTV
adjustment was duplicative of the countercyclical capital buffer and
therefore unnecessary. A commenter argued that, while the MTMLTV
adjustment functioned effectively when applied to historical datasets,
it might not function as expected in the future and could, under
certain circumstances, reduce the Enterprises' incentives to acquire
high OLTV single-family mortgage exposures. Other commenters thought
that the procyclicality could be addressed by increasing reliance on
OLTV and credit scores at origination instead of MTMLTV and refreshed
credit scores. Some commenters thought that CRT could play a role in
mitigating procyclicality.
Many commenters recommended changes to the MTMLTV adjustment. Some
commenters suggested that the MTMLTV adjustment should be regionalized
by using home prices in each state or metropolitan statistical area to
avoid distorting regional lending based on national house price trends.
Another commenter advocated using a purchase-only HPI instead of the
all-transactions FHFA HPI. That commenter also advocated using data
from 1975 to 2001 to specify the long-term trend. Commenters also
proposed periodically reevaluating the MTMLTV adjustment.
Some commenters focused on the 5.0 percent collar. A few commenters
advocated not using a collar and instead applying the MTMLTV adjustment
regardless of the extent to which national house prices had departed
from the long-term trend. Other commenters suggested a wider collar or
an asymmetrical collar that set thresholds at different levels of
deviation above and below the long-term trend. One commenter suggested
applying the MTMTLTV adjustment to only half the incremental house
price appreciation above the collar.
After considering the views of commenters, FHFA has determined to
adopt the proposed rule's MTMLTV adjustment with two changes. First,
FHFA agrees with commenters that an expanded-data HPI, for example the
recently published national, not-seasonally adjusted, expanded-data
FHFA House Price Index[supreg], provides a better basis for identifying
departures from the inflation-adjusted long-term national house price
trends. The expanded-data FHFA HPI excludes the potential valuation
biases associated with refinancing transactions, which generally assign
a house valuation through an appraisal. The expanded-data FHFA HPI also
more accurately reflects market activity by supplementing the
Enterprises' acquisitions with data from Federal Housing Administration
mortgages and real property records. The additional data provide
sufficient sample sizes to ensure robust estimation of the HPI back to
1975.
To estimate the long-term trend using the expanded-data FHFA HPI,
FHFA employed the same trough-to-trough methodology used in the
proposed rule. The parameters of the long-term trend are estimated
using a linear regression on the natural logarithm of real HPI from the
trough in the first quarter of 1976 to the trough in the first quarter
of 2012, where the quarterly HPI has been deflated by the average
quarterly non-seasonally adjusted Consumer Price Index for All Urban
Consumers, U.S. City Average, All Items Less Shelter. The long-term
trend line for the expanded-data FHFA HPI is somewhat different than
the long-term trend line under the proposed rule. Under the final
rule's long-term trend line, as of June 30, 2020, house prices were
moderately greater than the 5 percent collar. As a result, as of June
30, 2020, each Enterprise would be required to make an increase to the
MTMLTVs of single-family mortgage exposures, increasing aggregate risk-
based capital for these exposures.
Second, the final rule prescribes a trigger for FHFA to re-estimate
the long-term trend line upon a new trough. FHFA will adjust the
formula for the long-term HPI trend in accordance with applicable law
if two conditions are

[[Page 82171]]

satisfied as of the end of a calendar quarter that follows the last
adjustment to the long-run HPI trend: (i) The average of the deflated
HPI's departures from the long-term HPI trend over four consecutive
calendar quarters has been less than -5.0 percent; and (ii) after the
end of the calendar quarter in which the first condition is satisfied,
the deflated HPI has increased to an extent that it again exceeds the
long-term HPI trend. The point in time of the new trough used by FHFA
to adjust the formula for the long-term HPI trend will be identified by
the calendar quarter with the smallest deflated HPI in the period that
includes the calendar quarter in which the first condition is satisfied
and ends at the end of the calendar quarter in which the second
condition is first satisfied. The proposed rule contemplated changes to
the 2018 proposal to mitigate the procyclicality of the aggregate risk-
based capital requirements of the 2018 proposal. FHFA agreed with many
of the commenters on the 2018 proposal that mitigating the
procyclicality of the 2018 proposal's risk-based capital requirements
would facilitate capital management and enhance the safety and
soundness of the Enterprises by preventing risk-based capital
requirements from decreasing to unsafe and unsound levels. Mitigating
that procyclicality was also critical, in FHFA's view, to position each
Enterprise to fulfill its statutory mission across the economic cycle.
FHFA continues to believe that the MTMLTV adjustment is effective in
mitigating that procyclicality.
In FHFA's view, the MTMLTV adjustment and the countercyclical
capital buffer are not duplicative. Each serves a different purpose.
FHFA does not expect to adjust the countercyclical capital buffer as a
means to replace or supplement the MTMLTV adjustment. Instead, as under
the Basel and U.S. banking frameworks, FHFA would adjust the
countercyclical capital buffer taking into account the macro-financial
environment in which the Enterprises operate, such that it would be
deployed only when excess aggregate credit growth is judged to be
associated with a build-up of system-wide risk. This focus on excess
aggregate credit growth would mean that the countercyclical capital
buffer likely would be deployed on an infrequent basis and generally
only when similar buffers are deployed by the U.S. banking regulators.
In contrast, the application of the MTMLTV would not depend on a
determination by FHFA. Rather the MTMLTV adjustment has an automatic
trigger such that an Enterprise would be required to make the
adjustment when national house prices increased or decreased by more
than 5.0 percent from the long-term trend. The MTMLTV adjustment
therefore could apply in circumstances in which house prices deviate
significantly from the long-term trend, but there is not simultaneously
a build-up of system-wide risk.
FHFA also continues to believe that the 5.0 percent collar strikes
an appropriate balance between mitigating procyclicality and preserving
the risk sensitivity of the regulatory capital framework. FHFA did
consider an asymmetric collar. After considering the relative frequency
of significant departures of house prices from the long-term trend,
FHFA believes the symmetrical 5.0 percent collar strikes an appropriate
balance that avoids distorting the economic signals provided by
relatively frequent, but less significant, departures both above and
below that trend.
FHFA also considered, but determined not to, regionalize the MTMLTV
adjustment by using more granular house price indexes, such as state or
MSA house price indexes. Doing so could potentially have enhanced risk
sensitivity but would significantly increase the complexity of the
regulatory capital framework and the model risk associated with a more
granular adjustment.
3. Risk Multipliers
The proposed rule would have required an Enterprise to adjust the
base risk weight assigned to a single-family mortgage exposure using a
set of risk multipliers to account for additional loan characteristics.
The risk multipliers would have refined the base risk weight to account
for risk factors beyond the primary risk factors reflected in the
single-family grids and for variations in secondary risk factors not
captured in the risk profiles of the synthetic loans used to calibrate
the single-family grids. The proposed rule's risk multipliers were
substantially the same as those of the 2018 proposal, with some
simplifications and refinements. The adjusted risk weight for a single-
family mortgage exposure would have been the product of the base risk
weight, the combined risk multiplier, and any credit enhancement
multiplier.
Commenters generally supported the proposed rule's risk
multipliers, including the simplifications and refinements made to the
2018 proposal. Several commenters suggested that FHFA should establish
a process for reviewing the risk multipliers every few years that
includes soliciting public input from interested parties. Some
commenters argued that the risk multipliers would result in more
capital relief for mortgage insurance than other forms of credit risk
transfer.
Several commenters urged FHFA to reinstate the 2018 proposal's cap
on the maximum combined risk multiplier for a single-family mortgage
exposure. One commenter argued that the base risk weights, when
adjusted by risk multipliers, would result in excessive credit risk
capital requirements for rate-term refinance loans and purchase-money
loans and inadequate credit risk capital requirements for cash-out
refinance loans. Other commenters suggested eliminating the risk
multiplier for refinance burnout.
Some commenters advocated risk multipliers that would reduce the
credit risk capital requirement for a single-family mortgage exposure
originated by a state housing finance agency or credit union, where the
borrower received down-payment support from a state housing finance
agency, or where the borrower received specified homebuyer counseling.
One commenter suggested that the risk multipliers should reduce the
credit risk capital requirement for a single-family mortgage exposure
with a lower balance, for a borrower below a particular area median
income threshold, and for a borrower in a locality with lower home
ownership rates. A commenter also suggested that the risk multipliers
should not increase the credit risk capital requirement for
condominium-secured single-family mortgage exposures and should permit
lenders to consider credit score alternatives, such as rent or utility
payments, for low-income and certain other borrowers. Some commenters
encouraged FHFA to align the risk multiplier for high-debt-to-income
ratio (DTI) single-family mortgage exposures with the 43 percent DTI
threshold of the qualified mortgage rule of the Bureau of Consumer
Financial Protection. Other commenters supported more tailored risk
multipliers for third-party originations based on an assessment of the
originator. Some commenters suggested removing the risk multipliers for
the borrower's credit score or that FHFA not use refreshed credit
scores for RPLs and NPLs so as to not disincentivize loan modifications
or encourage foreclosures.
FHFA is adopting the risk multipliers as proposed with one change.
To address commenters' concerns that risk multipliers, while
individually reasonable, could compound in certain combinations to
assign excessive credit risk capital requirements for single-family
mortgage exposures, the final

[[Page 82172]]

rule reinstates the 2018 proposal's cap that limits the combined risk
multiplier for a single-family mortgage exposure to 3.0. Relatively few
single-family mortgage exposures would have a risk multiplier in excess
of this cap, such that the cap should not increase the safety and
soundness risk to an Enterprise.
FHFA acknowledges commenters' concerns related to certain loan
characteristics that the commenters perceived to pose less credit risk,
including single-family mortgage exposures originated by state housing
finance agencies, credit unions, and certain third-party originators.
However, FHFA continues to believe that the base risk weights and risk
multipliers for these single-family mortgage exposures are consistent
with the best available evidence of the credit risk posed by these
exposures.
4. Credit Enhancement Multipliers
Under the proposed rule, to account for the decrease in an
Enterprise's exposure to unexpected loss on a single-family mortgage
exposure subject to loan-level credit enhancement, an Enterprise would
have adjusted the base risk weight using an adjusted credit enhancement
multiplier. That adjusted credit enhancement multiplier would have been
based on a credit enhancement multiplier (CE multiplier) for the loan-
level credit enhancement and then adjusted for the strength of the
counterparty providing the loan-level credit enhancement. A smaller CE
multiplier (and therefore a smaller adjusted credit enhancement
multiplier) would have corresponded to a loan-level credit enhancement
that transfers more of the projected unexpected loss to the
counterparty and thus requires the Enterprise to maintain less credit
risk capital for the single-family mortgage exposure.
Some commenters supported the proposed rule's approach to assigning
adjusted CE multipliers to single-family mortgage exposures with loan-
level credit enhancement, including the refinements to the counterparty
ratings. Many commenters criticized the proposed rule's approach for
providing less capital relief for loan-level credit enhancement than
the 2018 proposal. Commenters argued that the reduced capital relief
would not provide appropriate incentives for loan-level credit
enhancement, increasing risk to taxpayers. Commenters suggested that
the proposed rule's 35 percent loss-given-default assumption ignored
distinctions among counterparty types. Some commenters argued that more
capital relief should be provided for deeper loan-level credit
enhancement. Commenters suggested using the same CE multiplier for
cancelable and non-cancelable mortgage insurance. A few commenters
suggested that the CE multiplier on seasoned loans with cancelable
mortgage insurance did not provide sufficient capital relief. One
commenter argued that the approach to charter-level mortgage insurance
would penalize low-income borrowers. Other commenters urged FHFA to
provide capital relief only to mortgage insurers in compliance with the
Enterprises' Private Mortgage Insurer Eligibility Requirements
(PMIERs).
Many commenters advocated that FHFA require each Enterprise to
disclose more information with respect to the metrics and processes
that would be used by each Enterprise to assign counterparty ratings
and mortgage concentration classifications for the purpose of the
adjustments to the CE multiplier.
The final rule generally adopts the approach to adjusted CE
multipliers as proposed, except that FHFA has refined the counterparty
rating definitions to facilitate transparency. FHFA does not expect the
definitional changes to result in a change in the rating of any
counterparty. With this refinement, FHFA continues to believe that the
adjusted CE multipliers provide appropriate capital relief to account
for the decrease in an Enterprise's exposure to unexpected loss on a
single-family mortgage exposure subject to loan-level credit
enhancement, striking an appropriate balance between mitigating the
counterparty risk on loan-level enhancement while not adding undue
complexity to the regulatory capital framework.
5. Minimum Adjusted Risk Weight
The proposed rule would have established a floor on the adjusted
risk weight for a single-family mortgage exposure equal to 15 percent.
As discussed in the proposed rule, FHFA determined that a minimum risk
weight was necessary to ensure the safety and soundness of each
Enterprise and that each Enterprise is positioned to fulfill its
statutory mission across the economic cycle.
Some commenters supported the proposed rule's 15 percent floor on
the adjusted risk weight for a single-family mortgage exposure,
agreeing that the risk-sensitive framework posed meaningful model and
related risks and that the proposed rule's credit risk capital
requirements were generally too small.
Many other commenters were critical of the floor or its sizing.
Commenters thought that the floor reduced the risk sensitivity of the
regulatory capital framework and should be removed. Other commenters
thought that the floor was too high and should be reduced. Some
commenters suggested that the calibration of the floor could merit more
of an empirical basis. Some commenters argued that the floor was
unnecessary because other aspects of the proposed rule mitigated the
model and related risks associated with the calibration framework.
Other commenters thought the floor was not well calibrated to mitigate
model risk across the spectrum of single-family mortgage exposures. One
commenter suggested that the floor inappropriately capitalized
political risk, natural disaster risk, interest rate risk, and legal
risk, when the credit risk capital requirements should be calibrated
based only on credit risk.
Commenters observed that the floor would lead to an increase in the
credit risk capital requirement for a substantial portion of the
Enterprises' single-family mortgage exposures. Some commenters were
concerned that the floor would adversely impact the borrowing costs of
lower risk borrowers or could limit an Enterprise's ability to use
higher returns on these lower risk borrowers to support lower returns
on higher risk borrowers. Some commenters thought that the floor could
disincentivize the Enterprises from engaging in CRT. Commenters
expressed concern that the floor could cause mortgage intermediation to
shift away from the Enterprises to other market participants. Some
commenters thought that the floor could reduce the availability of
mortgage credit during normal economic conditions but without
supporting the availability of mortgage credit during economic
downturns. One commenter thought that the floor should be applied to
the base risk weight.
FHFA has determined that the final rule will include a floor on the
adjusted risk weight for a single-family mortgage exposure. As
discussed in the proposed rule, absent the floor, the credit risk
capital requirements as of the end of 2007 would not have been
sufficient to absorb each Enterprise's crisis-era cumulative capital
losses on its single-family book. As also discussed in the proposed
rule, FHFA continues to believe that a floor is appropriate to mitigate
certain risks and limitations associated with the underlying historical
data and models used to calibrate the credit risk capital requirements.
These risks and limitations are inherent to any methodology for
calibrating granular credit risk capital requirements. In particular:

[[Page 82173]]

A disproportionate share of the Enterprises' crisis-era
credit losses arose from certain single-family mortgage exposures that
are no longer eligible for acquisition by the Enterprises. The
calibration of the credit risk capital requirements attributed a
significant portion of the Enterprises' crisis-era losses to these
products. The statistical methods used to allocate losses between
borrower-related risk attributes and product-related risk attributes
pose significant model risk. The sizing of the regulatory capital
requirements also must guard against potential future relaxation of
underwriting standards and regulatory oversight over those underwriting
standards.
The Enterprises' crisis-era losses likely were mitigated
at least to some extent by the unprecedented support by the federal
government of the housing market and the economy and also by the
declining interest rate environment of the period. There is therefore
some risk that the risk-based capital requirements are not specifically
calibrated to ensure each Enterprise would be regarded as a viable
going concern following a future severe economic downturn that
potentially entails more unexpected losses, whether because there is
less or no federal support of the economy, because there is less or no
reduction in interest rates, or because of other causes.
There are some potentially material risks to the
Enterprises that are not assigned a risk-based capital requirement--for
example, risks relating to uninsured or underinsured losses from
flooding, earthquakes, or other natural disasters or radiological or
biological hazards. There also is no risk-based capital requirement for
the risks that climate change could pose to property values in some
localities.
Comparisons to the Basel and U.S. banking frameworks' credit risk
capital requirements for similar exposures reinforce FHFA's view that a
floor is appropriate. Absent a floor, before adjusting for CRT, and
before adjusting for the capital buffers under the proposed rule and
the Basel and U.S. banking frameworks, the Enterprises' average credit
risk capital requirement for single-family mortgage exposures would
have been roughly 40 percent that of U.S. banking organizations and
roughly 60 percent that of non-U.S. banking organizations.\41\
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\41\ Absent a floor, as of September 30, 2019, the average pre-
CRT net credit risk capital requirement on the Enterprises' single-
family mortgage exposures (which reflects the benefit of private
mortgage insurance but no adjustments for CRT) would have been 1.7
percent of unpaid principal balance, implying an average risk weight
of 21 percent. The U.S. banking framework generally assigns a 50
percent risk weight to these exposures to determine the credit risk
capital requirement (equivalent to a 4.0 percent adjusted total
capital requirement), while the current Basel framework generally
assigns a 35 percent risk weight (equivalent to a 2.8 percent
adjusted total capital requirement).
---------------------------------------------------------------------------

Several commenters expressed concern about the model and related
risks associated with the calibration framework for the risk-based
capital requirements for mortgage exposures. Several commenters also
argued that credit risk capital requirements generally should be
aligned across market participants. The FSOC Secondary Market Statement
found that ``[t]he Enterprises' credit risk requirements [under the
proposed rule] . . . likely would be lower than other credit providers
across significant portions of the risk spectrum and during much of the
credit cycle, which would create an advantage that could maintain
significant concentration of risk with the Enterprises.'' FSOC
``encourage[d] FHFA and other regulatory agencies to coordinate and
take other appropriate action to avoid market distortions that could
increase risks to financial stability by generally taking consistent
approaches to the capital requirements and other regulation of similar
risks across market participants, consistent with the business models
and missions of their regulated entities.''
After considering the views of commenters, FHFA has determined to
increase the floor to 20 percent. First, the gap between the proposed
rule's risk weights for lower risk single-family mortgage exposures and
the risk weights for analogous exposures under the Basel and U.S.
banking frameworks further evidences that the proposed rule's credit
risk capital requirements, even with the proposed rule's floor, might
not be adequate to ensure that each Enterprise operates in a safe and
sound manner. Mitigation of model risk has figured prominently in
FHFA's design of the final rule, including the calibration of the
floor. Second, some commenters' analysis suggested that the leverage
ratio requirements generally would exceed the risk-based capital
requirements over most of the economic cycle. That could further
evidence flaws in FHFA's method for calibrating the risk-based capital
requirements, particularly given FHFA's confidence in the method for
calibrating the leverage ratio requirements as affirmed by the FSOC
Secondary Market Statement's affirmation of the sizing of the leverage
ratio requirements. Third, FHFA remains concerned that the portfolio-
invariant calibration of the credit risk capital requirements for
mortgage exposures might not adequately take into account that each
Enterprise's mortgage-focused business does not permit a diversified
portfolio. Fourth, the gap in credit risk capital requirements relative
to the Basel and U.S. banking frameworks also suggests that the
Enterprises would continue to have a competitive advantage over some
other sources of mortgage credit. That would heighten risk to the
competitiveness, efficiency, and resiliency of the national housing
finance markets.
As discussed in Section V.B, FHFA continues to believe that the
differences between the business models, statutory mandates, and risk
profiles of the Enterprises and banking organizations should not
preclude comparisons of the credit risk capital requirement of a large
U.S. banking organization for a specific mortgage exposure to the
credit risk capital requirement of an Enterprise for a similar mortgage
exposure. Comparisons of credit risk capital requirements can further
safety and soundness by helping to identify and mitigate model and
related risks relating to the calibration of the requirements.
Comparisons of credit risk capital requirements can also further
financial stability by identifying undue differences in regulatory
requirements that might distort the market structure.
The BCBS has finalized a more risk-sensitive set of risk weights
for residential real estate exposures, which are to be implemented by
January 1, 2022.\42\ The Basel framework's standardized risk weights
for residential real estate exposures would depend on the LTV of the
exposure and would range from 20 percent to 70 percent for an exposure
on which repayment is not materially dependent on cash flows generated
by the property.\43\ The final rule's 20 percent risk weight floor is
aligned with the smallest risk weight under the eventual Basel
framework.
---------------------------------------------------------------------------

\42\ BCBS, Basel III: Finalising post-crisis reforms ]] 59-68
(Dec. 2017).
\43\ Greater risk weights would apply to residential real estate
where repayment is materially dependent on cash flows generated by
the property.
---------------------------------------------------------------------------

Notably the Basel framework's 20 percent risk weight applies only
to residential real estate exposures with LTVs less than 50 percent.
Under the final rule, single-family exposures with LTVs considerably
greater than 50 percent could be, and as of June 30, 2020 often would
have been, assigned a 20 percent risk weight. Even with this increase
in the floor, the Enterprises' average credit risk capital requirements
for single-family mortgage exposures likely would be lower than other
credit

[[Page 82174]]

providers across significant portions of the risk spectrum and during
much of the credit cycle.

B. Multifamily Mortgage Exposures

Much like the proposed rule, the standardized credit risk-weighted
assets for each multifamily mortgage exposure will be determined under
the final rule using grids and risk multipliers that together assign an
exposure-specific risk weight based on the risk characteristics of the
multifamily mortgage exposure. The base risk weight will be a function
of the multifamily mortgage exposure's MTMLTV and mark-to-market debt
service coverage ratio (MTMDSCR). This base risk weight will then be
adjusted based on other risk attributes. Finally, this adjusted risk
weight will be subject to a floor.
1. Calibration Framework
Many commenters were critical of the framework for calibrating the
credit risk capital requirements for multifamily mortgage exposures.
Commenters recommended that FHFA provide more transparency into the
data and models used to calibrate these requirements. Some commenters
indicated that they could not reproduce the proposed rule's credit risk
capital requirements using available data. Some commenters thought
that, relative to single-family mortgage exposures, FHFA had not
devoted sufficient time and attention to the proposed rule's approach
to multifamily mortgage exposures, raising the risk of unintended
consequences. Several commenters suggested that FHFA should establish a
process for reviewing the base risk weights and risk multipliers every
few years that includes soliciting public input from interested parties
and that considers new performance data.
Commenters argued that the proposed rule's credit risk capital
requirements exceeded the Enterprises' historical loss experiences,
including during the 2008 financial crisis. Some commenters suggested
that the credit risk capital requirements for multifamily mortgage
exposures should not be significantly greater those of single-family
mortgage exposures, particularly in light of the unique characteristics
and risk management practices and the crisis-era performance of each
Enterprise's multifamily business relative to its single-family
business. One commenter suggested that one Enterprise's multifamily
business incurred significant losses in the late 1980s and early 1990s
but viewed that loss experience as irrelevant as a result of changes in
the market structure. Commenters argued that it would be inappropriate,
if a severe economic downturn has recently occurred, to require credit
risk capital sufficient to absorb the lifetime unexpected losses of a
second severe economic downturn.
One commenter noted that the delinquency rate of one Enterprise's
single-family business was greater than that of its multifamily
business. Some commenters argued that the multifamily mortgage
exposures of the Enterprises historically have performed better than
similar exposures of U.S. banking organizations, such that the
comparisons to the U.S. banking framework were not meaningful.
Commenters provided pre-crisis data on peak credit loss ratios and loss
rates across different vintages of multifamily mortgage exposures and
also comparisons to single-family mortgage exposure performance. Some
commenters urged FHFA to use the same stress scenarios and assumptions
to calibrate credit risk capital requirements for both multifamily
mortgage exposures and single-family mortgage exposures.
Some commenters thought that the credit risk capital requirements
were not sufficiently sensitive to the leverage of the multifamily
mortgage exposures. One commenter suggested a cap on the risk weights
for multifamily mortgage exposures and that less regulatory capital be
required of exposures with less leverage.
Another commenter recommended a separate capital requirement of 50
basis points of adjusted total assets to mitigate the model risk
associated with the calibration framework. Several commenters argued
that FHFA should acknowledge that accounting losses comprised a
substantial portion of the Enterprises' crisis-era loss experience.
Some commenters suggested that the credit risk capital requirements
were motivated by an intent to drive changes to the structure of the
national housing finance markets. Commenters also suggested that the
final rule should permit flexibility to allow the Enterprises to adapt
to an evolving market and for their partners to innovate.
A commenter expressed the view that the calibration framework did
not properly address the differences between each Enterprise's
multifamily business model. One potential remedy, according to a
commenter, would be to permit an Enterprise to count three years of
future servicing revenue, instead of one year, to determine its
uncollateralized exposure. Some commenters argued that the credit risk
capital requirements were not aligned with the different credit risks
across workforce housing, student housing, and luxury housing.
FHFA continues to believe that the calibration framework is
appropriate to ensure that each Enterprise operates in a safe and sound
manner and is positioned to fulfill its statutory mission across the
economic cycle. As discussed in the proposed rule, FHFA generally
calibrated the base risk weights and risk multipliers for multifamily
mortgage exposures to require credit risk capital sufficient to absorb
the lifetime unexpected losses incurred on multifamily mortgage
exposures experiencing a shock to property values similar to that
observed during the 2008 financial crisis. The multifamily-specific
stress scenarios used to generate the base risk weights and risk
multipliers involve two parameters: (i) Net operating income (NOI),
where NOI represents gross potential income (gross rents) net of
vacancy and operating expenses, and (ii) property values. The
multifamily-specific stress scenario assumes an NOI decline of 15
percent and a property value decline of 35 percent. This stress
scenario is consistent with market conditions observed during the 2008
financial crisis, views from third-party market participants and data
vendors, and assumptions behind the Enterprises' stress tests.
FHFA acknowledges commenters' views that this calibration framework
results in credit risk capital requirements for multifamily mortgage
exposures that might be greater than the Enterprises' loss experience
during the 2008 financial crisis. That economic downturn featured a
decrease in homeownership rates and an increase in demand for
multifamily housing. Future economic downturns might not entail similar
market dynamics that would mitigate unexpected losses on multifamily
mortgage exposures. FHFA continues to monitor the effects of the COVID-
19 stress on the Enterprises' student housing, senior housing, and
other multifamily businesses. Moreover, the credit risk capital
requirements are calibrated to absorb projected lifetime losses (net of
expected losses) in a stress scenario that entails a NOI decline of 15
percent and a property value decline of 35 percent, not to absorb the
losses actually experienced during the 2008 financial crisis. Related
to this, FHFA believes that the Enterprises' stress tests are not an
appropriate consideration in calibrating the credit risk capital
requirements for multifamily mortgage exposures. The Enterprises' past
stress tests use a nine-quarter loss horizon, whereas much of the
projected lifetime unexpected losses would be recognized

[[Page 82175]]

after the end of that horizon. The Enterprises' stress tests then
offset those limited losses with the revenues recognized in the
horizon, yielding a projection of capital exhaustion considerably lower
than lifetime unexpected losses.
2. Base Risk Weights
The proposed rule would have required an Enterprise to determine a
base risk weight for each multifamily mortgage exposure using a set of
two multifamily grids--one for multifamily mortgage exposures with
fixed rates (multifamily FRMs), and one for multifamily mortgage
exposures with adjustable rates (multifamily ARMs). A multifamily
mortgage exposure that has both a fixed-rate period and an adjustable-
rate period (hybrid loans) would have been deemed a multifamily FRM
during the fixed-rate period and a multifamily ARM during the
adjustable-rate period. The proposed rule's multifamily grids were
quantitatively identical to the multifamily grids in the 2018 proposal,
except the credit risk capital requirements were presented as base risk
weights relative to the 8.0 percent adjusted total capital requirement
rather than as a percent of unpaid principal balance.
One commenter recommended that FHFA recalibrate the base risk
weights for multifamily mortgage exposures to more accurately reflect
the Enterprises' historical loss experiences, including during the 2008
financial crisis. Multiple commenters recommended that the base risk
weights be more sensitive to MTMLTV, particularly for multifamily
mortgage exposures with relatively low MTMLTVs, so as to not
incentivize the Enterprises to support higher leverage lending. One
commenter suggested FHFA reduce the differences in the base risk
weights for multifamily FRMs and multifamily ARMs. Another commenter
thought that the base risk weights would discourage the Enterprises
from supporting affordable workforce housing because of the greater
base risk weights for higher MTMLTV and lower MTMDSCR multifamily
mortgage exposures.
The final rule adopts the base risk weights for multifamily
mortgage exposures as proposed. As discussed in Section IX.B.1, FHFA
continues to believe that the calibration framework for the base risk
weights is appropriate to ensure that each Enterprise operates in a
safe and sound manner and is positioned to fulfill its statutory
mission across the economic cycle.
3. Countercyclical Adjustment
In contrast to the single-family framework, the proposed rule's
multifamily framework did not include an adjustment to mitigate the
procyclicality of the aggregate risk-based capital requirements,
although FHFA believed such an adjustment could be merited. The
proposed rule's single-family countercyclical adjustment was based on
an estimated long-term trend in an inflation-adjusted all-transactions
FHFA HPI. As of the time of the proposed rule, FHFA did not produce a
comparable multifamily series, and it was unclear whether there was
sufficient data from which to develop a reliable long-term trend in
multifamily property values. FHFA solicited comments on options and
available data for a countercyclical adjustment to the credit risk
capital requirements for multifamily mortgage exposures.
Commenters generally recommended that FHFA adopt a countercyclical
adjustment to mitigate the procyclicality of the aggregate risk-based
capital requirements for multifamily mortgage exposures. Some
commenters suggested a countercyclical adjustment was particularly
important for multifamily mortgage exposures because many have balloon-
payment features. Commenters suggested that FHFA construct an index
based on vacancy rates, effective rents, or other indicia of the
fundamental value of multifamily properties. Several commenters urged
FHFA use OLTV instead of MTMLTV as an alternative to an index-based
countercyclical adjustment.
FHFA is not adopting a countercyclical adjustment in the final
rule. After considering the suggestions and views of commenters, FHFA
has not identified sufficient public domain data to develop a reliable
long-term trend for multifamily property values. Some of the data sets
recommended by commenters are not available without cost to the public.
FHFA continues to see considerable merit to a countercyclical or
similar adjustment. FHFA will continue to monitor the issue and assess
available data with which to potentially construct an index.
4. Risk Multipliers
As with single-family mortgage exposures, the proposed rule would
have required an Enterprise to adjust the base risk weight for a
multifamily mortgage exposure to account for additional loan
characteristics using a set of multifamily-specific risk multipliers.
The risk multipliers would have refined the base risk weight to account
for risk factors beyond the primary risk factors reflected in the
multifamily grids and for variations in secondary risk factors not
captured in the risk profiles of the synthetic loans used to calibrate
the multifamily grids. The risk multipliers were substantially the same
as those of the 2018 proposal, with some simplifications and
refinements. The adjusted risk weight for a multifamily mortgage
exposure would have been the product of the base risk weight and the
combined risk multiplier.
Several commenters urged FHFA to reinstate the 2018 proposal's risk
multiplier for multifamily mortgage exposures with a government
subsidy. One commenter recommended a risk multiplier that would reduce
the credit risk capital requirement for targeted affordable housing
properties, such as properties with income and rent restrictions
pursuant to Low-Income Housing Tax Credit (LIHTC) or similar programs,
properties benefitting from project-based rental assistance programs,
properties with supplemental tenant services, housing tax credits and
tax-exempt bond financing, property tax abatement, energy retrofits, or
income diversification. Another commenter suggested a risk multiplier
of 0.6 for LIHTC properties.
Commenters recommended that FHFA provide for more similar risk
multipliers across loan sizes. Commenters recommended that the risk
multiplier for loan size should be a continuous function of loan size
to avoid incentivizes to adjust the loan size. One commenter questioned
whether the risk multiplier for small loan sizes was consistent with
the underlying credit risk.
A commenter recommended that FHFA revisit the risk multiplier for
loan term, providing some evidence that credit risk was less for
multifamily mortgage exposures with longer terms. A commenter
recommended greater risk multipliers for senior housing and student
housing, offset by lower risk multipliers for other multifamily
properties.
The final rule adopts the risk multipliers as proposed. As
discussed in Section IX.B.1, FHFA continues to believe that the
calibration framework for the risk multipliers is appropriate to ensure
that each Enterprise operates in a safe and sound manner and is
positioned to fulfill its statutory mission across the economic cycle.
FHFA has analyzed the available performance data for government-
subsidized multifamily mortgage exposures. Due to the relatively
infrequent instances of loss across multifamily loan programs that
include a government subsidy, FHFA

[[Page 82176]]

has determined that it was not feasible to accurately calibrate
thresholds at which the level of government subsidy impacted the
probability of loss occurring or the severity of that loss. FHFA
acknowledges commenters' arguments in support of more nuanced or finely
calibrated risk multipliers for loan size, loan term, and other risk
characteristics, but FHFA believes that any potential benefit is
outweighed by the increased complexity.
5. Minimum Adjusted Risk Weight
The 2018 proposal acknowledged that combinations of overlapping
characteristics could potentially result in unduly low credit risk
capital requirements for certain multifamily mortgage exposures. Under
the 2018 proposal, the Enterprises were required to impose a floor of
0.5 on the combined multiplier. FHFA took a somewhat different approach
in the proposed rule. As for single-family mortgage exposures, the
proposed rule would have established a floor on the adjusted risk
weight for a multifamily mortgage exposure equal to 15 percent.
The commenters' views on the proposed rule's 15 percent floor on
the adjusted risk weight for a multifamily mortgage exposure were
similar to their views on the floor for single-family mortgage
exposures, with some commenters addressing the two floors together.
Some commenters supported the floor, agreeing that the risk-sensitive
framework posed meaningful model and related risks and that the
proposed rule's credit risk capital requirements were generally too
small.
Many other commenters were critical of the floor or its sizing.
Commenters thought that the floor reduced the risk sensitivity of the
regulatory capital framework and should be removed. Other commenters
thought that the floor was too high and should be reduced. Some
commenters suggested that the calibration of the floor could merit more
of an empirical basis. Some commenters argued that the floor was
unnecessary because other aspects of the proposed rule mitigated the
model and related risks associated with the calibration framework.
Other commenters thought the floor was not well calibrated to mitigate
model risk across the spectrum of multifamily mortgage exposures.
Some commenters thought that the floor could disincentivize the
Enterprises from engaging in CRT. Commenters expressed concern that the
floor could cause mortgage intermediation to shift away from the
Enterprises to other market participants. Some commenters thought the
calibration of the floor should not take into account the risk weights
under the U.S. banking framework because of the better historical
performance of the Enterprises' multifamily mortgage exposures.
Commenters also argued that different floors would be appropriate for
single-family mortgage exposures and multifamily mortgage exposures.
One commenter thought that the floor should be applied to the base risk
weight, assuming certain other changes for CRT on multifamily mortgage
exposures.
FHFA has determined that the final rule will include a floor on the
adjusted risk weight for a multifamily mortgage exposure. As discussed
in the proposed rule, FHFA continues to believe that a floor is
appropriate to mitigate certain risks and limitations associated with
the underlying historical data and models used to calibrate the credit
risk capital requirements. These risks include the potential that
crisis-era losses were mitigated by the unprecedented federal
government support of the economy and the impact of lower interest
rates. In addition, these risks include potentially material risks that
are not assigned a risk-based requirement, for example those that might
arise from natural or other disasters.
FHFA has determined to increase the floor to 20 percent for reasons
similar to its determination with respect to the floor on the risk
weight assigned to a single-family mortgage exposure. Several
commenters expressed concern about the model and related risks
associated with the calibration framework for the risk-based capital
requirements for mortgage exposures. Several commenters also argued
that credit risk capital requirements generally should be aligned
across market participants. Some commenters' analysis suggested that
the leverage ratio requirements generally would exceed the risk-based
capital requirements over most of the economic cycle. That could
evidence flaws in FHFA's method for calibrating the risk-based capital
requirements, particularly given FHFA's confidence in the method for
calibrating the leverage ratio requirements and the FSOC Secondary
Market Statement's affirmation of the sizing of the leverage ratio
requirements. FHFA also remains concerned that the portfolio-invariant
calibration of the credit risk capital requirements for mortgage
exposures might not adequately take into account that each Enterprise's
mortgage-focused business does not permit a diversified portfolio.
The BCBS has finalized a more risk-sensitive set of risk weights
for residential real estate exposures, which are to be implemented by
January 1, 2022.\44\ The Basel framework's standardized risk weights
for residential real estate exposures would depend on the LTV of the
exposure and would range from 30 percent to 105 percent for an exposure
on which repayment is materially dependent on cash flows generated by
the property. Those risk weights would range from 20 percent to 70
percent for an exposure on which repayment is not materially dependent
on cash flows generated by the property. The final rule's 20 percent
risk weight floor is aligned with the smallest risk weight under the
eventual Basel framework.
---------------------------------------------------------------------------

\44\ BCBS, Basel III: Finalising post-crisis reforms ]] 59-68
(Dec. 2017).
---------------------------------------------------------------------------

C. PLS and Other Non-CRT Securitization Exposures

As contemplated by the 2018 proposal, under the proposed rule, an
Enterprise would have determined its credit risk capital requirement
for PLS and other securitization exposures under a securitization
framework that would have been substantially the same as that of the
U.S. banking framework. An Enterprise was permitted to elect to
determine its credit risk capital requirement for a retained CRT
exposure under a somewhat different framework, even if that retained
CRT exposure might be similar to an exposure to a traditional or
synthetic securitization under the securitization framework.
Under the proposed rule, an Enterprise generally would have
assigned a risk weight for a PLS or other securitization exposure using
the simplified supervisory formula approach (SSFA). Pursuant to the
SSFA, an Enterprise would have determined the risk weight for a
securitization exposure using a formula that is based on, among other
things, the subordination level of the securitization exposure and the
adjusted aggregate credit risk capital requirement of the underlying
exposures. A 1,250 percent risk weight would have been assigned to any
securitization exposure that absorbs losses up to the adjusted
aggregate credit risk capital requirement of the underlying exposures,
in effect requiring one dollar of adjusted total capital for each
dollar of exposure amount. After that point, the risk weight for a
securitization exposure would have been assigned pursuant to an
exponential decay function that decreases as the detachment point or
attachment point increases, subject to a minimum risk weight of 20
percent.
At the inception of a securitization, the SSFA's exponential decay
function

[[Page 82177]]

for risk weights, together with the 20 percent risk weight floor, would
have required more regulatory capital on a transaction-wide basis than
would be required if the underlying exposures had not been securitized.
That is, if an Enterprise held every tranche of a securitization, its
overall regulatory capital requirement would have been greater than if
the Enterprise owned all of the underlying exposures. Consistent with
the rationale of U.S. banking regulators, FHFA stated in the proposed
rule that it believed this outcome was important to reduce regulatory
capital arbitrage through securitizations and to manage the structural
and other risks that might be posed by a securitization.\45\
---------------------------------------------------------------------------

\45\ See Regulatory Capital Rules: Regulatory Capital,
Implementation of Basel III, Capital Adequacy, Transition
Provisions, Prompt Corrective Action, Standardized Approach for
Risk-weighted Assets, Market Discipline and Disclosure Requirements,
Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
Rule, 78 FR 62018, 62119 (Oct. 11, 2013) (``At the inception of a
securitization, the SSFA requires more capital on a transaction-wide
basis than would be required if the underlying assets had not been
securitized. That is, if the banking organization held every tranche
of a securitization, its overall capital requirement would be
greater than if the banking organization held the underlying assets
in portfolio. The agencies believe this overall outcome is important
in reducing the likelihood of regulatory capital arbitrage through
securitizations.'').
---------------------------------------------------------------------------

FHFA did not receive comments on the proposed rule's approach to
PLS and other non-CRT securitization exposures and is adopting that
approach as proposed.

D. Retained CRT Exposures

As discussed below, FHFA received many comments on the proposed
rule's approach to CRT. FHFA continues to believe that CRT can play an
important role in ensuring that each Enterprise operates in a safe and
sound manner and is positioned to fulfill its statutory mission across
the economic cycle. FHFA also continues to believe that an Enterprise
does retain some credit risk on its CRT and that that risk should be
appropriately capitalized. As discussed below, FHFA has adopted changes
in the final rule that are intended to better tailor the risk-based
capital requirements to the risk retained by an Enterprise on its CRT.
For CRT on mortgage exposures having relatively lower credit risk, the
final rule reduces the amount of regulatory capital that must be
maintained to reflect that the CRT does not have the same loss-
absorbing capacity as equity financing. Other changes increase the risk
sensitivity of the method for assigning a risk weight to a retained CRT
exposure and the method for calculating the loss-timing adjustment on a
CRT on multifamily mortgage exposures. Relative to the proposed rule,
these changes were intended to increase the capital relief afforded an
Enterprise for well-structured CRT on many common mortgage exposures,
and generally to provide increased risk sensitivity in the CRT
framework, potentially increasing incentives for the Enterprises to
engage in CRT.
1. Proposed Rule's Enhancements
FHFA has continued to refine the CRT assessment framework based on
its understanding of the safety and soundness risks and limits relating
to the effectiveness of CRT in transferring credit risk on the
underlying exposures. CRT transfers credit risk only on a specified
reference pool, while equity financing is available to ``cross cover''
credit risk on other exposures of the Enterprise. CRT transfers only
credit risk, while equity financing also can absorb losses arising from
operational and market risks. An Enterprise generally may pause
distributions on equity financing during a financial stress but
typically must continue debt service or other payments on CRT
instruments. Therefore, equity financing provides more robust safety
and soundness benefits across exposures and risks than a similar amount
of credit exposure transferred through CRT.
One of the lessons of the 2008 financial crisis is that
securitization structures, especially complex securitizations, might
not perform as expected during a financial stress. In fact, some large
banking organizations even elected to reconsolidate some of their
securitizations.\46\ Similarly, there might be unique legal risks posed
by the contractual terms of CRT structures and by the practices
associated with contractual enforcement. CRT investors have recently
threatened litigation with respect to credit events arising out of
COVID-19-related forbearances. There also are structural and other
risks that were not reflected in the proposed rule's adjustments for
loss-sharing risk and loss-timing risk that could further limit the
effectiveness of CRT in transferring credit risk.
---------------------------------------------------------------------------

\46\ See Risk-Based Capital Guidelines; Capital Adequacy
Guidelines; Capital Maintenance: Regulatory Capital; Impact of
Modifications to Generally Accepted Accounting Principles;
Consolidation of Asset-Backed Commercial Paper Programs; and Other
Related Issues, 74 FR 47138, 47142 (Sept. 15, 2009) (``In the case
of some structures that banking organizations were not required to
consolidate prior to the 2009 GAAP modifications, the recent turmoil
in the financial markets has demonstrated the extent to which the
credit risk exposure of the sponsoring banking organization to such
structures (and their related assets) has in fact been greater than
the agencies estimated, and more associated with non-contractual
considerations than the agencies had expected. For example, recent
performance data on structures involving revolving assets show that
banking organizations have often provided non-contractual (implicit)
support to prevent senior securities of the structure from being
downgraded, thereby mitigating reputational risk and the associated
alienation of investors, and preserving access to cost-effective
funding.''); see also FCIC Report at 246, available at https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf (``When the
mortgage securities market dried up and money market mutual funds
became skittish about broad categories of ABCP, the banks would be
required under these liquidity puts to stand behind the paper and
bring the assets onto their balance sheets, transferring losses back
into the commercial banking system. In some cases, to protect
relationships with investors, banks would support programs they had
sponsored even when they had made no prior commitment to do so.'');
see also FCIC Report at 138-139 (``The events of 2007 would reveal
the fallacy of those assumptions and catapult the entire $25 billion
in commercial paper straight onto the bank's balance sheet,
requiring it to come up with $25 billion in cash as well as more
capital to satisfy bank regulators.'').
---------------------------------------------------------------------------

FHFA's assessment framework also considers the extent to which an
Enterprise's CRT program could limit the Enterprise's ability to
fulfill its statutory mission to provide stability and ongoing
assistance to the secondary mortgage market across the economic cycle.
A financial stress could reduce investor demand for, or increase the
cost of, new CRT issuances or undermine the financial strength of some
existing CRT counterparties. The procyclicality of some CRT structures
could adversely impact an Enterprise's ability to support the secondary
mortgage market if the Enterprise lacked sufficient equity financing to
support new acquisitions of mortgage exposures. To fulfill its mission,
an Enterprise should avoid overreliance on CRT and should maintain at
least enough equity capital to support new originations during a period
of financial stress, when new CRT issuances might not be available.
FHFA's assessment framework also seeks to prevent each Enterprise's
CRT program from undermining the liquidity, efficiency,
competitiveness, or resiliency of the national housing finance markets.
Some CRT structures might tend to increase the leverage in the housing
finance system, especially to the extent some CRT investors themselves
rely on short-term debt funding. The disruption in the CRT markets
during the recent COVID-19-related financial stress might have been
driven in part by leveraged market participants that had invested in
CRT rapidly de-levering when confronted by margin calls on short-term
financing.
Taking into account these considerations, the proposed rule
contemplated enhancements to the 2018

[[Page 82178]]

proposal's regulatory capital treatment of CRT to refine FHFA's
balancing of the safety and soundness benefits of CRT against the
potential safety and soundness, mission, and housing market stability
risks that might be posed by CRT. Consistent with the U.S. banking
framework, FHFA proposed operational criteria to mitigate the risk that
the terms or structure of the CRT would not be effective in
transferring credit risk. These operational criteria for CRT were less
restrictive than those applicable to traditional or synthetic
securitizations under the U.S. banking framework. To partially mitigate
the safety and soundness risks posed by this less restrictive approach,
FHFA would have required an Enterprise to publicly disclose material
risks to the effectiveness of the CRT so as to foster market discipline
and FHFA's supervision and regulation.
FHFA also proposed to prescribe the regulatory capital consequences
of an Enterprise providing support to a CRT in excess of the
Enterprise's pre-determined contractual obligations. As under the U.S.
banking framework, if an Enterprise provides implicit support for a
CRT, the Enterprise would have been required to include in its risk-
weighted assets all of the underlying exposures associated with the CRT
as if the exposures were not covered by the CRT.
Generally consistent with the U.S. banking framework, FHFA also
proposed a prudential floor of 10 percent on the risk weight assigned
to any retained CRT exposure. FHFA also proposed certain refinements to
the adjustments to the regulatory capital treatment of CRT for the
loss-sharing, loss-timing, and other risks that a CRT might not be
fully effective in transferring credit risk to third parties. In
particular, FHFA proposed to refine the 2018 proposal's loss-sharing
adjustment and loss-timing adjustment, add an overall effectiveness
adjustment for the differences between CRT and regulatory capital, and
incorporate a loss-timing adjustment for CRT on multifamily mortgage
exposures.
2. Risk Weight Floor
Many commenters criticized the proposed rule's 10 percent floor on
the risk weight assigned to retained CRT exposures. As discussed below,
FHFA continues to believe that an Enterprise retains credit risk to the
extent it retains CRT exposures and that such risk should be
appropriately capitalized.
Many commenters argued that the 10 percent floor on the risk weight
assigned to a retained CRT exposure would unduly decrease the capital
relief provided by CRT and reduce the Enterprises' incentives to engage
in CRT. Commenters suggested that the floor was duplicative of the
proposed rule's overall effectiveness adjustment or unnecessary because
of other enhancements contemplated by the proposed rule, including
FHFA's ability to approve CRT structures and the stress capital and
other buffers. Commenters argued that a credit risk capital requirement
for retained CRT exposures was inconsistent with the Enterprises'
stress tests. Commenters pointed out the differences between the
proposed rule's approach and the 2018 proposal's approach, which in
effect assigned a 0 percent risk weight to some retained CRT exposures.
Some commenters saw no need for a floor given the perceived remote risk
of loss borne by senior CRT tranches.
Commenters argued that FHFA had not provided sufficient analytical
support for the floor. Commenters suggested that FHFA should assess the
impact of the floor on the Enterprises' risk management practices,
their business models, and their CRT programs. Commenters thought that
the floor could misalign the Enterprises' incentives, including in some
cases by requiring an Enterprise to maintain more regulatory capital
for some CRT structures than other structures that transferred less
credit risk. One commenter suggested that, as a result of the floor, an
Enterprise could achieve more capital relief with a CRT that has a
shorter maturity and a detachment point that is less than projected
stress loss.
Commenters noted that the floor on the risk weight for retained CRT
exposures and the overall effectiveness adjustment would have unique
implications for CRT on multifamily mortgage exposures. A commenter
recommended that the 15 percent floor on the risk weight for
multifamily mortgage exposures should be applied to the base risk
weight instead of the adjusted risk weight so as to not distort
incentives to enter into CRT.
Some commenters did recommend reducing instead of eliminating the
floor. Other commenters suggested calibrating a variable floor based on
the seniority of the retained risk weight and aggregate net credit risk
capital requirement of the underlying mortgage exposures. One commenter
questioned the relevance of the Basel framework's analogous floor,
arguing that that floor protected banking organizations from unknown
risks while that risk is mitigated for the Enterprises by their
underwriting standards and their control over servicing and loss
mitigation. Another commenter suggested that the floor could provide a
rationale for a smaller PLBA-leverage ratio requirement.
FHFA has determined that the final rule should preserve the
proposed rule's 10 percent floor on the risk weight assigned to a
retained CRT exposure. The floor avoids treating a retained CRT
exposure as if it poses no credit risk. Under the 2018 proposal, a
retained CRT exposure with a detachment point less than the net credit
risk capital requirement of the underlying mortgage exposures would, in
effect, have had a risk weight of 1,250 percent (i.e., the 2018
proposal would have required a dollar of total capital for each dollar
of exposure amount), while a retained CRT exposure with an attachment
point only marginally greater than that net credit risk capital
requirement would have had a risk weight of 0 percent. A retained CRT
exposure with an attachment point just beyond that cut-off point likely
still would pose some credit risk as a result of the model risks
associated with the calibration of the credit risk capital requirement
of the underlying exposures and the calibration of the loss-timing
adjustment and loss-sharing adjustment. Related to model risk, there is
the risk that the structuring of some CRT is driven by regulatory
arbitrage, with an Enterprise focused on CRT structures that obtain
capital relief that is disproportionate to the modeled credit risk
actually transferred. There is also the risk that a CRT will not
perform as expected in transferring credit risk to third parties,
perhaps because a court will not enforce the contractual terms of the
CRT structure as expected. To that point, each Enterprise has
significant discretion in performing loss mitigation and other
servicing activities, which can sometimes result in significant impact
on the timing and amount of losses that are borne by the CRT investors.
Because CRT tranches, even senior CRT tranches, are not risk-free,
each Enterprise should maintain regulatory capital to absorb losses on
those retained CRT exposures. This approach is generally consistent
with that of the Basel and U.S. banking framework, both of which also
impose floors on the risk weights for retained securitization
exposures.\47\ Notably, the U.S. banking

[[Page 82179]]

framework's risk weight floor on securitization exposures is
considerably greater at 20 percent.
---------------------------------------------------------------------------

\47\ For these and other reasons, the Basel and U.S. banking
frameworks impose a prudential floor on the risk weight for any
securitization exposure. BCBS, Revisions to the Securitisation
Framework Consultative Document at 17 (Dec. 2013; final July 2016),
available at https://www.bis.org/publ/bcbs269.pdf (``The objectives
of a risk-weight floor are: [m]itigate concerns related to incorrect
model specifications and error from banks' estimates of inputs to
capital formulas ([i.e.] model risk); and [r]educe the variation in
outcomes for similar risks.'').
---------------------------------------------------------------------------

3. Risk Weight Determination
As discussed above, commenters thought that the 10 percent risk
weight floor could misalign the Enterprises' incentives, including in
some cases by requiring an Enterprise to maintain more regulatory
capital for some CRT structures than other structures that transferred
less credit risk. One commenter suggested that, as a result of the
floor, an Enterprise could achieve more capital relief with a CRT that
has a shorter maturity and a detachment point that is less than
projected stress loss.
FHFA acknowledges that the interaction of the floor with the loss-
sharing, loss-timing, and overall effectiveness adjustments could, for
certain structures, result in an Enterprise's credit risk capital
requirement decreasing even as the Enterprise transfers less risk to
third parties by lowering the detachment point of the most senior
transferred tranche. A reduction in the required regulatory capital
arising from less risk transfer would be a misalignment of incentives
that could pose safety and soundness risk.
To address these concerns, FHFA has revised the calculation of the
risk weight assigned to each CRT tranche. Under the final rule, this
approach assigns a 1,250 percent risk weight for a tranche with a
detachment point less than the projected stress loss (which is, in
effect, the same risk-based capital requirement that would have been
assigned to the tranche under the 2018 proposal), a 10 percent risk
weight for a tranche with an attachment point greater than the
projected stress loss, and a weighted average risk weight for a tranche
that straddles the stress loss. That weighted average risk weight would
be the average of 1,250 percent weighted by the portion of the tranche
exposed to projected stress loss and 10 percent weighted by the portion
of the tranche not exposed to projected stress loss. One benefit of
this approach is that the required regulatory capital on retained CRT
exposures should decrease monotonically with an increase in the
detachment point on the transferred CRT tranches, all else equal.
4. Overall Effectiveness Adjustment
The proposed rule's overall effectiveness adjustment would have
reduced the risk-weighted assets of transferred CRT tranches by 10
percent, thereby reducing the capital relief afforded by the CRT. This
adjustment accounted for the fact that a CRT does not provide the same
loss-absorbing capacity as equity financing. Many commenters criticized
this overall effectiveness adjustment. Several commenters argued that
the overall effectiveness adjustment would disincentivize the
Enterprises from engaging in CRT. Commenters also argued that the
overall effectiveness adjustment is unnecessary because of other
enhancements contemplated by the proposed rule, including the 10
percent risk weight floor on retained CRT exposures, FHFA's ability to
approve CRT structures, and the stress capital and other buffers.
Other commenters recommended that FHFA consider alternatives to the
overall effectiveness adjustment. Commenters recommended that the
overall effectiveness adjustment should not be applied to the
Enterprises' fully funded capital markets transactions because those
CRT structures do not entail counterparty credit risk. Some commenters
supported the overall effective adjustment or even increasing the
adjustment, with some conditioning that view on the removal of the 10
percent risk weight floor. One commenter viewed the overall
effectiveness adjustment as not unreasonable and recommended that FHFA
periodically review its calibration. Some commenters thought that the
overall effectiveness adjustment should not be applied to CRT on
multifamily exposures in light of the unique structures of those CRT.
After considering commenters' views on the overall effectiveness
adjustment and other aspects of the proposed rule's approach to CRT,
FHFA has modified the overall effectiveness adjustment so that a CRT on
mortgage exposures with less credit risk will be subject to a smaller
adjustment, and potentially no adjustment at all. This modification
should reduce the extent to which the overall effectiveness adjustment,
in combination with the 10 percent risk weight floor, may require more
regulatory capital for retained CRT exposures than is necessary to
ensure safety and soundness. This modification would reduce the amount
of the overall effectiveness adjustment for many of the CRT
historically conducted by the Enterprises. This modification also helps
ensure that FHFA does not unduly disincentivize CRT on mortgage
exposures with risk profiles similar to those of recent acquisitions by
the Enterprises.
Under the final rule's overall effectiveness adjustment, the
overall effectiveness adjustment would still reduce the risk-weighted
assets of transferred CRT tranches by 10 percent (reducing the capital
relief afforded by the CRT) if the aggregate net credit risk capital
requirement on the underlying mortgage exposures is 4.0 percent or
greater (corresponding to a weighted average risk weight of 50
percent). If the aggregate net credit risk capital requirement on the
underlying mortgage exposures is less than 4.0 percent, the overall
effectiveness adjustment would reduce the risk-weighted assets by a
percent amount less than 10 percent, with that percent amount specified
by a linear function that decreases the adjustment as the underlying
aggregate net credit risk capital requirement decreases. The adjustment
would be zero for a CRT on mortgage exposures with an aggregate net
credit risk capital requirement less than or equal to 1.6 percent
(corresponding to a weighted average risk weight of 20 percent). For
example, the final rule's overall effectiveness adjustment amount would
be 95 percent on a CRT on mortgage exposures with a weighted average
risk weight of 35 percent, as compared to the 90 percent overall
effectiveness adjustment under the proposed rule.
5. Loss-Timing Adjustment
The proposed rule would have required an Enterprise to adjust the
exposure amount of its retained CRT exposures to account for the
mismatch between the contractual coverage of the CRT and the timing of
the unexpected losses on the underlying mortgage exposures.
Some commenters generally supported the loss-timing adjustment and
its calibration. Some commenters noted that the loss-timing
adjustment's impact on the capital relief afforded by CRT was less than
that of the overall effectiveness adjustment or the 10 percent risk
weight floor. Some commenters urged FHFA to replace the various
adjustments with a single measure of the effectiveness of a CRT.
Commenters also noted that the various adjustments tended to compound
into a substantial discount on the capital relief afforded CRT. As
discussed above, some commenters thought that the 10 percent risk
weight floor could, in combination with the loss-timing and other
adjustments, misalign the Enterprises' incentives, including in some
cases by requiring an Enterprise to maintain more regulatory capital
for some CRT structures than other structures that transferred less
credit risk.
Commenters recommended that the weighted average maturity, instead
of the maximum maturity, be used to determine the loss-timing
adjustment of a CRT with respect to multifamily

[[Page 82180]]

mortgage exposures. These commenters noted that the proposed rule's
approach would disproportionately reduce the capital relief on a CRT
when there is just one multifamily mortgage exposure with a large
mismatch between the contractual term of the CRT and the loan term of
the longest maturity multifamily mortgage exposure. That could reduce
the incentive to engage in CRT on multifamily mortgage exposures with
longer terms, which could adversely impact multifamily mortgage
exposures that support affordable housing.
FHFA agrees with commenters that the loss-timing adjustment should
be better calibrated to the relationship between the contractual term
of the CRT and the maturity profile of the underlying multifamily
mortgage exposures. This calibration should consider that many
multifamily mortgage exposures have balloon payments that could pose
credit losses toward the end of the contractual term of a CRT. Under
the proposed rule, the loss-timing adjustment was based on the ratio of
the contractual term of the CRT to the term of the multifamily mortgage
exposure with the longest maturity to protect against understating the
risk retained by the Enterprise. Under the final rule, the loss-timing
adjustment will be 100 percent for a multifamily mortgage exposure that
has a loan term that is less than or equal to the contractual term of
the CRT. For multifamily mortgage exposures with a loan term that is
greater than the contractual term of the CRT, the loss-timing
adjustment will be the ratio of the remaining contractual term of the
CRT to the unpaid principal balance-weighted average loan term of the
multifamily mortgage exposures, with that amount divided by two to
reflect FHFA's judgment as to the maturity-related risk for these
multifamily mortgage exposures with longer terms. The loss-timing
adjustment for the CRT would then be an average of those two
adjustments, each weighted by the unpaid principal balance of the
underlying mortgage exposures used to determine that adjustment. In
general, the final rule's approach will result in a greater loss-timing
adjustment amount, and greater capital relief, than was contemplated by
the proposed rule for a CRT with a contractual term less than 30 years.
This approach also should provide an incentive for the Enterprises to
lengthen the contractual term of CRTs on multifamily mortgage
exposures. The final rule's approach also should generally provide more
capital relief than the proposed rule for certain CRT on multifamily
mortgage exposures, all else equal.
6. Loss-Sharing Adjustment
The proposed rule would have required an Enterprise to adjust the
exposure amount of its retained CRT exposures to account for the
counterparty credit risk of the CRT counterparty.
Some commenters generally supported the loss-sharing adjustment and
its calibration. Some commenters noted that the loss-sharing
adjustment's impact on the capital relief afforded by CRT was less than
that of the overall effectiveness adjustment or the 10 percent risk
weight floor. Some commenters urged FHFA to replace the various
adjustments with a single measure of the effectiveness of a CRT.
Commenters also noted that the various adjustments tended to compound
into a substantial discount on the capital relief afforded CRT.
One commenter suggested that the proposed rule's loss-sharing
adjustment required excessive regulatory capital for counterparty
credit risk. Commenters argued that increased transparency as to the
criteria and process for assigning counterparty ratings could create
incentives for counterparties to take steps to satisfy that criteria
and become stronger counterparties. Some commenters thought that FHFA
should not assign more capital relief to diversified counterparties,
noting that mortgage-focused counterparties have specialized expertise
that might offset some of the counterparty strength benefits of
diversification. Commenters also urged FHFA to refine the framework so
that it takes into account which counterparties are more likely to
continue to participate in CRT across the economic cycle, including
during a period of financial stress.
Several commenters expressed views on CRT counterparty credit risk
management more broadly. Commenters reiterated that there is no
counterparty risk on CRT structures that are fully funded at issuance,
with the issuance proceeds kept in segregated accounts. Some commenters
stated that enhanced collateral requirements were unnecessary. Another
commenter noted recent developments in the international regulation of
collateralized insurance agreements and conveyed its view that
additional collateralization requirements were not necessary. One
commenter recommended that FHFA adopt a preference for CRT
counterparties such as reinsurers that support mortgage exposures to
low-income borrowers at lower interest rates (or pools with greater
shares of low-income mortgage loans). A commenter suggested that an
Enterprise should be required to publicly disclose implicit support
provided to a CRT counterparty and maintain regulatory capital for the
underlying mortgage exposures.
Commenters criticized the proposed rule's treatment of Fannie Mae's
DUS transactions. Some commenters argued that the capital relief for
DUS transactions should be determined under the framework for mortgage
insurance and other loan-level credit enhancement. One commenter
recommended that the loss-sharing adjustment for DUS transactions
should be determined at the level of the servicer, not at the level of
the CRT structure, using the aggregates of the credit risk capital
requirements, loss-share obligations, collateral, and other inputs
relating to the servicer's DUS transactions. One commenter thought that
the overall effectiveness adjustment duplicated the loss-sharing
adjustment when applied to a DUS transaction. A commenter suggested
that three years of future servicing revenue, instead of one year,
should be considered in determining the loss-sharing adjustment.
FHFA continues to believe the loss-sharing adjustment is
appropriately calibrated and is adopting the loss-sharing adjustment as
proposed. FHFA believes that the potential benefits of modifications to
the collateral or other requirements would be outweighed by the
increased safety and soundness risk. FHFA has determined to retain the
proposed rule's calculation of the loss-sharing adjustment at the
exposure level, while collateral is calculated at the lender-level.
FHFA believes this approach more accurately captures differences in
exposure-level loss-sharing structures and risk share percentages that
may occur within the portfolio of any given lender.
7. Eligible CRT Structures
The proposed rule would have provided capital relief for any
category of credit risk transfers that has been approved by FHFA as
effective in transferring the credit risk of one or more mortgage
exposures to another party, taking into account any counterparty,
recourse, or other risk to the Enterprise and any capital, liquidity,
or other requirements applicable to counterparties. That approach gave
FHFA considerable discretion to approve new structures, and it did not
afford interested parties an opportunity to comment on the specific
requirements governing each structure.
To foster transparency and increase the likelihood that FHFA
identifies and

[[Page 82181]]

mitigates the safety and soundness and other risks posed by CRT
structures, the final rule instead identifies and defines five specific
CRT structures that are eligible to provide capital relief. FHFA
contemplates that capital relief for other CRT structures could be
approved in the future. That change, however, would require an
amendment to the final rule following notice and an opportunity to
comment.
The eligible CRT structures identified in the final rule are the
structures currently used by the Enterprises for substantially all of
their CRT. These structures are:
Eligible funded synthetic risk transfers, which include
the Enterprises' STACR/CAS deals;
Eligible reinsurance risk transfers, which include the
Enterprises' ACIS/CIRT deals;
Eligible single-family lender risk shares, which include
any partial or full recourse agreement or similar agreement (other than
a participation agreement) between an Enterprise and the seller or
servicer of a single-family mortgage exposure;
Eligible multifamily lender risk share, which include
credit risk transfers that are on substantially the same terms and
conditions as in effect on June 30, 2020 for Fannie Mae's credit risk
transfers known as the ``Delegated Underwriting and Servicing
program''; and
Eligible senior-subordinated structures, which include
Freddie Mac's K-deals.
Any FHFA-approved CRT entered into before the effective date of the
final rule would continue to be eligible to provide capital relief
under the final rule regardless of whether it qualifies as one of these
five structures.
The final rule's approach to recourse agreements is somewhat
different from the proposed rule. Under the proposed rule, recourse
agreements would have afforded capital relief under an approach
generally similar to that of mortgage insurance, although with a loss-
timing adjustment for partial recourse agreements and less prescriptive
requirements for the counterparties. The economic substance of a
recourse agreement is the same as other credit risk transfers, and in
particular these structures generally pose counterparty risk and
structuring risk and do not have the same loss-absorbing capacity as
equity financing. FHFA has determined that integrating recourse
agreements into the CRT framework would result in a more consistent and
appropriate capitalization of the retained credit risk borne by the
Enterprises under their recourse agreements.
8. Other Comments and Issues
Commenters also offered more general concerns about the proposed
rule's approach to CRT. Commenters endorsed CRT as effective in
transferring risk to other private-sector market participants,
protecting taxpayers, and fostering the stability of the national
housing finance markets. Many commenters argued that the proposed
rule's approach did not provide appropriate capital relief for CRT, was
too punitive, and would disincentivize CRT. Commenters thought that
there could be adverse implications on the Enterprises' cost of capital
and their guarantee fees if the Enterprises were to reduce their use of
CRT.
Some commenters agreed with FHFA's view that equity financing
provides more loss-absorbing capacity than CRT. Some commenters agreed
that CRT should not be the dominant form of loss-absorbing capacity for
an Enterprise. Other commenters disagreed about CRT's loss-absorbing
capacity relative to equity financing. One commenter noted that equity
financing is exposed to other demands that could reduce its loss-
absorbing capacity, including the demands of creditors, while CRT is
dedicated to the absorption of credit losses. Some commenters agreed
that the loss-timing and loss-sharing adjustments could be appropriate
to mitigate the risk that CRT is not as effective as expected in
transferring credit risk, but that the proposed rule's other departures
from capital neutrality could lead to undesirable and counterintuitive
outcomes, including a CRT actually increasing an Enterprise's risk-
based capital requirements. Other commenters did not take issue with
the departure from capital neutrality so long as the adjustments were
not excessive.
Many commenters contended that the PLBA-adjusted leverage ratio
requirement likely would often exceed the PCCBA-adjusted risk-based
capital requirements, and that a binding PLBA-adjusted leverage ratio
requirement could decrease an Enterprise's incentive to engage in CRT.
Commenters observed that, while CRT could tend to increase leverage
in the national housing finance markets, the use of leverage in the
financial system is not novel, and that market mechanisms and
sophisticated market actors can respond to the misuse of leverage.
Commenters criticized FHFA's view that a financial stress could reduce
investor demand for, or increase the cost of, new CRT issuances or
undermine the financial strength of some existing CRT counterparties.
Multiple commenters asserted that the CRT markets had generally
continued to function during the COVID-19 stress and during several
natural disasters in 2017.
Commenters argued that the proposed rule's approach to CRT was
inconsistent with Treasury's recommendations in its Housing Reform
Plan, which they viewed as supporting the Enterprises' CRT programs and
a policy in favor of reducing the Enterprises' footprint by
transferring more risk to other private market participants. Some
commenters asserted that the proposed rule provided more credit relief
for mortgage insurance than CRT. Another commenter urged FHFA to permit
the Enterprises to restart their lender risk-sharing CRT on single-
family mortgage exposures. Some commenters recommended FHFA identify
enhancements to ensure that CRT structures transfer credit risk
definitively and without recourse to the Enterprises.
Some commenters asserted that CRT was uneconomic for the
Enterprises, provided excessive returns to CRT investors, and left
catastrophic risk with the Enterprises. One commenter suggested that
the Enterprises should not engage in CRT and instead the Enterprises
should be subject to minimum capital requirements.
Commenters suggested that FHFA preserve or expand certain features
of the CRT market, such as Real Estate Mortgage Investment Conduit
(REMIC) and To Be Announced (TBA) eligibility. Commenters generally
supported a tailored approach to CRT and recommended that FHFA not
adopt the SSFA.
Several commenters encouraged FHFA to enhance transparency into the
Enterprises' CRT programs and FHFA's assessment framework. One
commenter suggested that FHFA provide more data and analysis before
finalizing an approach to CRT. Another commenter recommended that FHFA
develop and disclose a model for assessing CRT structures under
different stress scenarios. Commenters also sought information on the
future of the Enterprises' CRT programs, including whether the
Enterprises would issue PLS or a security guaranteed by the federal
government.
Commenters urged FHFA to disclose more information on the criteria
and processes for assigning counterparty ratings. Commenters also
recommended FHFA require CRT counterparties to provide financial
disclosures. One commenter suggested that FHFA disclose a list of
counterparties in

[[Page 82182]]

significant CRT to foster transparency into the Enterprises'
counterparty credit risk.
Several commenters recommended that the proposed rule's approach to
CRT should apply only prospectively. One commenter urged FHFA to
temporarily extend for 10 years the 2018 proposal's approach to CRT
entered into before the publication of the proposed rule. Another
commenter expressed the view that current and future CRT structures
should be subject to the same requirements and restrictions.
One commenter recommended that the operational criterion
restricting clean-up calls should be clarified or removed so as not to
limit the practice of including optional redemptions provisions in CRT
structures. The commenter argued that other operational criteria, in
particular the requirement that a CRT be an ``eligible CRT structure''
approved by FHFA, would ensure appropriate supervision and regulation
of an Enterprise's redemptions of CRT.
FHFA believes that the changes to the final rule discussed in this
Section IX.D will mitigate some of the commenters' concerns about the
impact of the regulatory capital framework on the Enterprises' CRT
programs. The final rule also provides that many of the operational
criteria will apply only to CRT entered into after the effective date
of the final rule. However, even with these changes, the final rule
generally will require at inception more credit risk capital on a
transaction-wide basis than would be required if the underlying
mortgage exposures had not been made subject to a CRT. That is, if an
Enterprise held every tranche of a CRT, the Enterprise's credit risk
capital requirement on the retained CRT exposures generally would be
greater than the credit risk capital requirement of the underlying
mortgage exposures.\48\ As under the securitization framework, this
departure from strict capital neutrality is important to manage the
potential safety and soundness risks of CRT. This approach would help
mitigate the model risk associated with the calibration of the credit
risk capital requirements of the underlying exposures and also the
model risk posed by the calibration of the loss-timing adjustment and
loss-sharing adjustment.\49\ Complex CRT also may pose structural risk
and other risks that merit a departure from capital neutrality.\50\
This departure from capital neutrality also is important to reducing
the likelihood of regulatory capital arbitrage through CRT.\51\
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\48\ One implication of departing from capital neutrality is
that an Enterprise might have some existing CRT structures for which
the aggregate credit risk capital requirement of the retained CRT
exposures actually would be greater than the aggregate credit risk
capital requirement of the underlying exposures. This outcome might
be more likely, all else equal, where the underlying exposures have
a lower average risk weight, such as, for example, a CRT with
respect to seasoned single-family mortgage exposures. Consistent
with the U.S. banking framework, an Enterprise may elect to not
recognize a CRT for purposes of the credit risk capital requirements
and instead hold risk-based capital against the underlying
exposures.
\49\ BCBS, Revisions to the Securitisation Framework
Consultative Document at 4 (Dec. 2013; final July 2016), available
at https://www.bis.org/publ/bcbs269.pdf (``Capital requirements
should be calibrated to reasonably conservative standards. This
requires the framework to account for the model risk of determining
the risks of specific exposures. Models for securitisation tranche
performance depend in turn on models for underlying pools. In
addition, securitisations have a wide range of structural features
that do not exist for banks holding the underlying pool outright and
that are impossible to capture in models. This layering of models
and simplifying assumptions can exacerbate model risk, justifying a
rejection of a strict `capital neutrality' premise ([i.e.] the total
capital required after securitisation should not be identical to the
total capital before securitisation).'').
\50\ BCBS, Revisions to the Securitisation Framework at 6 (Dec.
2014; rev. July 2016), available at https://www.bis.org/bcbs/publ/d374.pdf (``All other things being equal, a securitisation with
lower structural risk needs a lower capital surcharge than a
securitisation with higher structural risk; and a securitisation
with less risky underlying assets requires a lower capital surcharge
than a securitisation with riskier underlying assets.'').
\51\ See Joint Agency Regulatory Capital Final Rule, 78 FR at
62119 (``At the inception of a securitization, the SSFA requires
more capital on a transaction-wide basis than would be required if
the underlying assets had not been securitized. That is, if the
banking organization held every tranche of a securitization, its
overall capital requirement would be greater than if the banking
organization held the underlying assets in portfolio. The agencies
believe this overall outcome is important in reducing the likelihood
of regulatory capital arbitrage through securitizations.'').
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The effects of the final rule on the Enterprises' CRT programs are
difficult to predict. As of September 30, 2019, the proposed rule would
have afforded the Enterprises' existing CRT roughly half of the capital
relief that would have been available under the 2018 proposal. That
estimate however does not provide an accurate sense of the final rule's
impact on future CRT. Each Enterprise structured its existing CRT
structures with attachment and detachment points, collateralization,
and other terms based on the conservatorship capital framework, and
each Enterprise likely will be able to structure the tranches and other
aspects of its future CRT somewhat differently, taking into account the
final rule, so as to better optimize capital relief. Also, the 10
percent risk weight floor has a larger impact on CRT on mortgage
exposures with lower risk weights, and the Enterprises will be able to
achieve more capital relief through CRT to the extent that house prices
converge toward their long-term trend or the Enterprises' risk weights
on their mortgage exposures included in CRT transactions tend to
increase.
The final rule continues to provide each Enterprise a mechanism for
flexible and substantial capital relief through CRT, and CRT likely
will remain a valuable tool for managing credit risk. As in Section
V.D, FHFA expects that each Enterprise will base its decisions on its
own risk assessments, not solely or even primarily on the regulatory
risk-based capital requirements. The changes made in the final rule
generally serve to increase incentives to use CRT relative to the
proposed rule. The Enterprises might also have incentives to transfer
credit risk beyond projected stress loss to mitigate the risk of an
increase in risk-based capital requirements during a period of stress.
The 20 percent floor on the risk weight assigned to mortgage exposures
might also increase the incentive to enter into CRT on mortgage
exposures subject to that floor.
The proposed rule solicited comment on whether FHFA should impose
any restrictions on the collateral eligible to secure CRT that pose
counterparty credit risk. The proposed rule also solicited comment on
whether the adjustments for counterparty credit risk are appropriately
calibrated. After considering the views of commenters, FHFA believes
that there might be opportunities to enhance the collateral and other
requirements and restrictions that mitigate the counterparty credit
risk posed by CRT counterparties. Given the complexity of these issues
and FHFA's commitment to transparency, FHFA is contemplating future
rulemakings to address these issues. Those future rulemakings also
could potentially seek to establish exceptions or other approaches to
the final rule's requirements and restrictions for certain CRT that
satisfy enhanced standards to ensure the effectiveness of the CRT.

E. Other Exposures

While substantially all of an Enterprise's credit risk is posed by
its single-family and multifamily mortgage exposures, each Enterprise
does have some amount of credit risk arising from a wide variety of
other exposures, including non-traditional mortgage exposures and non-
mortgage exposures. Calibrating credit risk capital requirements for
some of these non-mortgage exposures--for example, an Enterprise's
over-the-counter (OTC) and cleared derivatives and repo-style
transactions--is complex and

[[Page 82183]]

technically challenging. As discussed in the proposed rule, FHFA
continues to believe it is important to assign a credit risk capital
requirement to all material exposures, even those of small amounts
relative to an Enterprise's aggregate credit risk exposure.
The proposed rule contemplated incorporating the extensive
expertise of the U.S. and international banking regulators in
calibrating credit risk capital requirements for these other exposures,
with adjustments as appropriate for the Enterprises.\52\ The Basel
framework has evolved over almost four decades of debate and
collaboration among the world's leading financial regulators. That
framework also has been enhanced to address the lessons of the 2008
financial crisis. Moreover, developing FHFA's own framework for
assigning credit risk capital requirements for these other complex and
technically challenging exposures would risk distracting FHFA from its
core responsibility and area of relative expertise--fashioning a
mortgage risk-sensitive framework for the Enterprises.
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\52\ For example, consistent with the Enterprises' limited
authority to own equity, the final rule adopts a simplified version
of the Basel framework's approach to equity exposures. The final
rule will establish a default risk weight of 400 percent for equity
exposures (consistent with the U.S. banking framework's risk weight
for equity exposures to private ventures) and a 100 percent risk
weight for certain equity exposures to community development
ventures.
---------------------------------------------------------------------------

Under the proposed rule, an Enterprise generally would have
assigned a risk weight or risk weighted asset amount for an exposure
other than a mortgage exposure using the same methods for determining
credit risk capital requirements under the U.S. banking framework's
standardized approach, in particular the Federal Reserve Board's
regulatory capital requirements at subpart D of 12 CFR part 217
(Regulation Q). Exposures that would be assigned risk weights under the
U.S. banking framework include corporate exposures, exposures to
sovereigns, OTC derivatives, cleared transactions, collateralized
transactions, and off-balance sheet exposures.
Similarly, some exposures that were assigned credit risk capital
requirements under the 2018 proposal would instead have had a credit
risk capital requirement assigned under the U.S. banking framework.
These would include some DTAs, municipal debt, reverse mortgage loans,
reverse MBS, and cash and cash equivalents. For any exposure that was
not assigned a specific risk weight under the proposed rule, the
default risk weight would have been 100 percent, consistent with the
U.S. banking framework.
FHFA received few comments on the proposed rule's credit risk
capital requirements for other exposures. The main exception was that
commenters criticized the proposed rule's credit risk capital
requirement for exposures of an Enterprise to the other Enterprise or
another GSE. Commenters argued that the proposed rule would undermine
FHFA's single security initiative pursuant to which each Enterprise has
begun issuing a single MBS known as the Uniform Mortgage-backed
Security (UMBS). To foster fungibility, the UMBS initiative
contemplates that each Enterprise may issue a ``Supers'' mortgage-
related security, which is a re-securitization of UMBS and certain
other TBA-eligible securities, including other Supers.\53\ Commenters
argued that UMBS fungibility and liquidity could be adversely affected
by the proposed rule's assignment of a 20 percent risk weight to an
Enterprise's exposure to the other Enterprise arising out of a
guarantee of a security backed in whole or in part by securities of the
other Enterprise. For example, a credit risk capital requirement for
cross-guarantees could lead to a bifurcated treatment of UMBS because
each Enterprise could be incentivized to only guarantee Supers only
with its own UMBS, leading to different volumes and investor
perceptions of UMBS issued by each Enterprise. Some commenters also
argued that an Enterprise's exposures to the other Enterprise do not
increase aggregate credit risk among the Enterprises and that the
proposed rule's credit risk capital requirement in effect double-
counted that risk.
---------------------------------------------------------------------------

\53\ If an Enterprise guarantees a security backed in whole or
in part by securities of the other Enterprise, the Enterprise is
obligated under its guarantee to fund any shortfall in the event
that the other Enterprise fails to make a payment due on its
securities. The Enterprises have entered into an indemnification
agreement relating to commingled securities issued by the
Enterprises. The indemnification agreement obligates each Enterprise
to reimburse the other for any such shortfall.
---------------------------------------------------------------------------

FHFA has determined to finalize the proposed rule's approach to
other exposures, including an Enterprise's exposures to the other
Enterprise. The Enterprises currently are in conservatorship and
benefit from Treasury's commitment under the PSPA. However, the
Enterprises remain privately-owned corporations, and their obligations
do not have the explicit guarantee of the full faith and credit of the
United States. The U.S. banking regulators ``have long held the view
that obligations of the GSEs should not be accorded the same treatment
as obligations that carry the explicit guarantee of the U.S.
government.'' \54\ FHFA agrees that the MBS and other obligations of an
Enterprise should be subject to a credit risk capital requirement
greater than that assigned to those obligations that have an explicit
guarantee of the full faith and credit of the United States. FHFA also
agrees with the FSOC Secondary Market Statement that ``[t]he
Enterprises' provision of secondary market liquidity generates
significant interconnectedness among the Enterprises . . . . Moreover,
given their similar business models, risks at the Enterprises are
highly correlated; if one Enterprise experiences financial distress,
the other may as well.'' The interconnectedness arising out of UMBS can
further important policy objectives, but FHFA still believes the
exposures between each Enterprise should be appropriately capitalized
to mitigate the risk to safety and soundness that could be posed by
distress at the other Enterprise.
---------------------------------------------------------------------------

\54\ 77 FR 52888, 52896 (Aug. 30, 2012).
---------------------------------------------------------------------------

This approach does not constitute double-counting of the required
capital. An Enterprise issuing and guaranteeing a security backed by
the other Enterprise's MBS is not holding capital against the other
Enterprise's mortgage exposures, but only against its own exposure to
the other Enterprise's guarantee. The investor in the top-level
security is receiving double protection against credit risk by means of
a guarantee from each Enterprise. It is that double protection that is
being capitalized. FHFA believes that this capital treatment of that
double guarantee is appropriate and correctly reflects the risk to each
Enterprise.
To support investor confidence in that fungibility, FHFA
promulgated a final rule governing Enterprise actions that affect UMBS
cash flows to investors, issues quarterly prepayment monitoring
reports, and has used its powers as the Enterprises' conservator to
limit certain pooling practices with respect to the creation of UMBS.
In November 2019, FHFA issued a request for input on Enterprise UMBS
pooling practices. FHFA remains committed to the success of the UMBS
initiative and will continue to enforce that final rule and, if
necessary, will take appropriate supervisory and regulatory steps to
achieve that objective.

X. Credit Risk Capital: Advanced Approach

The proposed rule would have required an Enterprise to comply with
the risk-based capital requirements using the greater of its risk-
weighted

[[Page 82184]]

assets calculated under the standardized approach and the advanced
approach. The advanced approach requirements would have required each
Enterprise to maintain its own processes for identifying and assessing
credit risk, market risk, and operational risk. An Enterprise also
would have been subject to requirements and restrictions governing the
design, senior management oversight, independent validation, and stress
testing of its advanced systems. However, the proposed rule would not
have provided more specific and comprehensive prescriptions for an
Enterprise's internal models beyond these minimum requirements and
FHFA's supervision.
FHFA received relatively few comments on the proposed rule's
advanced approaches requirements for determining credit risk-weighted
assets. One commenter supported the proposed rule's approach because it
would require the Enterprise to improve their internal models. One
commenter argued that the proposed rule's requirements were not
sufficiently detailed and recommended re-proposing more specific
requirements.
Some commenters opposed the advanced approaches requirements.
Commenters argued that the standardized approach's lookup grids and
multipliers were already risk sensitive. Other commenters suggested
that the U.S. banking regulators now disfavor the analogous internal
model requirements applicable to large U.S. banking organizations. Some
commenters expressed concern about the lack of transparency into the
internal models that the Enterprises would use.
FHFA has determined that the final rule's advanced approaches
requirements should require each Enterprise to use its internal models
to determine its credit risk capital requirements for mortgage and
other exposures. As discussed in the proposed rule, these requirements
will help ensure that each Enterprise continues to enhance its risk
management system and that neither Enterprise simply relies on the
standardized approach's lookup grids and multipliers to define credit
risk tolerances, measure its credit risk, or allocate economic capital.
In the course of FHFA's supervision of each Enterprise's internal
models for credit risk, FHFA also could identify opportunities to
update or otherwise enhance the standardized approach's lookup grids
and multipliers through future rulemakings as market conditions evolve.
The final rule adopts the advanced approaches requirements as
proposed. FHFA acknowledges the views of those commenters that argued
that the proposed rule's advanced approaches requirements could merit
more specificity. FHFA solicited comment on whether to prescribe more
specific requirements and restrictions governing the internal models
and other procedures used by an Enterprise to determine its advanced
credit risk-weighted assets, including whether to require an Enterprise
to determine its advanced credit risk-weighted assets under subpart E
of Regulation Q. FHFA, however, did not propose specific rule text.
FHFA continues to see merit in more specific requirements and
restrictions governing an Enterprise's determination of its advanced
credit risk-weighted assets, and FHFA continues to contemplate that it
might engage in future rulemakings to further enhance this aspect of
the regulatory capital framework.
The final rule provides a transition period to permit each
Enterprise to develop the governance of the internal models required by
the final rule. Specifically, the advanced approaches requirements
generally will apply to an Enterprise on the later of January 1, 2025
and any later compliance date specific to those requirements provided
in a consent order or other transition order applicable to the
Enterprise.

XI. Market Risk Capital

The proposed rule would have required an Enterprise to calculate
its market risk-weighted assets for mortgage exposures and other
exposures with spread risk. Single-family and multifamily loans and
investments in securities held in an Enterprise's portfolio have market
risk from changes in value due to movements in interest rates and
credit spreads, among other things. As the Enterprises currently hedge
interest rate risk at the portfolio level, and under the assumption
that the Enterprises' hedging effectively manages that risk, the
proposed rule's market risk capital requirements would have been
limited only to spread risk.\55\ Exposures that were subject to the
proposed rule's market risk capital requirement would have included any
tangible asset that has more than de minimis spread risk, regardless of
whether the position is marked-to-market for financial statement
reporting purposes and regardless of whether the position is held by
the Enterprise for the purpose of short-term resale or with the intent
of benefiting from actual or expected short-term price movements, or to
lock in arbitrage profits. Covered positions would have included:
---------------------------------------------------------------------------

\55\ FHFA's supervision of each Enterprise includes examinations
of the effectiveness of the Enterprise's hedging of its interest
rate risk.
---------------------------------------------------------------------------

Any NPL, re-performing loan (RPL), reverse mortgage loan,
or other mortgage exposure that, in any case, does not secure an MBS
guaranteed by the Enterprise;
Any MBS guaranteed by an Enterprise, MBS guaranteed by
Ginnie Mae, reverse mortgage security, PLS, CRT exposure, or other
securitization exposure; and
Any other trading asset or trading liability, whether on-
or off-balance sheet.
FHFA received relatively few comments on the proposed rule's market
risk capital requirements. With respect to the standardized approach, a
commenter indicated no objection to the single point approach or a
spread duration approach. Another commenter argued that the market risk
capital requirements should only apply to exposures with more than de
minimis spread risk. Another commenter recommended increasing the
market risk capital requirement on multifamily mortgage exposures to at
least 100 basis points so that it was consistent with the requirement
for multifamily MBS.
With respect to the advanced approaches requirements, commenters
suggested that the U.S. banking regulators now disfavor the analogous
requirements applicable to the large U.S. banking organizations.
Commenters argued that the standardized approach was already risk
sensitive. Commenters also suggested that the proposed rule's
requirements were not sufficiently detailed and recommended re-
proposing more specific requirements and restrictions, while another
recommended that FHFA allow a sufficient transition period.
The final rule adopts the market risk capital requirements as
proposed. FHFA acknowledges the views of those commenters that thought
that the proposed rule's advanced approaches requirements could merit
more specificity. FHFA solicited comment on whether to prescribe more
specific requirements and restrictions governing the internal models
and other procedures used by an Enterprise to determine its advanced
market risk-weighted assets, including whether to require an Enterprise
to determine its advanced market risk-weighted assets under subpart F
of Regulation Q. FHFA, however, did not propose specific rule text.
FHFA continues to see merit in more specific requirements and
restrictions governing an Enterprise's determination of its advanced
market risk-weighted assets, and FHFA

[[Page 82185]]

continues to contemplate that it might engage in future rulemakings to
further enhance this aspect of the regulatory capital framework.
The final rule provides a transition period to permit each
Enterprise to develop the internal models required by the final rule.
Specifically, the advanced approaches requirements generally will apply
to an Enterprise on the later of January 1, 2025 and any later
compliance date specific to those requirements provided in a consent
order or other transition order applicable to the Enterprise. During
the transition period, each Enterprise's market risk capital
requirement will be equal to its measure for spread risk, determined as
contemplated by the proposed rule's standardized approach.

XII. Operational Risk Capital

The proposed rule would have established an operational risk
capital requirement to be calculated using the advanced measurement
approach of the U.S. banking framework but with a floor set at 15 basis
points of adjusted total assets. This approach was developed in
response to comments on the 2018 proposal. Commenters on the 2018
proposal suggested that the proposed Basel basic indicators approach
was insufficient because the Enterprises were too complex to justify
such a simple approach and because FHFA's implementation did not allow
the requirement to vary appropriately under the basic indicators
approach.
Operational risk was defined under the proposed rule as the risk of
loss resulting from inadequate or failed internal processes, people,
and systems or from external events (including legal risk but excluding
strategic and reputational risk). Under the proposed rule, the
Enterprise's risk-based capital requirement for operational risk
generally would have been its operational risk exposure minus any
eligible operational risk offsets. That amount would potentially have
been subject to adjustments if the Enterprise qualified to use
operational risk mitigants. An Enterprise's operational risk exposure
would have been the 99.9th percentile of the distribution of potential
aggregate operational losses, as generated by the Enterprise's
operational risk quantification system over a one-year horizon (and not
incorporating eligible operational risk offsets or qualifying
operational risk mitigants).
FHFA received relatively few comments on the proposed rule's
operational risk capital requirements. Some commenters were critical of
the overall approach and the floor. One commenter recommended reducing
the confidence interval. A few commenters raised concerns about the
transparency of the Enterprises' internal models. A commenter
recommended that FHFA develop a transparent approach using historical
data and statistical analysis. Another commenter recommended the U.S.
banking framework's standardized measurement approach. One commenter
recommended an operational risk capital requirement of 25 basis points.
Other commenters criticized the floor on the operational risk
capital requirement. Several commenters urged FHFA to remove or reduce
the floor, which could reduce an Enterprise's incentive to enhance its
internal models. One commenter argued that FHFA had not justified
doubling the floor from the 2018 proposal's requirement.
The final rule adopts the proposed rule's approach to operational
risk capital, including the floor of 15 basis points of adjusted total
assets. FHFA continues to believe that it is important that operational
risk capital does not fall below a meaningful, credible amount. 15
basis points of adjusted total assets also would have represented
approximately double what FHFA originally proposed in the 2018
proposal, and approximately double the amount of operational risk
capital estimated internally by the Enterprises using the Basel
standardized approach. FHFA believes doubling the internally estimated
figure is appropriate given the estimates were calculated using
historical results while in conservatorship. FHFA estimates that the
Enterprises' operational risk capital requirements under the U.S.
banking framework's standardized measurement approach would have been
somewhat greater than this floor. FHFA also calibrated this floor
taking into account the operational risk capital requirements of large
U.S. banking organizations. Of the U.S. bank holding companies with at
least $500 billion in total assets at the end of 2019, the smallest
operational risk capital requirement was 0.69 percent of that U.S.
banking organization's total leverage exposure.
FHFA understands that time and resources will be required for each
Enterprise to develop the internal models and data to implement the
advanced measurement approach. FHFA is also aware that the U.S. banking
regulators are considering potentially replacing the advanced
measurement approach with the Basel framework's standardized
measurement approach. FHFA contemplates a transition period to permit
each Enterprise to develop the internal models required by the final
rule. Specifically, the internal model requirements of these
operational risk capital requirements generally will apply to an
Enterprise on the later of January 1, 2025 and any later compliance
date specific to those requirements provided in a consent order or
other transition order applicable to the Enterprise. During that
interim period, each Enterprise's operational risk capital requirement
will be 15 basis points of its adjusted total assets.

XIII. Impact of the Enterprise Capital Rule

These impact tables are based on FHFA's estimates based on
available data and could differ from an Enterprise's estimates.
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XIV. Key Differences From the U.S. Banking Framework

FHFA solicited comment on the appropriateness of key differences
between the credit risk capital requirements for mortgage exposures
under the proposed rule and the U.S. banking framework. Some commenters
argued that the proposed rule inappropriately treated the Enterprises
as banks and that ``bank-like'' quantities of required capital would be
inappropriate for the Enterprises. Other commenters advocated a general
alignment of the credit risk capital requirements for similar mortgage
exposures across the Enterprises and other market participants.
As discussed in the proposed rule and in Section V.C, FHFA
continues to believe that the differences between the business models,
statutory mandates, and risk profiles of the Enterprises and banking
organizations should not preclude comparisons of the credit risk
capital requirement of a large U.S. banking organization for a specific
mortgage exposure to the credit risk capital requirement of an
Enterprise for a similar mortgage exposure. FSOC also viewed this as a
valid and meaningful point of comparison. The FSOC Secondary Market
Statement found that ``[t]he Enterprises' credit risk requirements . .
. likely would be lower than other credit providers across significant
portions of the risk spectrum and during much of the credit cycle,
which would create an advantage that could maintain significant
concentration of risk with the

[[Page 82196]]

Enterprises.'' FSOC ``encourage[d] FHFA and other regulatory agencies
to coordinate and take other appropriate action to avoid market
distortions that could increase risks to financial stability by
generally taking consistent approaches to the capital requirements and
other regulation of similar risks across market participants,
consistent with the business models and missions of their regulated
entities.''
Consistent with FSOC's recommendation, and in furtherance of
continued transparency and coordination, FHFA has identified several
key differences between this final rule and the U.S. banking framework.
Risk-based capital requirements. As of June 30, 2020 and
before adjusting for CRT or the buffers under both frameworks, the
average credit risk capital requirements under the final rule for the
Enterprises' single-family mortgage exposures generally would have been
roughly three-quarters those of similar exposures under the U.S.
banking framework. The Enterprises together would have been required
under the final rule's risk-based capital requirements to maintain $283
billion in risk-based adjusted total capital as of June 30, 2020 to
avoid restrictions on capital distributions and discretionary bonuses.
Had they been instead subject to the U.S. banking framework, the
Enterprises would have been required to maintain approximately $450
billion, perhaps significantly more, in risk-based total capital (not
including market risk and operational risk capital) to avoid similar
restrictions. In light of these facts, FHFA reiterates that the final
rule would not subject the Enterprises to the same capital requirements
that apply to U.S. banking organizations.
CRT capital relief. The final rule takes a considerably
different approach to assigning risk weights to retained CRT exposures.
In particular, the minimum risk weight assigned to retained CRT
exposures would be 10 percent under the final rule, while it would have
been 20 percent under the U.S. banking framework. The final rule also
provides capital relief for a number of CRT structures that would not
be eligible for capital relief under the U.S. banking framework.
Mortgage insurance. The final rule provides a more
explicit mechanism than the U.S. banking framework for recognizing and
assigning capital relief for mortgage insurance.
Buffers. As acknowledged by the FSOC Secondary Market
Statement, an increase in the average risk weight on an Enterprise's
exposures would cause the dollar amount of the stress capital buffer,
capital conservation buffer, and stability capital buffer to become a
smaller share of the dollar amount of the U.S. banking framework's
analogous buffers were they applied to the Enterprise.\56\ At the June
30, 2020 average risk weight of 33 percent, Fannie Mae's PCCBA of 1.82
percent of adjusted total assets would have been equivalent to a buffer
that is 5.6 percent of risk-weighted assets. If that average risk
weight had instead been 35 percent, that same PCCBA would have been
equivalent to a buffer that is 5.2 percent of risk-weighted assets.
That growing gap could have implications for a level playing field and
the potential for market distortions that pose risk to financial
stability.
---------------------------------------------------------------------------

\56\ FSOC Secondary Market Statement (``Because the proposed
buffers change based on adjusted total asset size and market share,
an Enterprise's capital buffers could decline on a risk-adjusted
basis in response to deteriorating Enterprise asset quality or
during periods of stress.'').
---------------------------------------------------------------------------

Market risk capital. The final rule and U.S. banking
framework take considerably different approaches to market risk capital
requirements. As discussed in Section XI, the final rule generally
assigns market risk capital requirements to a broader set of exposures,
including ones already subject to credit risk capital requirements,
while the U.S. banking framework requires market risk capital not just
for spread risk but also a broader range of market risks. The final
rule also would be significantly less prescriptive as to requirements
and restrictions governing the internal models used to determine the
market risk capital requirements. FHFA is considering future
rulemakings to prescribe more specific requirements and restrictions.
Internal-ratings approach. Like the U.S. banking
framework, each Enterprise would be required to determine its risk-
weighted assets under two approaches--a standardized approach and an
advanced approach--with the greater of the two risk-weighted assets
used to determine its risk-based capital requirements. Unlike the U.S.
banking framework, the final rule would be significantly less
prescriptive as to requirements and restrictions governing the internal
models used to determine the advanced risk-weighted assets. FHFA is
considering future rulemakings to prescribe more specific requirements
and restrictions.
FHFA believes that each of these differences from the U.S. banking
framework is appropriate given the different business models, statutory
mandates, and risk profiles of the Enterprises. FHFA acknowledges that
these differences could create some risks with respect to a level
playing field, the potential for market distortions that pose risk to
financial stability or the competitiveness, efficiency, or resiliency
of the national housing finance markets, and even the safety and
soundness of the Enterprises. FHFA is committed to working with other
regulatory agencies to coordinate and take other appropriate action to
avoid market distortions that could increase risks to financial
stability or the national housing finance markets and, in that spirit,
is also committed to reassessing its regulatory capital framework from
time to time.

XV. Transition Period

The proposed rule was intended to establish a post-conservatorship
regulatory capital framework that would ensure that each Enterprise
operates in a safe and sound manner and is positioned to fulfill its
statutory mission to provide stability and ongoing assistance to the
secondary mortgage market across the economic cycle, in particular
during periods of financial stress. Given the Enterprises' current
conservatorship status and capitalization, certain sections and
subparts of the proposed rule would have been subject to delayed
compliance dates as set forth in Sec. 1240.4 of the proposed rule.
The capital requirements and buffers set out in subpart B of the
proposed rule would have had a delayed compliance date, unless adjusted
by FHFA as described below, of the later of one year from publication
of the final rule or the date of the termination of conservatorship.
FHFA recognized that the path for transition out of conservatorship and
meeting the full capital requirements and buffers was not settled at
the time of the proposed rule. Therefore, the proposed rule would have
provided FHFA with the discretion to defer compliance with the capital
requirements and thereby not subject an Enterprise to statutory
prohibitions on capital distributions that would apply if those
requirements were not met.
During that deferral period, the PCCBA would have been the CET1
capital that would otherwise be required under the proposed rule's
Sec. 1240.10 plus the PCCBA that would otherwise apply under normal
conditions under the proposed rule's Sec. 1240.11(a)(5); and the PLBA
would have been 4.0 percent of the adjusted total assets of the
Enterprise. To benefit from the deferral period, an Enterprise would
have been required to comply with any corrective

[[Page 82197]]

plan or agreement or order that sets out the actions by which an
Enterprise will achieve compliance with specified capital requirements.
In addition, the proposed rule would have delayed compliance for
reporting under the proposed rule's Sec. 1240.1(f) for one year from
the date of publication of the final rule.
Commenters generally were supportive of the proposed rule's
compliance period. Commenters were particularly concerned that a short
recapitalization period could disrupt the national housing finance
markets. Some commenters generally supported a longer compliance
period. Some commenters urged FHFA to provide a specific timeline for
phase-in of the regulatory capital requirements and PCCBA and PLBA, as
the U.S. banking regulators did for similar requirements. Some focused
on delaying the effective date for the proposed rule's payout
restrictions. A few commenters endorsed the contemplated deferral
period so long as an Enterprise complied with any corrective action
plan or agreement or order. These commenters noted that an order could
position FHFA to maintain heightened supervision of the Enterprise
during a recapitalization period while facilitating each Enterprise's
ability to conduct significant common equity offerings.
FHFA has revised the contemplated compliance period in several
respects, including to provide for an effective date of the final rule
that is 60 days after publication in the Federal Register and establish
different transition periods for the advanced approaches requirements.
Under the final rule, an Enterprise will not be subject to any
requirement under the final rule until the compliance date for the
requirement under the final rule. The compliance date for the
regulatory capital requirements (distinct from the PCCBA or the PLBA)
will be the later of the date of the termination of the conservatorship
of the Enterprise (or, if later, the effective date of the final rule,
which would be 60 days after its publication in the Federal Register)
and any later compliance date provided in a consent order or other
transition order applicable to the Enterprise. In contrast, the final
rule provides that the compliance date for the PCCBA and the PLBA will
be the date of the termination of the conservatorship of the Enterprise
(or, if later, the effective date of the final rule), so as to provide
additional authority to FHFA to restrict dividends and other capital
distributions during the period in which the Enterprise raises
regulatory capital to achieve compliance with the regulatory capital
requirements. FHFA expects that this interim period could be governed
by a capital restoration plan that would be binding on the Enterprise
pursuant to a consent order or other transition order.
The final rule's advanced approaches requirements will be delayed
until the later of January 1, 2025 and any later compliance date
specific to those requirements provided in a consent order or other
transition order applicable to the Enterprise. Regardless of the date
of the termination of the conservatorship of an Enterprise, the
Enterprise will be required to report its regulatory capital, PCCBA,
PLBA, standardized total risk-weighted assets, and adjusted total
assets beginning January 1, 2022.

XVI. Temporary Increases of Minimum Capital Requirements

To reinforce its reserved authorities under Sec. 1240.1(d), FHFA
proposed to amend its existing rule, 12 CFR part 1225, ``Minimum
Capital--Temporary Increase,'' to clarify that the authority
implemented in that rule to temporarily increase a regulated entity's
required capital minimums applies to risk-based minimum capital levels
as well as to minimum leverage ratios. This amendment would have
aligned the scope of this regulation, adopted under 12 U.S.C. 4612(d),
with the FHFA Director's authority under 12 U.S.C. 4612(e) to establish
additional capital and reserve requirements for particular purposes,
which authorizes risk-based adjustments to capital requirements for
particular products and activities and is not limited to adjustments to
the leverage ratio. FHFA also proposed to amend the definition of
``total exposure'' in Sec. 1206.2 to have the same meaning as
``adjusted total assets'' as defined in Sec. 1240.2 of the proposed
rule. FHFA also proposed to remove 12 CFR part 1750.
FHFA did not receive any comments on this aspect of the proposed
rule, and the final rule adopts these provisions as proposed.

XVII. Administrative Law Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a regulation that has a significant economic impact on a substantial
number of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
regulation's impact on small entities. FHFA need not undertake such an
analysis if FHFA has certified that the regulation will not have a
significant economic impact on a substantial number of small entities.
5 U.S.C. 605(b). FHFA has considered the impact of the final rule under
the Regulatory Flexibility Act. The General Counsel of FHFA certifies
that the final rule will not have a significant economic impact on a
substantial number of small entities because the final rule is
applicable only to the Enterprises, which are not small entities for
purposes of the Regulatory Flexibility Act.

B. Paperwork Reduction Act

The Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.) requires
that regulations involving the collection of information receive
clearance from the Office of Management and Budget (OMB). The final
rule contains no such collection of information requiring OMB approval
under the PRA. Therefore, no information has been submitted to OMB for
review.

C. Congressional Review Act

In accordance with the Congressional Review Act (5 U.S.C. 801 et
seq.), FHFA has determined that this final rule is a major rule and has
verified this determination with the Office of Information and
Regulatory Affairs of OMB.

Final Rule

List of Subjects

12 CFR Part 1206

Assessments, Federal home loan banks, Government-sponsored
enterprises, Reporting and recordkeeping requirements.

12 CFR Part 1225

Federal home loan banks, Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Capital, Filings, Minimum
capital, Procedures, Standards.

12 CFR Part 1240

Capital, Credit, Enterprise, Investments, Reporting and
recordkeeping requirements.

12 CFR Part 1750

Banks, banking, Capital classification, Mortgages, Organization and
functions (Government agencies), Risk-based capital, Securities.

Authority and Issuance

For the reasons stated in the preamble, under the authority of 12
U.S.C. 4511, 4513, 4513b, 4514, 4515, 4526, 4611, and 4612, FHFA amends
chapters XII and XVII, of title 12 of the Code of Federal Regulations
as follows:

[[Page 82198]]

Chapter XII--Federal Housing Finance Agency

Subchapter A--Organization and Operations

PART 1206--ASSESSMENTS

0
1. The authority citation for part 1206 continues to read as follows:

Authority: 12 U.S.C. 4516.

0
2. Amend Sec. 1206.2 by revising the definition of ``Total exposure''
to read as follows:

Sec. 1206.2 Definitions.

* * * * *
Total exposure has the same meaning given to adjusted total assets
in 12 CFR 1240.2.
* * * * *

Subchapter B--Entity Regulations

PART 1225--MINIMUM CAPITAL--TEMPORARY INCREASE

0
3. The authority citation for part 1225 is amended to read as follows:

Authority: 12 U.S.C. 4513, 4526, and 4612.

0
4. Amend Sec. 1225.2 by revising the definition of ``Minimum capital
level'' to read as follows:

Sec. 1225.2 Definitions.

* * * * *
Minimum capital level means the lowest amount of capital meeting
any regulation or orders issued pursuant to 12 U.S.C. 1426 and 12
U.S.C. 4612, or any similar requirement established by regulation,
order or other action.
* * * * *

Subchapter C--Enterprises

0
5. Add part 1240 to subchapter C to read as follows:

PART 1240--CAPITAL ADEQUACY OF ENTERPRISES

Sec.
Subpart A--General Provisions
1240.1 Purpose, applicability, reservations of authority, reporting,
and timing.
1240.2 Definitions.
1240.3 Operational requirements for counterparty credit risk.
1240.4 Transition.
Subpart B--Capital Requirements and Buffers
1240.10 Capital requirements.
1240.11 Capital conservation buffer and leverage buffer.
Subpart C--Definition of Capital
1240.20 Capital components and eligibility criteria for regulatory
capital instruments.
1240.21 [Reserved]
1240.22 Regulatory capital adjustments and deductions.
Subpart D--Risk-Weighted Assets--Standardized Approach
1240.30 Applicability.

Risk-Weighted Assets for General Credit Risk

1240.31 Mechanics for calculating risk-weighted assets for general
credit risk.
1240.32 General risk weights.
1240.33 Single-family mortgage exposures.
1240.34 Multifamily mortgage exposures.
1240.35 Off-balance sheet exposures.
1240.36 Derivative contracts.
1240.37 Cleared transactions.
1240.38 Guarantees and credit derivatives: substitution treatment.
1240.39 Collateralized transactions.

Risk-Weighted Assets for Unsettled Transactions

1240.40 Unsettled transactions.

Risk-Weighted Assets for CRT and Other Securitization Exposures

1240.41 Operational requirements for CRT and other securitization
exposures.
1240.42 Risk-Weighted assets for CRT and other securitization
exposures.
1240.43 Simplified supervisory formula approach (SSFA).
1240.44 Credit risk transfer approach (CRTA).
1240.45 Securitization exposures to which the SSFA and the CRTA do
not apply.
1240.46 Recognition of credit risk mitigants for securitization
exposures.

Risk-Weighted Assets for Equity Exposures

1240.51 Introduction and exposure measurement.
1240.52 Simple risk-weight approach (SRWA).
1240.53-1240.60 [Reserved]
Subpart E--Risk-Weighted Assets--Internal Ratings-Based and Advanced
Measurement Approaches
1240.100 Purpose, applicability, and principle of conservatism.
1240.101 Definitions.
1240.121 Minimum requirements.
1240.122 Ongoing qualification.
1240.123 Advanced approaches credit risk-weighted asset
calculations.
1240.124-1240.160 [Reserved]
1240.161 Qualification requirements for incorporation of operational
risk mitigants.
1240.162 Mechanics of operational risk risk-weighted asset
calculation.
Subpart F--Risk-Weighted Assets--Market Risk
1240.201 Purpose, applicability, and reservation of authority.
1240.202 Definitions.
1240.203 Requirements for managing market risk.
1240.204 Measure for spread risk.
Subpart G--Stability Capital Buffer
1240.400 Stability capital buffer.

Authority: 12 U.S.C. 4511, 4513, 4513b, 4514, 4517, 4526, 4611,
and 4612.

Subpart A--General Provisions

Sec. 1240.1 Purpose, applicability, reservations of authority,
reporting, and timing.

(a) Purpose. This part establishes capital requirements and overall
capital adequacy standards for the Enterprises. This part includes
methodologies for calculating capital requirements, disclosure
requirements related to the capital requirements, and transition
provisions for the application of this part.
(b) Authorities--(1) Limitations of authority. Nothing in this part
shall be read to limit the authority of FHFA to take action under other
provisions of law, including action to address unsafe or unsound
practices or conditions, deficient capital levels, or violations of law
or regulation under the Safety and Soundness Act, and including action
under sections 1313(a)(2), 1365-1367, 1371-1376 of the Safety and
Soundness Act (12 U.S.C. 4513(a)(2), 4615-4617, and 4631-4636).
(2) Permissible activities. Nothing in this part may be construed
to authorize, permit, or require an Enterprise to engage in any
activity not authorized by its authorizing statute or that would
otherwise be inconsistent with its authorizing statute or the Safety
and Soundness Act.
(c) Applicability--(1) Covered regulated entities. This part
applies on a consolidated basis to each Enterprise.
(2) Capital requirements and overall capital adequacy standards.
Subject to Sec. 1240.4, each Enterprise must calculate its capital
requirements and meet the overall capital adequacy standards in subpart
B of this part.
(3) Regulatory capital. Subject to Sec. 1240.4, each Enterprise
must calculate its regulatory capital in accordance with subpart C of
this part.
(4) Risk-weighted assets. (i) Subject to Sec. 1240.4, each
Enterprise must use the methodologies in subparts D and F of this part
to calculate standardized total risk-weighted assets.
(ii) Subject to Sec. 1240.4, each Enterprise must use the
methodologies in subparts E and F of this part to calculate advanced
approaches total risk-weighted assets.
(d) Reservation of authority regarding capital. Subject to
applicable provisions of the Safety and Soundness Act--
(1) Additional capital in the aggregate. FHFA may require an
Enterprise to hold an amount of regulatory capital greater than
otherwise required under this part if FHFA determines that the
Enterprise's capital requirements under this part are not commensurate
with the Enterprise's

[[Page 82199]]

credit, market, operational, or other risks.
(2) Regulatory capital elements. (i) If FHFA determines that a
particular common equity tier 1 capital, additional tier 1 capital, or
tier 2 capital element has characteristics or terms that diminish its
ability to absorb losses, or otherwise present safety and soundness
concerns, FHFA may require the Enterprise to exclude all or a portion
of such element from common equity tier 1 capital, additional tier 1
capital, or tier 2 capital, as appropriate.
(ii) Notwithstanding the criteria for regulatory capital
instruments set forth in subpart C of this part, FHFA may find that a
capital element may be included in an Enterprise's common equity tier 1
capital, additional tier 1 capital, or tier 2 capital on a permanent or
temporary basis consistent with the loss absorption capacity of the
element and in accordance with Sec. 1240.20(e).
(3) Risk-weighted asset amounts. If FHFA determines that the risk-
weighted asset amount calculated under this part by the Enterprise for
one or more exposures is not commensurate with the risks associated
with those exposures, FHFA may require the Enterprise to assign a
different risk-weighted asset amount to the exposure(s) or to deduct
the amount of the exposure(s) from its regulatory capital.
(4) Total leverage. If FHFA determines that the adjusted total
asset amount calculated by an Enterprise is inappropriate for the
exposure(s) or the circumstances of the Enterprise, FHFA may require
the Enterprise to adjust this exposure amount in the numerator and the
denominator for purposes of the leverage ratio calculations.
(5) Consolidation of certain exposures. FHFA may determine that the
risk-based capital treatment for an exposure or the treatment provided
to an entity that is not consolidated on the Enterprise's balance sheet
is not commensurate with the risk of the exposure and the relationship
of the Enterprise to the entity. Upon making this determination, FHFA
may require the Enterprise to treat the exposure or entity as if it
were consolidated on the balance sheet of the Enterprise for purposes
of determining the Enterprise's risk-based capital requirements and
calculating the Enterprise's risk-based capital ratios accordingly.
FHFA will look to the substance of, and risk associated with, the
transaction, as well as other relevant factors FHFA deems appropriate
in determining whether to require such treatment.
(6) Other reservation of authority. With respect to any deduction
or limitation required under this part, FHFA may require a different
deduction or limitation, provided that such alternative deduction or
limitation is commensurate with the Enterprise's risk and consistent
with safety and soundness.
(e) Corrective action and enforcement. (1) FHFA may enforce this
part pursuant to sections 1371, 1372, and 1376 of the Safety and
Soundness Act (12 U.S.C. 4631, 4632, 4636).
(2) FHFA also may enforce the total capital requirement established
under Sec. 1240.10(a) and the core capital requirement established
under Sec. 1240.10(e) pursuant to section 1364 of the Safety and
Soundness Act (12 U.S.C. 4614).
(3) This part is also a prudential standard adopted under section
1313B of the Safety and Soundness Act (12 U.S.C. 4513b), excluding
Sec. 1240.11, which is a prudential standard only for purposes of
Sec. 1240.4. Section 1313B of the Safety and Soundness Act (12 U.S.C.
4513b) authorizes the Director to require that an Enterprise submit a
corrective plan under Sec. 1236.4 specifying the actions the
Enterprise will take to correct the deficiency if the Director
determines that an Enterprise is not in compliance with this part.
(f) Reporting procedure and timing--(1) Capital Reports--(i) In
general. Each Enterprise shall file a capital report with FHFA every
calendar quarter providing the information and data required by FHFA.
The specifics of required information and data, and the report format,
will be separately provided to the Enterprise by FHFA.
(ii) Required content. The capital report shall include, as of the
end of the last calendar quarter--
(A) The common equity tier 1 capital, core capital, tier 1 capital,
total capital, and adjusted total capital of the Enterprise;
(B) The stress capital buffer, the capital conservation buffer
amount (if prescribed by FHFA), the stability capital buffer, and the
maximum payout ratio of the Enterprise;
(C) The adjusted total assets of the Enterprise; and
(D) The standardized total risk-weighted assets of the Enterprise.
(2) Timing. The Enterprise must submit the capital report not later
than 60 days after the last day of the calendar quarter or at such
other time as the Director requires.
(3) Approval. The capital report must be approved by the Chief Risk
Officer and the Chief Financial Officer of an Enterprise prior to
submission to FHFA.
(4) Adjustment. In the event an Enterprise makes an adjustment to
its financial statements for a quarter or a date for which information
was provided pursuant to this paragraph (f), which would cause an
adjustment to a capital report, an Enterprise must file with the
Director an amended capital report not later than 15 days after the
date of such adjustment.
(5) Public disclosure. An Enterprise must disclose in an
appropriate publicly available filing or other document each of the
information reported under paragraph (f)(1)(ii) of this section.

Sec. 1240.2 Definitions.

As used in this part:
Acquired CRT exposure means, with respect to an Enterprise:
(1) Any exposure that arises from a credit risk transfer of the
Enterprise and has been acquired by the Enterprise since the issuance
or entry into the credit risk transfer by the Enterprise; or
(2) Any exposure that arises from a credit risk transfer of the
other Enterprise.
Additional tier 1 capital is defined in Sec. 1240.20(c).
Adjusted allowances for credit losses (AACL) means valuation
allowances that have been established through a charge against earnings
or retained earnings for expected credit losses on financial assets
measured at amortized cost and a lessor's net investment in leases that
have been established to reduce the amortized cost basis of the assets
to amounts expected to be collected as determined in accordance with
GAAP. For purposes of this part, adjusted allowances for credit losses
include allowances for expected credit losses on off-balance sheet
credit exposures not accounted for as insurance as determined in
accordance with GAAP. Adjusted allowances for credit losses allowances
created that reflect credit losses on purchased credit deteriorated
assets and available-for-sale debt securities.
Adjusted total assets means the sum of the items described in
paragraphs (1) though (9) of this definition, as adjusted pursuant to
paragraph (9) of this definition for a clearing member Enterprise:
(1) The balance sheet carrying value of all of the Enterprise's on-
balance sheet assets, plus the value of securities sold under a
repurchase transaction or a securities lending transaction that
qualifies for sales treatment under GAAP, less amounts deducted from
tier 1 capital under Sec. 1240.22(a), (c), and (d), and less the value
of securities received in security-for-security repo-style
transactions, where the Enterprise acts as a securities lender and
includes the securities received in its on-balance

[[Page 82200]]

sheet assets but has not sold or re-hypothecated the securities
received;
(2) The potential future credit exposure (PFE) for each derivative
contract or each single-product netting set of derivative contracts
(including a cleared transaction except as provided in paragraph (9) of
this definition and, at the discretion of the Enterprise, excluding a
forward agreement treated as a derivative contract that is part of a
repurchase or reverse repurchase or a securities borrowing or lending
transaction that qualifies for sales treatment under GAAP), to which
the Enterprise is a counterparty as determined under Sec. 1240.36, but
without regard to Sec. 1240.36(c), provided that:
(i) An Enterprise may choose to exclude the PFE of all credit
derivatives or other similar instruments through which it provides
credit protection when calculating the PFE under Sec. 1240.36, but
without regard to Sec. 1240.36(c), provided that it does not adjust
the net-to-gross ratio (NGR); and
(ii) An Enterprise that chooses to exclude the PFE of credit
derivatives or other similar instruments through which it provides
credit protection pursuant to paragraph (2)(i) of this definition must
do so consistently over time for the calculation of the PFE for all
such instruments;
(3)(i) The amount of cash collateral that is received from a
counterparty to a derivative contract and that has offset the mark-to-
fair value of the derivative asset, or cash collateral that is posted
to a counterparty to a derivative contract and that has reduced the
Enterprise's on-balance sheet assets, unless such cash collateral is
all or part of variation margin that satisfies the conditions in
paragraphs (3)(iv) through (vii) of this definition;
(ii) The variation margin is used to reduce the current credit
exposure of the derivative contract, calculated as described in Sec.
1240.36(b), and not the PFE;
(iii) For the purpose of the calculation of the NGR described in
Sec. 1240.36(b)(2)(ii)(B), variation margin described in paragraph
(3)(ii) of this definition may not reduce the net current credit
exposure or the gross current credit exposure;
(iv) For derivative contracts that are not cleared through a QCCP,
the cash collateral received by the recipient counterparty is not
segregated (by law, regulation, or an agreement with the counterparty);
(v) Variation margin is calculated and transferred on a daily basis
based on the mark-to-fair value of the derivative contract;
(vi) The variation margin transferred under the derivative contract
or the governing rules of the CCP or QCCP for a cleared transaction is
the full amount that is necessary to fully extinguish the net current
credit exposure to the counterparty of the derivative contracts,
subject to the threshold and minimum transfer amounts applicable to the
counterparty under the terms of the derivative contract or the
governing rules for a cleared transaction;
(vii) The variation margin is in the form of cash in the same
currency as the currency of settlement set forth in the derivative
contract, provided that for the purposes of this paragraph (3)(vii),
currency of settlement means any currency for settlement specified in
the governing qualifying master netting agreement and the credit
support annex to the qualifying master netting agreement, or in the
governing rules for a cleared transaction; and
(viii) The derivative contract and the variation margin are
governed by a qualifying master netting agreement between the legal
entities that are the counterparties to the derivative contract or by
the governing rules for a cleared transaction, and the qualifying
master netting agreement or the governing rules for a cleared
transaction must explicitly stipulate that the counterparties agree to
settle any payment obligations on a net basis, taking into account any
variation margin received or provided under the contract if a credit
event involving either counterparty occurs;
(4) The effective notional principal amount (that is, the apparent
or stated notional principal amount multiplied by any multiplier in the
derivative contract) of a credit derivative, or other similar
instrument, through which the Enterprise provides credit protection,
provided that:
(i) The Enterprise may reduce the effective notional principal
amount of the credit derivative by the amount of any reduction in the
mark-to-fair value of the credit derivative if the reduction is
recognized in common equity tier 1 capital;
(ii) The Enterprise may reduce the effective notional principal
amount of the credit derivative by the effective notional principal
amount of a purchased credit derivative or other similar instrument,
provided that the remaining maturity of the purchased credit derivative
is equal to or greater than the remaining maturity of the credit
derivative through which the Enterprise provides credit protection and
that:
(A) With respect to a credit derivative that references a single
exposure, the reference exposure of the purchased credit derivative is
to the same legal entity and ranks pari passu with, or is junior to,
the reference exposure of the credit derivative through which the
Enterprise provides credit protection; or
(B) With respect to a credit derivative that references multiple
exposures, the reference exposures of the purchased credit derivative
are to the same legal entities and rank pari passu with the reference
exposures of the credit derivative through which the Enterprise
provides credit protection, and the level of seniority of the purchased
credit derivative ranks pari passu to the level of seniority of the
credit derivative through which the Enterprise provides credit
protection;
(C) Where an Enterprise has reduced the effective notional amount
of a credit derivative through which the Enterprise provides credit
protection in accordance with paragraph (4)(i) of this definition, the
Enterprise must also reduce the effective notional principal amount of
a purchased credit derivative used to offset the credit derivative
through which the Enterprise provides credit protection, by the amount
of any increase in the mark-to-fair value of the purchased credit
derivative that is recognized in common equity tier 1 capital; and
(D) Where the Enterprise purchases credit protection through a
total return swap and records the net payments received on a credit
derivative through which the Enterprise provides credit protection in
net income, but does not record offsetting deterioration in the mark-
to-fair value of the credit derivative through which the Enterprise
provides credit protection in net income (either through reductions in
fair value or by additions to reserves), the Enterprise may not use the
purchased credit protection to offset the effective notional principal
amount of the related credit derivative through which the Enterprise
provides credit protection;
(5) Where an Enterprise acting as a principal has more than one
repo-style transaction with the same counterparty and has offset the
gross value of receivables due from a counterparty under reverse
repurchase transactions by the gross value of payables under repurchase
transactions due to the same counterparty, the gross value of
receivables associated with the repo-style transactions less any on-
balance sheet receivables amount associated with these repo-style
transactions included under paragraph (1) of this definition, unless
the following criteria are met:
(i) The offsetting transactions have the same explicit final
settlement date under their governing agreements;

[[Page 82201]]

(ii) The right to offset the amount owed to the counterparty with
the amount owed by the counterparty is legally enforceable in the
normal course of business and in the event of receivership, insolvency,
liquidation, or similar proceeding; and
(iii) Under the governing agreements, the counterparties intend to
settle net, settle simultaneously, or settle according to a process
that is the functional equivalent of net settlement, (that is, the cash
flows of the transactions are equivalent, in effect, to a single net
amount on the settlement date), where both transactions are settled
through the same settlement system, the settlement arrangements are
supported by cash or intraday credit facilities intended to ensure that
settlement of both transactions will occur by the end of the business
day, and the settlement of the underlying securities does not interfere
with the net cash settlement;
(6) The counterparty credit risk of a repo-style transaction,
including where the Enterprise acts as an agent for a repo-style
transaction and indemnifies the customer with respect to the
performance of the customer's counterparty in an amount limited to the
difference between the fair value of the security or cash its customer
has lent and the fair value of the collateral the borrower has
provided, calculated as follows:
(i) If the transaction is not subject to a qualifying master
netting agreement, the counterparty credit risk (E*) for transactions
with a counterparty must be calculated on a transaction by transaction
basis, such that each transaction i is treated as its own netting set,
in accordance with the following formula, where Ei is the fair value of
the instruments, gold, or cash that the Enterprise has lent, sold
subject to repurchase, or provided as collateral to the counterparty,
and Ci is the fair value of the instruments, gold, or cash that the
Enterprise has borrowed, purchased subject to resale, or received as
collateral from the counterparty:

Ei* = max {0, [Ei--Ci]{time}

(ii) If the transaction is subject to a qualifying master netting
agreement, the counterparty credit risk (E*) must be calculated as the
greater of zero and the total fair value of the instruments, gold, or
cash that the Enterprise has lent, sold subject to repurchase or
provided as collateral to a counterparty for all transactions included
in the qualifying master netting agreement ([Sigma]Ei), less
the total fair value of the instruments, gold, or cash that the
Enterprise borrowed, purchased subject to resale or received as
collateral from the counterparty for those transactions
([Sigma]Ci), in accordance with the following formula:

E* = max {0, [[Sigma]Ei- [Sigma]Ci]{time}

(7) If an Enterprise acting as an agent for a repo-style
transaction provides a guarantee to a customer of the security or cash
its customer has lent or borrowed with respect to the performance of
the customer's counterparty and the guarantee is not limited to the
difference between the fair value of the security or cash its customer
has lent and the fair value of the collateral the borrower has
provided, the amount of the guarantee that is greater than the
difference between the fair value of the security or cash its customer
has lent and the value of the collateral the borrower has provided;
(8) The credit equivalent amount of all off-balance sheet exposures
of the Enterprise, excluding repo-style transactions, repurchase or
reverse repurchase or securities borrowing or lending transactions that
qualify for sales treatment under GAAP, and derivative transactions,
determined using the applicable credit conversion factor under Sec.
1240.35(b), provided, however, that the minimum credit conversion
factor that may be assigned to an off-balance sheet exposure under this
paragraph is 10 percent; and
(9) For an Enterprise that is a clearing member:
(i) A clearing member Enterprise that guarantees the performance of
a clearing member client with respect to a cleared transaction must
treat its exposure to the clearing member client as a derivative
contract for purposes of determining its adjusted total assets;
(ii) A clearing member Enterprise that guarantees the performance
of a CCP with respect to a transaction cleared on behalf of a clearing
member client must treat its exposure to the CCP as a derivative
contract for purposes of determining its adjusted total assets;
(iii) A clearing member Enterprise that does not guarantee the
performance of a CCP with respect to a transaction cleared on behalf of
a clearing member client may exclude its exposure to the CCP for
purposes of determining its adjusted total assets;
(iv) An Enterprise that is a clearing member may exclude from its
adjusted total assets the effective notional principal amount of credit
protection sold through a credit derivative contract, or other similar
instrument, that it clears on behalf of a clearing member client
through a CCP as calculated in accordance with paragraph (4) of this
definition; and
(v) Notwithstanding paragraphs (9)(i) through (iii) of this
definition, an Enterprise may exclude from its adjusted total assets a
clearing member's exposure to a clearing member client for a derivative
contract, if the clearing member client and the clearing member are
affiliates and consolidated for financial reporting purposes on the
Enterprise's balance sheet.
Adjusted total capital means the sum of tier 1 capital and tier 2
capital.
Advanced approaches total risk-weighted assets means:
(1) The sum of:
(i) Credit-risk-weighted assets for general credit risk (including
for mortgage exposures), cleared transactions, default fund
contributions, unsettled transactions, securitization exposures
(including retained CRT exposures), equity exposures, and the fair
value adjustment to reflect counterparty credit risk in valuation of
OTC derivative contracts, each as calculated under Sec. 1240.123.
(ii) Risk-weighted assets for operational risk, as calculated under
Sec. 1240.162(c); and
(iii) Advanced market risk-weighted assets; minus
(2) Excess eligible credit reserves not included in the
Enterprise's tier 2 capital.
Advanced market risk-weighted assets means the advanced measure for
spread risk calculated under Sec. 1240.204(a) multiplied by 12.5.
Affiliate has the meaning given in section 1303(1) of the Safety
and Soundness Act (12 U.S.C. 4502(1)).
Allowances for loan and lease losses (ALLL) means valuation
allowances that have been established through a charge against earnings
to cover estimated credit losses on loans, lease financing receivables
or other extensions of credit as determined in accordance with GAAP.
For purposes of this part, ALLL includes allowances that have been
established through a charge against earnings to cover estimated credit
losses associated with off-balance sheet credit exposures as determined
in accordance with GAAP.
Bankruptcy remote means, with respect to an entity or asset, that
the entity or asset would be excluded from an insolvent entity's estate
in receivership, insolvency, liquidation, or similar proceeding.
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of an Enterprise as determined in accordance
with GAAP. For all assets other than available-for-sale debt securities
or purchased credit deteriorated assets, the carrying value is not
reduced by any associated credit

[[Page 82202]]

loss allowance that is determined in accordance with GAAP.
Central counterparty (CCP) means a counterparty (for example, a
clearing house) that facilitates trades between counterparties in one
or more financial markets by either guaranteeing trades or novating
contracts.
CFTC means the U.S. Commodity Futures Trading Commission.
Clean-up call means a contractual provision that permits an
originating Enterprise or servicer to call securitization exposures
before their stated maturity or call date.
Cleared transaction means an exposure associated with an
outstanding derivative contract or repo-style transaction that an
Enterprise or clearing member has entered into with a central
counterparty (that is, a transaction that a central counterparty has
accepted).
(1) The following transactions are cleared transactions:
(i) A transaction between a CCP and an Enterprise that is a
clearing member of the CCP where the Enterprise enters into the
transaction with the CCP for the Enterprise's own account;
(ii) A transaction between a CCP and an Enterprise that is a
clearing member of the CCP where the Enterprise is acting as a
financial intermediary on behalf of a clearing member client and the
transaction offsets another transaction that satisfies the requirements
set forth in Sec. 1240.3(a);
(iii) A transaction between a clearing member client Enterprise and
a clearing member where the clearing member acts as a financial
intermediary on behalf of the clearing member client and enters into an
offsetting transaction with a CCP, provided that the requirements set
forth in Sec. 1240.3(a) are met; or
(iv) A transaction between a clearing member client Enterprise and
a CCP where a clearing member guarantees the performance of the
clearing member client Enterprise to the CCP and the transaction meets
the requirements of Sec. 1240.3(a)(2) and (3).
(2) The exposure of an Enterprise that is a clearing member to its
clearing member client is not a cleared transaction where the
Enterprise is either acting as a financial intermediary and enters into
an offsetting transaction with a CCP or where the Enterprise provides a
guarantee to the CCP on the performance of the client.
Clearing member means a member of, or direct participant in, a CCP
that is entitled to enter into transactions with the CCP.
Clearing member client means a party to a cleared transaction
associated with a CCP in which a clearing member acts either as a
financial intermediary with respect to the party or guarantees the
performance of the party to the CCP.
Client-facing derivative transaction means a derivative contract
that is not a cleared transaction where the Enterprise is either acting
as a financial intermediary and enters into an offsetting transaction
with a qualifying central counterparty (QCCP) or where the Enterprise
provides a guarantee on the performance of a client on a transaction
between the client and a QCCP.
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to an Enterprise for a single financial contract or
for all financial contracts in a netting set and confers upon the
Enterprise a perfected, first-priority security interest
(notwithstanding the prior security interest of any custodial agent),
or the legal equivalent thereof, in the collateral posted by the
counterparty under the agreement. This security interest must provide
the Enterprise with a right to close-out the financial positions and
liquidate the collateral upon an event of default of, or failure to
perform by, the counterparty under the collateral agreement. A contract
would not satisfy this requirement if the Enterprise's exercise of
rights under the agreement may be stayed or avoided:
(1) Under applicable law in the relevant jurisdictions, other than
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (1)(i) in order to facilitate the orderly
resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(i) of this
definition; or
(2) Other than to the extent necessary for the counterparty to
comply with applicable law.
Commitment means any legally binding arrangement that obligates an
Enterprise to extend credit or to purchase assets.
Common equity tier 1 capital is defined in Sec. 1240.20(b).
Company means a corporation, partnership, limited liability
company, depository institution, business trust, special purpose
entity, association, or similar organization.
Core capital has the meaning given in section 1303(7) of the Safety
and Soundness Act (12 U.S.C. 4502(7)).
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, the European Stability Mechanism, the
European Financial Stability Facility, a multi-lateral development bank
(MDB), a depository institution, a foreign bank, a credit union, or a
public sector entity (PSE);
(2) An exposure to a GSE;
(3) A mortgage exposure;
(4) A cleared transaction;
(5) A default fund contribution;
(6) A securitization exposure;
(7) An equity exposure;
(8) An unsettled transaction; or
(9) A separate account.
Credit derivative means a financial contract executed under
standard industry credit derivative documentation that allows one party
(the protection purchaser) to transfer the credit risk of one or more
exposures (reference exposure(s)) to another party (the protection
provider) for a certain period of time.
Credit-enhancing interest-only strip (CEIO) means an on-balance
sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the
interest and no more than a minimal amount of principal due on the
underlying exposures of a securitization; and
(2) Exposes the holder of the CEIO to credit risk directly or
indirectly associated with the underlying exposures that exceeds a pro
rata share of the holder's claim on the underlying exposures, whether
through subordination provisions or other credit-enhancement
techniques.
Credit risk mitigant means collateral, a credit derivative, or a
guarantee.
Credit risk transfer (CRT) means any traditional securitization,
synthetic securitization, senior/subordinated structure, credit
derivative, guarantee, or other contract, structure, or arrangement
(other than primary mortgage insurance) that allows an Enterprise to
transfer the credit risk of one or more mortgage exposures (reference
exposure(s)) to another party (the protection provider).
Credit union means an insured credit union as defined under the
Federal Credit Union Act (12 U.S.C. 1752 et seq.).
CRT special purpose entity (CRT SPE) means a corporation, trust, or
other entity organized for the specific purpose of bearing credit risk
transferred through

[[Page 82203]]

a CRT, the activities of which are limited to those appropriate to
accomplish this purpose.
Current Expected Credit Losses (CECL) means the current expected
credit losses methodology under GAAP.
Current exposure means, with respect to a netting set, the larger
of zero or the fair value of a transaction or portfolio of transactions
within the netting set that would be lost upon default of the
counterparty, assuming no recovery on the value of the transactions.
Current exposure methodology means the method of calculating the
exposure amount for over-the-counter derivative contracts in Sec.
1240.36(b).
Custodian means a financial institution that has legal custody of
collateral provided to a CCP.
Default fund contribution means the funds contributed or
commitments made by a clearing member to a CCP's mutualized loss
sharing arrangement.
Depository institution means a depository institution as defined in
section 3 of the Federal Deposit Insurance Act.
Derivative contract means a financial contract whose value is
derived from the values of one or more underlying assets, reference
rates, or indices of asset values or reference rates. Derivative
contracts include interest rate derivative contracts, exchange rate
derivative contracts, equity derivative contracts, commodity derivative
contracts, credit derivative contracts, and any other instrument that
poses similar counterparty credit risks. Derivative contracts also
include unsettled securities, commodities, and foreign exchange
transactions with a contractual settlement or delivery lag that is
longer than the lesser of the market standard for the particular
instrument or five business days.
Discretionary bonus payment means a payment made to an executive
officer of an Enterprise, where:
(1) The Enterprise retains discretion as to whether to make, and
the amount of, the payment until the payment is awarded to the
executive officer;
(2) The amount paid is determined by the Enterprise without prior
promise to, or agreement with, the executive officer; and
(3) The executive officer has no contractual right, whether express
or implied, to the bonus payment.
Distribution means:
(1) A reduction of tier 1 capital through the repurchase of a tier
1 capital instrument or by other means, except when an Enterprise,
within the same quarter when the repurchase is announced, fully
replaces a tier 1 capital instrument it has repurchased by issuing
another capital instrument that meets the eligibility criteria for:
(i) A common equity tier 1 capital instrument if the instrument
being repurchased was part of the Enterprise's common equity tier 1
capital, or
(ii) A common equity tier 1 or additional tier 1 capital instrument
if the instrument being repurchased was part of the Enterprise's tier 1
capital;
(2) A reduction of tier 2 capital through the repurchase, or
redemption prior to maturity, of a tier 2 capital instrument or by
other means, except when an Enterprise, within the same quarter when
the repurchase or redemption is announced, fully replaces a tier 2
capital instrument it has repurchased by issuing another capital
instrument that meets the eligibility criteria for a tier 1 or tier 2
capital instrument;
(3) A dividend declaration or payment on any tier 1 capital
instrument;
(4) A dividend declaration or interest payment on any tier 2
capital instrument if the Enterprise has full discretion to permanently
or temporarily suspend such payments without triggering an event of
default; or
(5) Any similar transaction that FHFA determines to be in substance
a distribution of capital.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
Early amortization provision means a provision in the documentation
governing a securitization that, when triggered, causes investors in
the securitization exposures to be repaid before the original stated
maturity of the securitization exposures, unless the provision:
(1) Is triggered solely by events not directly related to the
performance of the underlying exposures or the originating Enterprise
(such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by borrowers on
the underlying exposures even after the provision is triggered.
Effective notional amount means for an eligible guarantee or
eligible credit derivative, the lesser of the contractual notional
amount of the credit risk mitigant and the exposure amount of the
hedged exposure, multiplied by the percentage coverage of the credit
risk mitigant.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating
Enterprise or servicer;
(2) Is not structured to avoid allocating losses to securitization
exposures held by investors or otherwise structured to provide credit
enhancement to the securitization; and
(3)(i) For a traditional securitization, is only exercisable when
10 percent or less of the principal amount of the underlying exposures
or securitization exposures (determined as of the inception of the
securitization) is outstanding; or
(ii) For a synthetic securitization or credit risk transfer, is
only exercisable when 10 percent or less of the principal amount of the
reference portfolio of underlying exposures (determined as of the
inception of the securitization) is outstanding.
Eligible credit derivative means a credit derivative in the form of
a credit default swap, nth-to-default swap, total return swap, or any
other form of credit derivative approved by FHFA, provided that:
(1) The contract meets the requirements of an eligible guarantee
and has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap or nth-to-
default swap, the contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that
is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship or
inability of the reference exposure issuer to pay its debts, or its
failure or admission in writing of its inability generally to pay its
debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event
valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer
an exposure to the protection provider at settlement, the terms of at
least one of the exposures that is permitted to be transferred under
the contract provide that any required consent to transfer may not be
unreasonably withheld;
(7) If the credit derivative is a credit default swap or nth-to-
default swap, the

[[Page 82204]]

contract clearly identifies the parties responsible for determining
whether a credit event has occurred, specifies that this determination
is not the sole responsibility of the protection provider, and gives
the protection purchaser the right to notify the protection provider of
the occurrence of a credit event; and
(8) If the credit derivative is a total return swap and the
Enterprise records net payments received on the swap as net income, the
Enterprise records offsetting deterioration in the value of the hedged
exposure (either through reductions in fair value or by an addition to
reserves).
Eligible credit reserves means all general allowances that have
been established through a charge against earnings or retained earnings
to cover expected credit losses associated with on- or off-balance
sheet wholesale and retail exposures, including AACL associated with
such exposures. Eligible credit reserves exclude allowances that
reflect credit losses on purchased credit deteriorated assets and
available-for-sale debt securities and other specific reserves created
against recognized losses.
Eligible funded synthetic risk transfer means a credit risk
transfer in which--
(1) A CRT SPE that is bankruptcy remote from the Enterprise and not
consolidated with the Enterprise under GAAP is contractually obligated
to reimburse the Enterprise for specified losses on a reference pool of
mortgage exposures of the Enterprise upon designated credit events and
designated modification events;
(2) The credit risk transferred to the CRT SPE is transferred to
one or more third parties through two or more classes of securities of
different seniority issued by the CRT SPE;
(3) The performance of each class of securities issued by the CRT
SPE depends on the performance of the reference pool; and
(4) The proceeds of the securities issued by the CRT SPE--
(i) Are, at the time of entry into the transaction, in the
aggregate no less than the maximum obligation of the CRT SPE to the
Enterprise; and
(ii) Are invested in financial collateral that secures the payment
obligations of the CRT SPE to the Enterprise.
Eligible guarantee means a guarantee that:
(1) Is written;
(2) Is either:
(i) Unconditional, or
(ii) A contingent obligation of the U.S. government or its
agencies, the enforceability of which is dependent upon some
affirmative action on the part of the beneficiary of the guarantee or a
third party (for example, meeting servicing requirements);
(3) Covers all or a pro rata portion of all contractual payments of
the obligated party on the reference exposure;
(4) Gives the beneficiary a direct claim against the protection
provider;
(5) Is not unilaterally cancelable by the protection provider for
reasons other than the breach of the contract by the beneficiary;
(6) Except for a guarantee by a sovereign, is legally enforceable
against the protection provider in a jurisdiction where the protection
provider has sufficient assets against which a judgment may be attached
and enforced;
(7) Requires the protection provider to make payment to the
beneficiary on the occurrence of a default (as defined in the
guarantee) of the obligated party on the reference exposure in a timely
manner without the beneficiary first having to take legal actions to
pursue the obligor for payment;
(8) Does not increase the beneficiary's cost of credit protection
on the guarantee in response to deterioration in the credit quality of
the reference exposure;
(9) Is not provided by an affiliate of the Enterprise; and
(10) Is provided by an eligible guarantor.
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the
International Monetary Fund, the European Central Bank, the European
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), the European Stability Mechanism, the
European Financial Stability Facility, a multilateral development bank
(MDB), a depository institution, a bank holding company as defined in
section 2 of the Bank Holding Company Act of 1956, as amended (12
U.S.C. 1841 et seq.), a savings and loan holding company, a credit
union, a foreign bank, or a qualifying central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter,
has issued and outstanding an unsecured debt security without credit
enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the
credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the
business of providing credit protection (such as a monoline bond
insurer or re-insurer).
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid
and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked-to-fair value daily, and the
transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that
provides the Enterprise the right to accelerate and terminate the
extension of credit and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
insolvency, liquidation, conservatorship, or similar proceeding, of the
counterparty, provided that, in any such case:
(A) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(1) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs,\1\ or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (1)(iii)(A)(1) in order to facilitate the
orderly resolution of the defaulting counterparty; or
---------------------------------------------------------------------------

\1\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code
(11 U.S.C. 555), qualified financial contracts under section
11(e)(8) of the Federal Deposit Insurance Act, or netting contracts
between or among financial institutions.
---------------------------------------------------------------------------

(2) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of
this definition; and
(B) The agreement may limit the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with applicable law.
(2) In order to recognize an exposure as an eligible margin loan
for purposes of this subpart, an Enterprise must comply with the
requirements of Sec. 1240.3(b) with respect to that exposure.
Eligible multifamily lender risk share means a credit risk transfer
under which an entity that is approved by an Enterprise to sell
multifamily mortgage exposures to an Enterprise retains credit risk of
one or more multifamily mortgage exposures on substantially the same
terms and conditions as in effect

[[Page 82205]]

on June 30, 2020 for Fannie Mae's credit risk transfers known as the
``Delegated Underwriting and Servicing program''.
Eligible reinsurance risk transfer means a credit risk transfer in
which the Enterprise transfers the credit risk on one or more mortgage
exposures to an insurance company or reinsurer that has been approved
by the Enterprise.
Eligible senior-subordinated structure means a traditional
securitization in which the underlying exposures are mortgage exposures
of the Enterprise and the Enterprise guarantees the timely payment of
principal and interest on one or more senior tranches.
Eligible single-family lender risk share means any partial or full
recourse agreement or similar agreement (other than a participation
agreement) between an Enterprise and the seller or servicer of a
single-family mortgage exposure pursuant to which the seller or
servicer agrees either to reimburse the Enterprise for losses arising
out of the default of the single-family mortgage exposure or to
repurchase or replace the single-family mortgage exposure in the event
of the default of the single-family mortgage exposure.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting and
whether certificated or not certificated) that represents a direct or
an indirect ownership interest in, and is a residual claim on, the
assets and income of a company, unless:
(i) The issuing company is consolidated with the Enterprise under
GAAP;
(ii) The Enterprise is required to deduct the ownership interest
from tier 1 or tier 2 capital under this part;
(iii) The ownership interest incorporates a payment or other
similar obligation on the part of the issuing company (such as an
obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into a
security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or
instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization
exposure) to the extent the return on the security or instrument is
based on the performance of a security or instrument described in
paragraph (1) of this definition.
ERISA means the Employee Retirement Income and Security Act of 1974
(29 U.S.C. 1001 et seq.).
Executive officer means a person who holds the title or, without
regard to title, salary, or compensation, performs the function of one
or more of the following positions: President, chief executive officer,
executive chairman, chief operating officer, chief financial officer,
chief investment officer, chief legal officer, chief lending officer,
chief risk officer, or head of a major business line, and other staff
that the board of directors of the Enterprise deems to have equivalent
responsibility.
Exposure amount means:
(1) For the on-balance sheet component of an exposure (including a
mortgage exposure); an OTC derivative contract; a repo-style
transaction or an eligible margin loan for which the Enterprise
determines the exposure amount under Sec. 1240.39; a cleared
transaction; a default fund contribution; or a securitization
exposure), the Enterprise's carrying value of the exposure.
(2) For the off-balance sheet component of an exposure (other than
an OTC derivative contract; a repo-style transaction or an eligible
margin loan for which the Enterprise calculates the exposure amount
under Sec. 1240.39; a cleared transaction; a default fund
contribution; or a securitization exposure), the notional amount of the
off-balance sheet component multiplied by the appropriate credit
conversion factor (CCF) in Sec. 1240.35.
(3) For an exposure that is an OTC derivative contract, the
exposure amount determined under Sec. 1240.36.
(4) For an exposure that is a cleared transaction, the exposure
amount determined under Sec. 1240.37.
(5) For an exposure that is an eligible margin loan or repo-style
transaction for which the Enterprise calculates the exposure amount as
provided in Sec. 1240.39, the exposure amount determined under Sec.
1240.39.
(6) For an exposure that is a securitization exposure, the exposure
amount determined under Sec. 1240.42.
Federal Deposit Insurance Act means the Federal Deposit Insurance
Act (12 U.S.C. 1813).
Federal Reserve Board means the Board of Governors of the Federal
Reserve System.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the Enterprise (including cash held for
the Enterprise by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are not resecuritization
exposures and that are investment grade;
(iv) Short-term debt instruments that are not resecuritization
exposures and that are investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded; or
(vii) Money market fund shares and other mutual fund shares if a
price for the shares is publicly quoted daily; and
(2) In which the Enterprise has a perfected, first-priority
security interest or, outside of the United States, the legal
equivalent thereof (with the exception of cash on deposit and
notwithstanding the prior security interest of any custodial agent or
any priority security interest granted to a CCP in connection with
collateral posted to that CCP).
Gain-on-sale means an increase in the equity capital of an
Enterprise resulting from a traditional securitization other than an
increase in equity capital resulting from:
(1) The Enterprise's receipt of cash in connection with the
securitization; or
(2) The reporting of a mortgage servicing asset.
General obligation means a bond or similar obligation that is
backed by the full faith and credit of a public sector entity (PSE).
Government-sponsored enterprise (GSE) means an entity established
or chartered by the U.S. government to serve public purposes specified
by the U.S. Congress but whose debt obligations are not explicitly
guaranteed by the full faith and credit of the U.S. government,
including an Enterprise.
Guarantee means a financial guarantee, letter of credit, insurance,
or other similar financial instrument (other than a credit derivative)
that allows one party (beneficiary) to transfer the credit risk of one
or more specific exposures (reference exposure) to another party
(protection provider).
Investment grade means that the entity to which the Enterprise is
exposed through a loan or security, or the reference entity with
respect to a credit derivative, has adequate capacity to meet financial
commitments for the projected life of the asset or exposure. Such an
entity or reference entity has adequate capacity to meet financial
commitments if the risk of its default is low and the full and timely
repayment of principal and interest is expected.
Minimum transfer amount means the smallest amount of variation
margin that may be transferred between counterparties to a netting set
pursuant to the variation margin agreement.
Mortgage-backed security (MBS) means a security collateralized by a
pool or pools of mortgage exposures,

[[Page 82206]]

including any pass-through or collateralized mortgage obligation.
Mortgage exposure means either a single-family mortgage exposure or
a multifamily mortgage exposure.
Multifamily mortgage exposure means an exposure that is secured by
a first or subsequent lien on a property with five or more residential
units.
Mortgage servicing assets (MSAs) means the contractual rights owned
by an Enterprise to service for a fee mortgage loans that are owned by
others.
Multilateral development bank (MDB) means the International Bank
for Reconstruction and Development, the Multilateral Investment
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African
Development Bank, the European Bank for Reconstruction and Development,
the European Investment Bank, the European Investment Fund, the Nordic
Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, and any other
multilateral lending institution or regional development bank in which
the U.S. government is a shareholder or contributing member or which
FHFA determines poses comparable credit risk.
Netting set means a group of transactions with a single
counterparty that are subject to a qualifying master netting agreement
or a qualifying cross-product master netting agreement. For derivative
contracts, netting set also includes a single derivative contract
between an Enterprise and a single counterparty. For purposes of
calculating risk-based capital requirements using the internal models
methodology in subpart E of this part, this term does not cover a
transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the Enterprise has identified specific wrong-way risk.
Non-guaranteed separate account means a separate account where the
insurance company:
(1) Does not contractually guarantee either a minimum return or
account value to the contract holder; and
(2) Is not required to hold reserves (in the general account)
pursuant to its contractual obligations to a policyholder.
Nth-to-default credit derivative means a credit derivative that
provides credit protection only for the nth-defaulting reference
exposure in a group of reference exposures.
Original maturity with respect to an off-balance sheet commitment
means the length of time between the date a commitment is issued and:
(1) For a commitment that is not subject to extension or renewal,
the stated expiration date of the commitment; or
(2) For a commitment that is subject to extension or renewal, the
earliest date on which the Enterprise can, at its option,
unconditionally cancel the commitment.
Originating Enterprise, with respect to a securitization, means an
Enterprise that directly or indirectly originated or securitized the
underlying exposures included in the securitization.
Over-the-counter (OTC) derivative contract means a derivative
contract that is not a cleared transaction. An OTC derivative includes
a transaction:
(1) Between an Enterprise that is a clearing member and a
counterparty where the Enterprise is acting as a financial intermediary
and enters into a cleared transaction with a CCP that offsets the
transaction with the counterparty; or
(2) In which an Enterprise that is a clearing member provides a CCP
a guarantee on the performance of the counterparty to the transaction.
Participation agreement is defined in Sec. 1240.33(a).
Protection amount (P) means, with respect to an exposure hedged by
an eligible guarantee or eligible credit derivative, the effective
notional amount of the guarantee or credit derivative, reduced to
reflect any currency mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in Sec. 1240.38).
Publicly-traded means traded on:
(1) Any exchange registered with the SEC as a national securities
exchange under section 6 of the Securities Exchange Act; or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question.
Public sector entity (PSE) means a state, local authority, or other
governmental subdivision below the sovereign level.
Qualifying central counterparty (QCCP) means a central counterparty
that:
(1)(i) Is a designated financial market utility (FMU) under Title
VIII of the Dodd-Frank Act;
(ii) If not located in the United States, is regulated and
supervised in a manner equivalent to a designated FMU; or
(iii) Meets the following standards:
(A) The central counterparty requires all parties to contracts
cleared by the counterparty to be fully collateralized on a daily
basis;
(B) The Enterprise demonstrates to the satisfaction of FHFA that
the central counterparty:
(1) Is in sound financial condition;
(2) Is subject to supervision by the Federal Reserve Board, the
CFTC, or the Securities Exchange Commission (SEC), or, if the central
counterparty is not located in the United States, is subject to
effective oversight by a national supervisory authority in its home
country; and
(3) Meets or exceeds the risk-management standards for central
counterparties set forth in regulations established by the Federal
Reserve Board, the CFTC, or the SEC under Title VII or Title VIII of
the Dodd-Frank Act; or if the central counterparty is not located in
the United States, meets or exceeds similar risk-management standards
established under the law of its home country that are consistent with
international standards for central counterparty risk management as
established by the relevant standard setting body of the Bank of
International Settlements; and
(2)(i) Provides the Enterprise with the central counterparty's
hypothetical capital requirement or the information necessary to
calculate such hypothetical capital requirement, and other information
the Enterprise is required to obtain under Sec. 1240.37(d)(3);
(ii) Makes available to FHFA and the CCP's regulator the
information described in paragraph (2)(i) of this definition; and
(iii) Has not otherwise been determined by FHFA to not be a QCCP
due to its financial condition, risk profile, failure to meet
supervisory risk management standards, or other weaknesses or
supervisory concerns that are inconsistent with the risk weight
assigned to qualifying central counterparties under Sec. 1240.37.
(3) A QCCP that fails to meet the requirements of a QCCP in the
future may still be treated as a QCCP under the conditions specified in
Sec. 1240.3(f).
Qualifying master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty;

[[Page 82207]]

(2) The agreement provides the Enterprise the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set-off collateral promptly upon an event
of default, including upon an event of receivership, conservatorship,
insolvency, liquidation, or similar proceeding, of the counterparty,
provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with applicable law.
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the Enterprise acts as
agent for a customer and indemnifies the customer against loss,
provided that:
(1) The transaction is based solely on liquid and readily
marketable securities, cash, or gold;
(2) The transaction is marked-to-fair value daily and subject to
daily margin maintenance requirements;
(3)(i) The transaction is a ``securities contract'' or ``repurchase
agreement'' under section 555 or 559, respectively, of the Bankruptcy
Code (11 U.S.C. 555 or 559), a qualified financial contract under
section 11(e)(8) of the Federal Deposit Insurance Act, or a netting
contract between or among financial institutions; or
(ii) If the transaction does not meet the criteria set forth in
paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides
the Enterprise the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set-off collateral
promptly upon an event of default, including upon an event of
receivership, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case:
(1) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(i) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs, or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate
the orderly resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i)
of this definition; and
(2) The agreement may limit the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with applicable law; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by
the Enterprise; and
(2) Executed under an agreement that provides the Enterprise the
right to accelerate, terminate, and close-out the transaction on a net
basis and to liquidate or set-off collateral promptly upon an event of
counterparty default; and
(3) In order to recognize an exposure as a repo-style transaction
for purposes of this subpart, an Enterprise must comply with the
requirements of Sec. 1240.3(e) with respect to that exposure.
Resecuritization means a securitization which has more than one
underlying exposure and in which one or more of the underlying
exposures is a securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet exposure to a resecuritization; or
(2) An exposure that directly or indirectly references a
resecuritization exposure.
Retained CRT exposure means, with respect to an Enterprise, any
exposure that arises from a credit risk transfer of the Enterprise and
has been retained by the Enterprise since the issuance or entry into
the credit risk transfer by the Enterprise.
Revenue obligation means a bond or similar obligation that is an
obligation of a PSE, but which the PSE is committed to repay with
revenues from the specific project financed rather than general tax
funds.
Securities and Exchange Commission (SEC) means the U.S. Securities
and Exchange Commission.
Securities Exchange Act means the Securities Exchange Act of 1934
(15 U.S.C. 78).
Securitization exposure means:
(1) An on-balance sheet or off-balance sheet credit exposure that
arises from a traditional securitization or synthetic securitization
(including a resecuritization);
(2) An exposure that directly or indirectly references a
securitization exposure described in paragraph (1) of this definition;
(3) A retained CRT exposure; or
(4) An acquired CRT exposure.
Securitization special purpose entity (securitization SPE) means a
corporation, trust, or other entity organized for the specific purpose
of holding underlying exposures of a securitization, the activities of
which are limited to those appropriate to accomplish this purpose, and
the structure of which is intended to isolate the underlying exposures
held by the entity from the credit risk of the seller of the underlying
exposures to the entity.
Separate account means a legally segregated pool of assets owned
and held by an insurance company and maintained separately from the
insurance company's general account assets for the benefit of an
individual contract holder. To be a separate account:
(1) The account must be legally recognized as a separate account
under applicable law;
(2) The assets in the account must be insulated from general
liabilities of the insurance company under applicable law in the event
of the insurance company's insolvency;
(3) The insurance company must invest the funds within the account
as directed by the contract holder in designated investment
alternatives or in accordance with specific investment objectives or
policies; and
(4) All investment gains and losses, net of contract fees and
assessments, must be passed through to the contract holder, provided
that the contract may specify conditions under which there may be a
minimum guarantee but must not include contract terms that limit the
maximum investment return available to the policyholder.
Servicer cash advance facility means a facility under which the
servicer of the underlying exposures of a securitization may advance
cash to ensure an

[[Page 82208]]

uninterrupted flow of payments to investors in the securitization,
including advances made to cover foreclosure costs or other expenses to
facilitate the timely collection of the underlying exposures.
Single-family mortgage exposure means an exposure that is secured
by a first or subsequent lien on a property with one to four
residential units.
Sovereign means a central government (including the U.S.
government) or an agency, department, ministry, or central bank of a
central government.
Sovereign default means noncompliance by a sovereign with its
external debt service obligations or the inability or unwillingness of
a sovereign government to service an existing loan according to its
original terms, as evidenced by failure to pay principal and interest
timely and fully, arrearages, or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign; or
(2) An exposure directly and unconditionally backed by the full
faith and credit of a sovereign.
Specific wrong-way risk means wrong-way risk that arises when
either:
(1) The counterparty and issuer of the collateral supporting the
transaction; or
(2) The counterparty and the reference asset of the transaction,
are affiliates or are the same entity.
Standardized market risk-weighted assets means the standardized
measure for spread risk calculated under Sec. 1240.204(a) multiplied
by 12.5.
Standardized total risk-weighted assets means:
(1) The sum of--
(i) Total risk-weighted assets for general credit risk as
calculated under Sec. 1240.31;
(ii) Total risk-weighted assets for cleared transactions and
default fund contributions as calculated under Sec. 1240.37;
(iii) Total risk-weighted assets for unsettled transactions as
calculated under Sec. 1240.40;
(iv) Total risk-weighted assets for retained CRT exposures,
acquired CRT exposures, and other securitization exposures as
calculated under Sec. 1240.42;
(v) Total risk-weighted assets for equity exposures as calculated
under Sec. 1240.52;
(vi) Risk-weighted assets for operational risk, as calculated under
Sec. 1240.162(c) or Sec. 1240.162(d), as applicable; and
(vii) Standardized market risk-weighted assets; minus
(2) Excess eligible credit reserves not included in the
Enterprise's tier 2 capital.
Subsidiary means, with respect to a company, a company controlled
by that company.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is retained or transferred to one or more third parties
through the use of one or more credit derivatives or guarantees (other
than a guarantee that transfers only the credit risk of an individual
mortgage exposure or other retail exposure);
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are
financial exposures (such as mortgage exposures, loans, commitments,
credit derivatives, guarantees, receivables, asset-backed securities,
mortgage-backed securities, other debt securities, or equity
securities).
Tier 1 capital means the sum of common equity tier 1 capital and
additional tier 1 capital.
Tier 2 capital is defined in Sec. 1240.20(d).
Total capital has the meaning given in section 1303(23) of the
Safety and Soundness Act (12 U.S.C. 4502(23)).
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties other than
through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels
of seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are
financial exposures (such as mortgage exposures, loans, commitments,
credit derivatives, guarantees, receivables, asset-backed securities,
mortgage-backed securities, other debt securities, or equity
securities);
(5) The underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business
investment company defined in section 302 of the Small Business
Investment Act;
(7) The underlying exposures are not owned by a firm an investment
in which qualifies as a community development investment under section
24 (Eleventh) of the National Bank Act;
(8) FHFA may determine that a transaction in which the underlying
exposures are owned by an investment firm that exercises substantially
unfettered control over the size and composition of its assets,
liabilities, and off-balance sheet exposures is not a traditional
securitization based on the transaction's leverage, risk profile, or
economic substance;
(9) FHFA may deem a transaction that meets the definition of a
traditional securitization, notwithstanding paragraph (5), (6), or (7)
of this definition, to be a traditional securitization based on the
transaction's leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund held by a State member bank as
fiduciary and, consistent with local law, invested collectively--
(A) In a common trust fund maintained by such bank exclusively for
the collective investment and reinvestment of monies contributed
thereto by the bank in its capacity as trustee, executor,
administrator, guardian, or custodian under the Uniform Gifts to Minors
Act; or
(B) In a fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or similar trusts which are exempt from
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(iii) An employee benefit plan (as defined in 29 U.S.C. 1002(3)), a
governmental plan (as defined in 29 U.S.C. 1002(32)) that complies with
the tax deferral qualification requirements provided in the Internal
Revenue Code;
(iv) A synthetic exposure to the capital of a financial institution
to the extent deducted from capital under Sec. 1240.22; or
(v) Registered with the SEC under the Investment Company Act of
1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents thereof.
Tranche means all securitization exposures associated with a
securitization that have the same seniority level.
Transition order means an order issued by the Director under
section 1371 of the Safety and Soundness Act (12 U.S.C. 4631), a plan
required by the Director under section 1313B of the Safety and
Soundness Act (12 U.S.C. 4513b), or an order, agreement, or similar
arrangement of FHFA that, in any case, provides for a compliance date
for a requirement of this part that is later

[[Page 82209]]

than the compliance date for the requirement specified under Sec.
1240.4.
Unconditionally cancelable means with respect to a commitment, that
an Enterprise may, at any time, with or without cause, refuse to extend
credit under the commitment (to the extent permitted under applicable
law).
Underlying exposures means one or more exposures that have been
securitized in a securitization transaction.
Variation margin agreement means an agreement to collect or post
variation margin.
Variation margin threshold means the amount of credit exposure of
an Enterprise to its counterparty that, if exceeded, would require the
counterparty to post variation margin to the Enterprise pursuant to the
variation margin agreement.
Wrong-way risk means the risk that arises when an exposure to a
particular counterparty is positively correlated with the probability
of default of such counterparty itself.

Sec. 1240.3 Operational requirements for counterparty credit risk.

For purposes of calculating risk-weighted assets under subpart D of
this part:
(a) Cleared transaction. In order to recognize certain exposures as
cleared transactions pursuant to paragraphs (1)(ii), (iii), or (iv) of
the definition of ``cleared transaction'' in Sec. 1240.2, the
exposures must meet the applicable requirements set forth in this
paragraph (a).
(1) The offsetting transaction must be identified by the CCP as a
transaction for the clearing member client.
(2) The collateral supporting the transaction must be held in a
manner that prevents the Enterprise from facing any loss due to an
event of default, including from a liquidation, receivership,
insolvency, or similar proceeding of either the clearing member or the
clearing member's other clients.
(3) The Enterprise must conduct sufficient legal review to conclude
with a well-founded basis (and maintain sufficient written
documentation of that legal review) that in the event of a legal
challenge (including one resulting from a default or receivership,
insolvency, liquidation, or similar proceeding) the relevant court and
administrative authorities would find the arrangements of paragraph
(a)(2) of this section to be legal, valid, binding and enforceable
under the law of the relevant jurisdictions.
(4) The offsetting transaction with a clearing member must be
transferable under the transaction documents and applicable laws in the
relevant jurisdiction(s) to another clearing member should the clearing
member default, become insolvent, or enter receivership, insolvency,
liquidation, or similar proceedings.
(b) Eligible margin loan. In order to recognize an exposure as an
eligible margin loan as defined in Sec. 1240.2, an Enterprise must
conduct sufficient legal review to conclude with a well-founded basis
(and maintain sufficient written documentation of that legal review)
that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (1)(iii) of the definition
of ``eligible margin loan'' in Sec. 1240.2, and
(2) Is legal, valid, binding, and enforceable under applicable law
in the relevant jurisdictions.
(c) [Reserved]
(d) Qualifying master netting agreement. In order to recognize an
agreement as a qualifying master netting agreement as defined in Sec.
1240.2, an Enterprise must:
(1) Conduct sufficient legal review to conclude with a well-founded
basis (and maintain sufficient written documentation of that legal
review) that:
(i) The agreement meets the requirements of paragraph (2) of the
definition of ``qualifying master netting agreement'' in Sec. 1240.2;
and
(ii) In the event of a legal challenge (including one resulting
from default or from receivership, insolvency, liquidation, or similar
proceeding) the relevant court and administrative authorities would
find the agreement to be legal, valid, binding, and enforceable under
the law of the relevant jurisdictions; and
(2) Establish and maintain written procedures to monitor possible
changes in relevant law and to ensure that the agreement continues to
satisfy the requirements of the definition of ``qualifying master
netting agreement'' in Sec. 1240.2.
(e) Repo-style transaction. In order to recognize an exposure as a
repo-style transaction as defined in Sec. 1240.2, an Enterprise must
conduct sufficient legal review to conclude with a well-founded basis
(and maintain sufficient written documentation of that legal review)
that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (3) of the definition of
``repo-style transaction'' in Sec. 1240.2, and
(2) Is legal, valid, binding, and enforceable under applicable law
in the relevant jurisdictions.
(f) Failure of a QCCP to satisfy the rule's requirements. If an
Enterprise determines that a CCP ceases to be a QCCP due to the failure
of the CCP to satisfy one or more of the requirements set forth in
paragraphs (2)(i) through (iii) of the definition of a ``QCCP'' in
Sec. 1240.2, the Enterprise may continue to treat the CCP as a QCCP
for up to three months following the determination. If the CCP fails to
remedy the relevant deficiency within three months after the initial
determination, or the CCP fails to satisfy the requirements set forth
in paragraphs (2)(i) through (iii) of the definition of a ``QCCP''
continuously for a three-month period after remedying the relevant
deficiency, an Enterprise may not treat the CCP as a QCCP for the
purposes of this part until after the Enterprise has determined that
the CCP has satisfied the requirements in paragraphs (2)(i) through
(iii) of the definition of a ``QCCP'' for three continuous months.

Sec. 1240.4 Transition.

(a) Compliance dates. An Enterprise will not be subject to any
requirement under this part until the compliance date for the
requirement under this section.
(b) Reporting requirements. The compliance date will be January 1,
2022, for the reporting requirements under any of the following:
(1) Any requirement under Sec. 1240.1(f);
(2) Any requirement under subpart C, D, or G of this part;
(3) Any requirement under Sec. 1240.162(d); and
(4) Any requirement to calculate the standardized measure for
spread risk under Sec. 1240.204.
(c) Advanced approaches requirements. Any requirement under subpart
E or F (other than Sec. 1240.162(d) or any requirement to calculate
the standardized measure for spread risk under Sec. 1240.204) will
have a compliance date of the later of January 1, 2025 and any later
compliance date for that requirement provided in a transition order
applicable to the Enterprise.
(d) Capital requirements and buffers--(1) Requirements. The
compliance date of any requirement under Sec. 1240.10 will be the
later of:
(i) The date of the termination of the conservatorship of the
Enterprise (or, if later, the effective date of this part); and
(ii) Any later compliance date for Sec. 1240.10 provided in a
transition order applicable to the Enterprise.
(2) Buffers. The compliance date of any requirement under Sec.
1240.11 will be the date of the termination of the conservatorship of
the Enterprise (or, if later, the effective date of this part).
(3) Capital restoration plan. If a transition order of an
Enterprise provides a compliance date for

[[Page 82210]]

Sec. 1240.10, the Director may determine that, for the period between
the compliance date for Sec. 1240.11 under paragraph (d)(2) of this
section and any later compliance date for Sec. 1240.10 provided in the
transition order--
(i) The prescribed capital conservation buffer amount of the
Enterprise will be the amount equal to the sum of--
(A) The common equity tier 1 capital that would otherwise be
required under Sec. 1240.10(d); and
(B) The prescribed capital conservation buffer amount that would
otherwise apply under Sec. 1240.11(a)(5); and
(ii) The prescribed leverage buffer amount of the Enterprise will
be equal to 4.0 percent of the adjusted total assets of the Enterprise.
(4) Prudential standard. If the Director makes a determination
under paragraph (d)(3) of this section, Sec. 1240.11 will be a
prudential standard adopted under section 1313B of the Safety and
Soundness Act (12 U.S.C. 4513b) until the compliance date of Sec.
1240.10.

Subpart B--Capital Requirements and Buffers

Sec. 1240.10 Capital requirements.

(a) Total capital. An Enterprise must maintain total capital not
less than the amount equal to 8.0 percent of the greater of:
(1) Standardized total risk-weighted assets; and
(2) Advanced approaches total risk-weighted assets.
(b) Adjusted total capital. An Enterprise must maintain adjusted
total capital not less than the amount equal to 8.0 percent of the
greater of:
(1) Standardized total risk-weighted assets; and
(2) Advanced approaches total risk-weighted assets.
(c) Tier 1 capital. An Enterprise must maintain tier 1 capital not
less than the amount equal to 6.0 percent of the greater of:
(1) Standardized total risk-weighted assets; and
(2) Advanced approaches total risk-weighted assets.
(d) Common equity tier 1 capital. An Enterprise must maintain
common equity tier 1 capital not less than the amount equal to 4.5
percent of the greater of:
(1) Standardized total risk-weighted assets; and
(2) Advanced approaches total risk-weighted assets.
(e) Core capital. An Enterprise must maintain core capital not less
than the amount equal to 2.5 percent of adjusted total assets.
(f) Leverage ratio. An Enterprise must maintain tier 1 capital not
less than the amount equal to 2.5 percent of adjusted total assets.
(g) Capital adequacy. (1) Notwithstanding the minimum requirements
in this part, an Enterprise must maintain capital commensurate with the
level and nature of all risks to which the Enterprise is exposed. The
supervisory evaluation of an Enterprise's capital adequacy is based on
an individual assessment of numerous factors, including the character
and condition of the Enterprise's assets and its existing and
prospective liabilities and other corporate responsibilities.
(2) An Enterprise must have a process for assessing its overall
capital adequacy in relation to its risk profile and a comprehensive
strategy for maintaining an appropriate level of capital.

Sec. 1240.11 Capital conservation buffer and leverage buffer.

(a) Definitions. For purposes of this section, the following
definitions apply:
(1) Capital conservation buffer. An Enterprise's capital
conservation buffer is the amount calculated under paragraph (c)(2) of
this section.
(2) Eligible retained income. The eligible retained income of an
Enterprise is the greater of:
(i) The Enterprise's net income, as defined under GAAP, for the
four calendar quarters preceding the current calendar quarter, net of
any distributions and associated tax effects not already reflected in
net income; and
(ii) The average of the Enterprise's net income for the four
calendar quarters preceding the current calendar quarter.
(3) Leverage buffer. An Enterprise's leverage buffer is the amount
calculated under paragraph (d)(2) of this section.
(4) Maximum payout ratio. The maximum payout ratio is the
percentage of eligible retained income that an Enterprise can pay out
in the form of distributions and discretionary bonus payments during
the current calendar quarter. The maximum payout ratio is determined
under paragraph (b)(2) of this section.
(5) Prescribed capital conservation buffer amount. An Enterprise's
prescribed capital conservation buffer amount is equal to its stress
capital buffer in accordance with paragraph (a)(7) of this section plus
its applicable countercyclical capital buffer amount in accordance with
paragraph (e) of this section plus its applicable stability capital
buffer in accordance with paragraph (f) of this section.
(6) Prescribed leverage buffer amount. An Enterprise's prescribed
leverage buffer amount is 1.5 percent of the Enterprise's adjusted
total assets, as of the last day of the previous calendar quarter.
(7) Stress capital buffer. (i) Subject to paragraph (a)(7)(iii) of
this section, FHFA will determine the stress capital buffer pursuant to
this paragraph (a)(7).
(ii) An Enterprise's stress capital buffer is equal to the
Enterprise's adjusted total assets, as of the last day of the previous
calendar quarter, multiplied by the greater of:
(A) The following calculation:
(1) The ratio of an Enterprise's common equity tier 1 capital to
adjusted total assets, as of the final quarter of the previous calendar
year, unless otherwise determined by FHFA; minus
(2) The lowest projected ratio of the Enterprise's common equity
tier 1 capital to adjusted total assets in any quarter of the planning
horizon under a supervisory stress test; plus
(3) The ratio of:
(i) The sum of the Enterprise's planned common stock dividends
(expressed as a dollar amount) for each of the quarters of the planning
horizon of the supervisory stress test, unless otherwise determined by
FHFA; to
(ii) The adjusted total assets of the Enterprise in the quarter in
which the Enterprise had its lowest projected ratio of common equity
tier 1 capital to adjusted total assets in any quarter of the planning
horizon under the supervisory stress test; and
(B) 0.75 percent.
(iii) Notwithstanding anything to the contrary in paragraph
(a)(7)(ii) of this section, if FHFA does not determine the stress
capital buffer for an Enterprise under this paragraph (a)(7), the
Enterprise's stress capital buffer is equal to 0.75 percent of the
Enterprise's adjusted total assets, as of the last day of the previous
calendar quarter.
(b) Maximum payout amount--(1) Limits on distributions and
discretionary bonus payments. An Enterprise shall not make
distributions or discretionary bonus payments or create an obligation
to make such distributions or payments during the current calendar
quarter that, in the aggregate, exceed the amount equal to the
Enterprise's eligible retained income for the calendar quarter,
multiplied by its maximum payout ratio.
(2) Maximum payout ratio. The maximum payout ratio of an Enterprise
is the lowest of the payout ratios determined by its capital
conservation buffer and its leverage buffer, as set forth on Table 1 to
paragraph (b)(5) of this section.
(3) No maximum payout amount limitation. An Enterprise is not
subject

[[Page 82211]]

to a restriction under paragraph (b)(1) of this section if it has:
(i) A capital conservation buffer that is greater than its
prescribed capital conservation buffer amount; and
(ii) A leverage buffer that is greater than its prescribed leverage
buffer amount.
(4) Negative eligible retained income. An Enterprise may not make
distributions or discretionary bonus payments during the current
calendar quarter if:
(i) The eligible retained income of the Enterprise is negative; and
(ii) Either:
(A) The capital conservation buffer of the Enterprise was less than
its stress capital buffer; or
(B) The leverage buffer of the Enterprise was less than its
prescribed leverage buffer amount.
(5) Prior approval. Notwithstanding the limitations in paragraphs
(b)(1) through (3) of this section, FHFA may permit an Enterprise to
make a distribution or discretionary bonus payment upon a request of
the Enterprise, if FHFA determines that the distribution or
discretionary bonus payment would not be contrary to the purposes of
this section or to the safety and soundness of the Enterprise. In
making such a determination, FHFA will consider the nature and extent
of the request and the particular circumstances giving rise to the
request.
[GRAPHIC] [TIFF OMITTED] TR17DE20.011

(c) Capital conservation buffer--(1) Composition of the capital
conservation buffer. The capital conservation buffer is composed solely
of common equity tier 1 capital.
(2) Calculation of capital conservation buffer. (i) An Enterprise's
capital conservation buffer is equal to the lowest of the following,
calculated as of the last day of the previous calendar quarter:
(A) The Enterprise's adjusted total capital minus the minimum
amount of adjusted total capital under Sec. 1240.10(b);
(B) The Enterprise's tier 1 capital minus the minimum amount of
tier 1 capital under Sec. 1240.10(c); or
(C) The Enterprise's common equity tier 1 capital minus the minimum
amount of common equity tier 1 capital under Sec. 1240.10(d).
(ii) Notwithstanding paragraphs (c)(2)(i)(A) through (C) of this
section, if the Enterprise's adjusted total capital, tier 1 capital, or
common equity tier 1 capital is less than or equal to the Enterprise's
minimum adjusted total capital, tier 1 capital, or common equity tier 1
capital, respectively, the Enterprise's capital conservation buffer is
zero.
(d) Leverage buffer--(1) Composition of the leverage buffer. The
leverage buffer is composed solely of tier 1 capital.
(2) Calculation of the leverage buffer. (i) An Enterprise's
leverage buffer is equal to the Enterprise's tier 1 capital minus the
minimum amount of tier 1 capital under Sec. 1240.10(f), calculated as
of the last day of the previous calendar quarter.
(ii) Notwithstanding paragraph (d)(2)(i) of this section, if the
Enterprise's tier 1 capital is less than or equal to the minimum amount
of tier 1 capital under Sec. 1240.10(d), the Enterprise's leverage
buffer is zero.
(e) Countercyclical capital buffer amount--(1) Composition of the
countercyclical capital buffer amount. The countercyclical capital
buffer amount is composed solely of common equity tier 1 capital.
(2) Amount--(i) Initial countercyclical capital buffer. The initial
countercyclical capital buffer amount is zero.
(ii) Adjustment of the countercyclical capital buffer amount. FHFA
will adjust the countercyclical capital buffer amount in accordance
with applicable law.
(iii) Range of countercyclical capital buffer amount. FHFA will
adjust the countercyclical capital buffer amount between zero percent
and 0.75 percent of adjusted total assets.
(iv) Adjustment determination. FHFA will base its decision to
adjust the countercyclical capital buffer amount under this section on
a range of macroeconomic, financial, and

[[Page 82212]]

supervisory information indicating an increase in systemic risk,
including the ratio of credit to gross domestic product, a variety of
asset prices, other factors indicative of relative credit and liquidity
expansion or contraction, funding spreads, credit condition surveys,
indices based on credit default swap spreads, options implied
volatility, and measures of systemic risk.
(3) Effective date of adjusted countercyclical capital buffer
amount--(i) Increase adjustment. A determination by FHFA under
paragraph (e)(2)(ii) of this section to increase the countercyclical
capital buffer amount will be effective 12 months from the date of
announcement, unless FHFA establishes an earlier effective date and
includes a statement articulating the reasons for the earlier effective
date.
(ii) Decrease adjustment. A determination by FHFA to decrease the
established countercyclical capital buffer amount under paragraph
(e)(2)(ii) of this section will be effective on the day following
announcement of the final determination or the earliest date
permissible under applicable law or regulation, whichever is later.
(iii) Twelve month sunset. The countercyclical capital buffer
amount will return to zero percent 12 months after the effective date
that the adjusted countercyclical capital buffer amount is announced,
unless FHFA announces a decision to maintain the adjusted
countercyclical capital buffer amount or adjust it again before the
expiration of the 12-month period.
(f) Stability capital buffer. An Enterprise must use its stability
capital buffer calculated in accordance with subpart G of this part for
purposes of determining its maximum payout ratio under Table 1 to
paragraph (b)(5) of this section.

Subpart C--Definition of Capital

Sec. 1240.20 Capital components and eligibility criteria for
regulatory capital instruments.

(a) Regulatory capital components. An Enterprise's regulatory
capital components are:
(1) Common equity tier 1 capital;
(2) Additional tier 1 capital;
(3) Tier 2 capital;
(4) Core capital; and
(5) Total capital.
(b) Common equity tier 1 capital. Common equity tier 1 capital is
the sum of the common equity tier 1 capital elements in this paragraph
(b), minus regulatory adjustments and deductions in Sec. 1240.22. The
common equity tier 1 capital elements are:
(1) Any common stock instruments (plus any related surplus) issued
by the Enterprise, net of treasury stock, that meet all the following
criteria:
(i) The instrument is paid-in, issued directly by the Enterprise,
and represents the most subordinated claim in a receivership,
insolvency, liquidation, or similar proceeding of the Enterprise;
(ii) The holder of the instrument is entitled to a claim on the
residual assets of the Enterprise that is proportional with the
holder's share of the Enterprise's issued capital after all senior
claims have been satisfied in a receivership, insolvency, liquidation,
or similar proceeding;
(iii) The instrument has no maturity date, can only be redeemed via
discretionary repurchases with the prior approval of FHFA to the extent
otherwise required by law or regulation, and does not contain any term
or feature that creates an incentive to redeem;
(iv) The Enterprise did not create at issuance of the instrument
through any action or communication an expectation that it will buy
back, cancel, or redeem the instrument, and the instrument does not
include any term or feature that might give rise to such an
expectation;
(v) Any cash dividend payments on the instrument are paid out of
the Enterprise's net income, retained earnings, or surplus related to
common stock, and are not subject to a limit imposed by the contractual
terms governing the instrument.
(vi) The Enterprise has full discretion at all times to refrain
from paying any dividends and making any other distributions on the
instrument without triggering an event of default, a requirement to
make a payment-in-kind, or an imposition of any other restrictions on
the Enterprise;
(vii) Dividend payments and any other distributions on the
instrument may be paid only after all legal and contractual obligations
of the Enterprise have been satisfied, including payments due on more
senior claims;
(viii) The holders of the instrument bear losses as they occur
equally, proportionately, and simultaneously with the holders of all
other common stock instruments before any losses are borne by holders
of claims on the Enterprise with greater priority in a receivership,
insolvency, liquidation, or similar proceeding;
(ix) The paid-in amount is classified as equity under GAAP;
(x) The Enterprise, or an entity that the Enterprise controls, did
not purchase or directly or indirectly fund the purchase of the
instrument;
(xi) The instrument is not secured, not covered by a guarantee of
the Enterprise or of an affiliate of the Enterprise, and is not subject
to any other arrangement that legally or economically enhances the
seniority of the instrument;
(xii) The instrument has been issued in accordance with applicable
laws and regulations; and
(xiii) The instrument is reported on the Enterprise's regulatory
financial statements separately from other capital instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive income (AOCI) as reported under
GAAP.\1\
---------------------------------------------------------------------------

\1\ See Sec. 1240.22 for specific adjustments related to AOCI.
---------------------------------------------------------------------------

(4) Notwithstanding the criteria for common stock instruments
referenced above, an Enterprise's common stock issued and held in trust
for the benefit of its employees as part of an employee stock ownership
plan does not violate any of the criteria in paragraph (b)(1)(iii),
(iv), or (xi) of this section, provided that any repurchase of the
stock is required solely by virtue of ERISA for an instrument of an
Enterprise that is not publicly-traded. In addition, an instrument
issued by an Enterprise to its employee stock ownership plan does not
violate the criterion in paragraph (b)(1)(x) of this section.
(c) Additional tier 1 capital. Additional tier 1 capital is the sum
of additional tier 1 capital elements and any related surplus, minus
the regulatory adjustments and deductions in Sec. 1240.22. Additional
tier 1 capital elements are:
(1) Subject to paragraph (e)(2) of this section, instruments (plus
any related surplus) that meet the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to general creditors and
subordinated debt holders of the Enterprise in a receivership,
insolvency, liquidation, or similar proceeding;
(iii) The instrument is not secured, not covered by a guarantee of
the Enterprise or of an affiliate of the Enterprise, and not subject to
any other arrangement that legally or economically enhances the
seniority of the instrument;
(iv) The instrument has no maturity date and does not contain a
dividend step-up or any other term or feature that creates an incentive
to redeem; and
(v) If callable by its terms, the instrument may be called by the
Enterprise only after a minimum of five years following issuance,
except that the

[[Page 82213]]

terms of the instrument may allow it to be called earlier than five
years upon the occurrence of a regulatory event that precludes the
instrument from being included in additional tier 1 capital, a tax
event, or if the issuing entity is required to register as an
investment company pursuant to the Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.). In addition:
(A) The Enterprise must receive prior approval from FHFA to
exercise a call option on the instrument.
(B) The Enterprise does not create at issuance of the instrument,
through any action or communication, an expectation that the call
option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter,
the Enterprise must either: Replace the instrument to be called with an
equal amount of instruments that meet the criteria under paragraph (b)
of this section or this paragraph (c); \2\ or demonstrate to the
satisfaction of FHFA that following redemption, the Enterprise will
continue to hold capital commensurate with its risk.
---------------------------------------------------------------------------

\2\ Replacement can be concurrent with redemption of existing
additional tier 1 capital instruments.
---------------------------------------------------------------------------

(vi) Redemption or repurchase of the instrument requires prior
approval from FHFA.
(vii) The Enterprise has full discretion at all times to cancel
dividends or other distributions on the instrument without triggering
an event of default, a requirement to make a payment-in-kind, or an
imposition of other restrictions on the Enterprise except in relation
to any distributions to holders of common stock or instruments that are
pari passu with the instrument.
(viii) Any distributions on the instrument are paid out of the
Enterprise's net income, retained earnings, or surplus related to other
additional tier 1 capital instruments.
(ix) The instrument does not have a credit-sensitive feature, such
as a dividend rate that is reset periodically based in whole or in part
on the Enterprise's credit quality, but may have a dividend rate that
is adjusted periodically independent of the Enterprise's credit
quality, in relation to general market interest rates or similar
adjustments.
(x) The paid-in amount is classified as equity under GAAP.
(xi) The Enterprise, or an entity that the Enterprise controls, did
not purchase or directly or indirectly fund the purchase of the
instrument.
(xii) The instrument does not have any features that would limit or
discourage additional issuance of capital by the Enterprise, such as
provisions that require the Enterprise to compensate holders of the
instrument if a new instrument is issued at a lower price during a
specified time frame.
(xiii) If the instrument is not issued directly by the Enterprise
or by a subsidiary of the Enterprise that is an operating entity, the
only asset of the issuing entity is its investment in the capital of
the Enterprise, and proceeds must be immediately available without
limitation to the Enterprise or to the Enterprise's top-tier holding
company in a form which meets or exceeds all of the other criteria for
additional tier 1 capital instruments.\3\
---------------------------------------------------------------------------

\3\ De minimis assets related to the operation of the issuing
entity can be disregarded for purposes of this criterion.
---------------------------------------------------------------------------

(xiv) The governing agreement, offering circular, or prospectus of
an instrument issued after February 16, 2021 must disclose that the
holders of the instrument may be fully subordinated to interests held
by the U.S. government in the event that the Enterprise enters into a
receivership, insolvency, liquidation, or similar proceeding.
(2) Notwithstanding the criteria for additional tier 1 capital
instruments referenced above, an instrument issued by an Enterprise and
held in trust for the benefit of its employees as part of an employee
stock ownership plan does not violate any of the criteria in paragraph
(c)(1)(iii) of this section, provided that any repurchase is required
solely by virtue of ERISA for an instrument of an Enterprise that is
not publicly-traded. In addition, an instrument issued by an Enterprise
to its employee stock ownership plan does not violate the criteria in
paragraphs (c)(1)(v) or (c)(1)(xi) of this section.
(d) Tier 2 capital. Tier 2 capital is the sum of tier 2 capital
elements and any related surplus, minus the regulatory adjustments and
deductions in Sec. 1240.22. Tier 2 capital elements are:
(1) Subject to paragraph (e)(2) of this section, instruments (plus
related surplus) that meet the following criteria:
(i) The instrument is issued and paid-in.
(ii) The instrument is subordinated to general creditors of the
Enterprise.
(iii) The instrument is not secured, not covered by a guarantee of
the Enterprise or of an affiliate of the Enterprise, and not subject to
any other arrangement that legally or economically enhances the
seniority of the instrument in relation to more senior claims.
(iv) The instrument has a minimum original maturity of at least
five years. At the beginning of each of the last five years of the life
of the instrument, the amount that is eligible to be included in tier 2
capital is reduced by 20 percent of the original amount of the
instrument (net of redemptions) and is excluded from regulatory capital
when the remaining maturity is less than one year. In addition, the
instrument must not have any terms or features that require, or create
significant incentives for, the Enterprise to redeem the instrument
prior to maturity.\4\
---------------------------------------------------------------------------

\4\ An instrument that by its terms automatically converts into
a tier 1 capital instrument prior to five years after issuance
complies with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------

(v) The instrument, by its terms, may be called by the Enterprise
only after a minimum of five years following issuance, except that the
terms of the instrument may allow it to be called sooner upon the
occurrence of an event that would preclude the instrument from being
included in tier 2 capital, a tax event. In addition:
(A) The Enterprise must receive the prior approval of FHFA to
exercise a call option on the instrument.
(B) The Enterprise does not create at issuance, through action or
communication, an expectation the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter,
the Enterprise must either: Replace any amount called with an
equivalent amount of an instrument that meets the criteria for
regulatory capital under this section; \5\ or demonstrate to the
satisfaction of FHFA that following redemption, the Enterprise would
continue to hold an amount of capital that is commensurate with its
risk.
---------------------------------------------------------------------------

\5\ An Enterprise may replace tier 2 capital instruments
concurrent with the redemption of existing tier 2 capital
instruments.
---------------------------------------------------------------------------

(vi) The holder of the instrument must have no contractual right to
accelerate payment of principal or interest on the instrument, except
in the event of a receivership, insolvency, liquidation, or similar
proceeding of the Enterprise.
(vii) The instrument has no credit-sensitive feature, such as a
dividend or interest rate that is reset periodically based in whole or
in part on the Enterprise's credit standing, but may have a dividend
rate that is adjusted periodically independent of the Enterprise's
credit standing, in relation to general market interest rates or
similar adjustments.
(viii) The Enterprise, or an entity that the Enterprise controls,
has not purchased and has not directly or indirectly funded the
purchase of the instrument.

[[Page 82214]]

(ix) If the instrument is not issued directly by the Enterprise or
by a subsidiary of the Enterprise that is an operating entity, the only
asset of the issuing entity is its investment in the capital of the
Enterprise, and proceeds must be immediately available without
limitation to the Enterprise or the Enterprise's top-tier holding
company in a form that meets or exceeds all the other criteria for tier
2 capital instruments under this section.\6\
---------------------------------------------------------------------------

\6\ An Enterprise may disregard de minimis assets related to the
operation of the issuing entity for purposes of this criterion.
---------------------------------------------------------------------------

(x) Redemption of the instrument prior to maturity or repurchase
requires the prior approval of FHFA.
(xi) The governing agreement, offering circular, or prospectus of
an instrument issued after February 16, 2021 must disclose that the
holders of the instrument may be fully subordinated to interests held
by the U.S. government in the event that the Enterprise enters into a
receivership, insolvency, liquidation, or similar proceeding.
(2) Any eligible credit reserves that exceed expected credit losses
to the extent that the excess reserve amount does not exceed 0.6
percent of credit risk-weighted assets.
(e) FHFA approval of a capital element. (1) An Enterprise must
receive FHFA prior approval to include a capital element (as listed in
this section) in its common equity tier 1 capital, additional tier 1
capital, or tier 2 capital unless the element:
(i) Was included in an Enterprise's tier 1 capital or tier 2
capital prior to June 30, 2020 and the underlying instrument may
continue to be included under the criteria set forth in this section;
or
(ii) Is equivalent, in terms of capital quality and ability to
absorb losses with respect to all material terms, to a regulatory
capital element FHFA determined may be included in regulatory capital
pursuant to paragraph (e)(3) of this section.
(2) An Enterprise may not include an instrument in its additional
tier 1 capital or a tier 2 capital unless FHFA has determined that the
Enterprise has made appropriate provision, including in any resolution
plan of the Enterprise, to ensure that the instrument would not pose a
material impediment to the ability of an Enterprise to issue common
stock instruments following the appointment of FHFA as conservator or
receiver under the Safety and Soundness Act.
(3) After determining that a regulatory capital element may be
included in an Enterprise's common equity tier 1 capital, additional
tier 1 capital, or tier 2 capital, FHFA will make its decision publicly
available, including a brief description of the material terms of the
regulatory capital element and the rationale for the determination.
(f) FHFA prior approval. An Enterprise may not repurchase or redeem
any common equity tier 1 capital, additional tier 1, or tier 2 capital
instrument without the prior approval of FHFA to the extent such prior
approval is required by paragraph (b), (c), or (d) of this section, as
applicable.

Sec. 1240.21 [Reserved]

Sec. 1240.22 Regulatory capital adjustments and deductions.

(a) Regulatory capital deductions from common equity tier 1
capital. An Enterprise must deduct from the sum of its common equity
tier 1 capital elements the items set forth in this paragraph (a):
(1) Goodwill, net of associated deferred tax liabilities (DTLs) in
accordance with paragraph (e) of this section;
(2) Intangible assets, other than MSAs, net of associated DTLs in
accordance with paragraph (e) of this section;
(3) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances
and net of DTLs in accordance with paragraph (e) of this section;
(4) Any gain-on-sale in connection with a securitization exposure;
(5) Any defined benefit pension fund net asset, net of any
associated DTL in accordance with paragraph (e) of this section, held
by the Enterprise. With the prior approval of FHFA, this deduction is
not required for any defined benefit pension fund net asset to the
extent the Enterprise has unrestricted and unfettered access to the
assets in that fund. An Enterprise must risk weight any portion of the
defined benefit pension fund asset that is not deducted under this
paragraph (a) as if the Enterprise directly holds a proportional
ownership share of each exposure in the defined benefit pension fund.
(6) The amount of expected credit loss that exceeds its eligible
credit reserves.
(b) Regulatory adjustments to common equity tier 1 capital. (1) An
Enterprise must adjust the sum of common equity tier 1 capital elements
pursuant to the requirements set forth in this paragraph (b). Such
adjustments to common equity tier 1 capital must be made net of the
associated deferred tax effects.
(i) An Enterprise must deduct any accumulated net gains and add any
accumulated net losses on cash flow hedges included in AOCI that relate
to the hedging of items that are not recognized at fair value on the
balance sheet.
(ii) An Enterprise must deduct any net gain and add any net loss
related to changes in the fair value of liabilities that are due to
changes in the Enterprise's own credit risk. An Enterprise must deduct
the difference between its credit spread premium and the risk-free rate
for derivatives that are liabilities as part of this adjustment.
(2) [Reserved]
(c) Deductions from regulatory capital related to investments in
capital instruments.\1\ An Enterprise must deduct an investment in the
Enterprise's own capital instruments as follows:
---------------------------------------------------------------------------

\1\ The Enterprise must calculate amounts deducted under
paragraphs (c) through (f) of this section after it calculates the
amount of ALLL or AACL, as applicable, includable in tier 2 capital
under Sec. 1240.20(d).
---------------------------------------------------------------------------

(1) An Enterprise must deduct an investment in the Enterprise's own
common stock instruments from its common equity tier 1 capital elements
to the extent such instruments are not excluded from regulatory capital
under Sec. 1240.20(b)(1);
(2) An Enterprise must deduct an investment in the Enterprise's own
additional tier 1 capital instruments from its additional tier 1
capital elements; and
(3) An Enterprise must deduct an investment in the Enterprise's own
tier 2 capital instruments from its tier 2 capital elements.
(d) Items subject to the 10 and 15 percent common equity tier 1
capital deduction thresholds. (1) An Enterprise must deduct from common
equity tier 1 capital elements the amount of each of the items set
forth in this paragraph (d) that, individually, exceeds 10 percent of
the sum of the Enterprise's common equity tier 1 capital elements, less
adjustments to and deductions from common equity tier 1 capital
required under paragraphs (a) through (c) of this section (the 10
percent common equity tier 1 capital deduction threshold).
(i) DTAs arising from temporary differences that the Enterprise
could not realize through net operating loss carrybacks, net of any
related valuation allowances and net of DTLs, in accordance with
paragraph (e) of this section. An Enterprise is not required to deduct
from the sum of its common equity tier 1 capital elements DTAs (net of
any related valuation allowances and net of DTLs, in accordance with
paragraph (e) of this section) arising from timing differences that the
Enterprise could realize through net

[[Page 82215]]

operating loss carrybacks. The Enterprise must risk weight these assets
at 100 percent.
(ii) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(2) An Enterprise must deduct from common equity tier 1 capital
elements the items listed in paragraph (d)(1) of this section that are
not deducted as a result of the application of the 10 percent common
equity tier 1 capital deduction threshold, and that, in aggregate,
exceed 17.65 percent of the sum of the Enterprise's common equity tier
1 capital elements, minus adjustments to and deductions from common
equity tier 1 capital required under paragraphs (a) through (c) of this
section, minus the items listed in paragraph (d)(1) of this section
(the 15 percent common equity tier 1 capital deduction threshold).\2\
---------------------------------------------------------------------------

\2\ The amount of the items in paragraph (d) of this section
that is not deducted from common equity tier 1 capital pursuant to
this section must be included in the risk-weighted assets of the
Enterprise and assigned a 250 percent risk weight.
---------------------------------------------------------------------------

(3) For purposes of calculating the amount of DTAs subject to the
10 and 15 percent common equity tier 1 capital deduction thresholds, an
Enterprise may exclude DTAs and DTLs relating to adjustments made to
common equity tier 1 capital under paragraph (b) of this section. An
Enterprise that elects to exclude DTAs relating to adjustments under
paragraph (b) of this section also must exclude DTLs and must do so
consistently in all future calculations. An Enterprise may change its
exclusion preference only after obtaining the prior approval of FHFA.
(e) Netting of DTLs against assets subject to deduction. (1) Except
as described in paragraph (e)(3) of this section, netting of DTLs
against assets that are subject to deduction under this section is
permitted, but not required, if the following conditions are met:
(i) The DTL is associated with the asset; and
(ii) The DTL would be extinguished if the associated asset becomes
impaired or is derecognized under GAAP.
(2) A DTL may only be netted against a single asset.
(3) For purposes of calculating the amount of DTAs subject to the
threshold deduction in paragraph (d) of this section, the amount of
DTAs that arise from net operating loss and tax credit carryforwards,
net of any related valuation allowances, and of DTAs arising from
temporary differences that the Enterprise could not realize through net
operating loss carrybacks, net of any related valuation allowances, may
be offset by DTLs (that have not been netted against assets subject to
deduction pursuant to paragraph (e)(1) of this section) subject to the
conditions set forth in this paragraph (e).
(i) Only the DTAs and DTLs that relate to taxes levied by the same
taxation authority and that are eligible for offsetting by that
authority may be offset for purposes of this deduction.
(ii) The amount of DTLs that the Enterprise nets against DTAs that
arise from net operating loss and tax credit carryforwards, net of any
related valuation allowances, and against DTAs arising from temporary
differences that the Enterprise could not realize through net operating
loss carrybacks, net of any related valuation allowances, must be
allocated in proportion to the amount of DTAs that arise from net
operating loss and tax credit carryforwards (net of any related
valuation allowances, but before any offsetting of DTLs) and of DTAs
arising from temporary differences that the Enterprise could not
realize through net operating loss carrybacks (net of any related
valuation allowances, but before any offsetting of DTLs), respectively.
(4) An Enterprise must net DTLs against assets subject to deduction
under this section in a consistent manner from reporting period to
reporting period. An Enterprise may change its preference regarding the
manner in which it nets DTLs against specific assets subject to
deduction under this section only after obtaining the prior approval of
FHFA.
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if an
Enterprise does not have a sufficient amount of a specific component of
capital to effect the required deduction after completing the
deductions required under paragraph (d) of this section, the Enterprise
must deduct the shortfall from the next higher (that is, more
subordinated) component of regulatory capital.
(g) Treatment of assets that are deducted. An Enterprise must
exclude from standardized total risk-weighted assets and advanced
approaches total risk-weighted assets any item deducted from regulatory
capital under paragraphs (a), (c), and (d) of this section.

Subpart D--Risk-Weighted Assets--Standardized Approach

Sec. 1240.30 Applicability.

(a) This subpart sets forth methodologies for determining risk-
weighted assets for purposes of the generally applicable risk-based
capital requirements for the Enterprises.
(b) This subpart is also applicable to covered positions, as
defined in subpart F of this part.

Risk-Weighted Assets for General Credit Risk

Sec. 1240.31 Mechanics for calculating risk-weighted assets for
general credit risk.

(a) General risk-weighting requirements. An Enterprise must apply
risk weights to its exposures as follows:
(1) An Enterprise must determine the exposure amount of each
mortgage exposure, each other on-balance sheet exposure, each OTC
derivative contract, and each off-balance sheet commitment, trade and
transaction-related contingency, guarantee, repo-style transaction,
forward agreement, or other similar transaction that is not:
(i) An unsettled transaction subject to Sec. 1240.40;
(ii) A cleared transaction subject to Sec. 1240.37;
(iii) A default fund contribution subject to Sec. 1240.37;
(iv) A retained CRT exposure, acquired CRT exposure, or other
securitization exposure subject to Sec. Sec. 1240.41 through 1240.46;
or
(v) An equity exposure (other than an equity OTC derivative
contract) subject to Sec. Sec. 1240.51 and 1240.52.
(2) An Enterprise must multiply each exposure amount by the risk
weight appropriate to the exposure based on the exposure type or
counterparty, eligible guarantor, or financial collateral to determine
the risk-weighted asset amount for each exposure.
(b) Total risk-weighted assets for general credit risk. Total risk-
weighted assets for general credit risk equals the sum of the risk-
weighted asset amounts calculated under this section.

Sec. 1240.32 General risk weights.

(a) Exposures to the U.S. government. (1) Notwithstanding any other
requirement in this subpart, an Enterprise must assign a zero percent
risk weight to:
(i) An exposure to the U.S. government, its central bank, or a U.S.
government agency; and
(ii) The portion of an exposure that is directly and
unconditionally guaranteed by the U.S. government, its central bank, or
a U.S. government agency. This includes a deposit or other exposure, or
the portion of a deposit or other exposure, that is insured or
otherwise unconditionally guaranteed by the FDIC or NCUA.
(2) An Enterprise must assign a 20 percent risk weight to the
portion of an exposure that is conditionally guaranteed by the U.S.
government, its central bank, or a U.S. government

[[Page 82216]]

agency. This includes an exposure, or the portion of an exposure, that
is conditionally guaranteed by the FDIC or NCUA.
(b) Certain supranational entities and multilateral development
banks (MDBs). An Enterprise must assign a zero percent risk weight to
an exposure to the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
the European Stability Mechanism, the European Financial Stability
Facility, or an MDB.
(c) Exposures to GSEs. (1) An Enterprise must assign a zero percent
risk weight to any MBS guaranteed by the Enterprise (other than any
retained CRT exposure).
(2) An Enterprise must assign a 20 percent risk weight to an
exposure to another GSE, including an MBS guaranteed by the other
Enterprise.
(d) Exposures to depository institutions and credit unions. (1) An
Enterprise must assign a 20 percent risk weight to an exposure to a
depository institution or credit union that is organized under the laws
of the United States or any state thereof, except as otherwise provided
under paragraph (d)(2) of this section.
(2) An Enterprise must assign a 100 percent risk weight to an
exposure to a financial institution if the exposure may be included in
that financial institution's capital unless the exposure is:
(i) An equity exposure; or
(ii) Deducted from regulatory capital under Sec. 1240.22.
(e) Exposures to U.S. public sector entities (PSEs). (1) An
Enterprise must assign a 20 percent risk weight to a general obligation
exposure to a PSE that is organized under the laws of the United States
or any state or political subdivision thereof.
(2) An Enterprise must assign a 50 percent risk weight to a revenue
obligation exposure to a PSE that is organized under the laws of the
United States or any state or political subdivision thereof.
(f) Corporate exposures. (1) An Enterprise must assign a 100
percent risk weight to all its corporate exposures, except as provided
in paragraphs (f)(2) and (3) of this section.
(2) An Enterprise must assign a 2 percent risk weight to an
exposure to a QCCP arising from the Enterprise posting cash collateral
to the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 1240.37(b)(3)(i)(A) and a 4 percent risk weight
to an exposure to a QCCP arising from the Enterprise posting cash
collateral to the QCCP in connection with a cleared transaction that
meets the requirements of Sec. 1240.37(b)(3)(i)(B).
(3) An Enterprise must assign a 2 percent risk weight to an
exposure to a QCCP arising from the Enterprise posting cash collateral
to the QCCP in connection with a cleared transaction that meets the
requirements of Sec. 1240.37(c)(3)(i).
(g) Residential mortgage exposures--(1) Single-family mortgage
exposures. An Enterprise must assign a risk weight to a single-family
mortgage exposure in accordance with Sec. 1240.33.
(2) Multifamily mortgage exposures. An Enterprise must assign a
risk weight to a multifamily mortgage exposure in accordance with Sec.
1240.34.
(h) Past due exposures. Except for an exposure to a sovereign
entity or a mortgage exposure, if an exposure is 90 days or more past
due or on nonaccrual:
(1) An Enterprise must assign a 150 percent risk weight to the
portion of the exposure that is not guaranteed or that is unsecured;
(2) An Enterprise may assign a risk weight to the guaranteed
portion of a past due exposure based on the risk weight that applies
under Sec. 1240.38 if the guarantee or credit derivative meets the
requirements of that section; and
(3) An Enterprise may assign a risk weight to the collateralized
portion of a past due exposure based on the risk weight that applies
under Sec. 1240.39 if the collateral meets the requirements of that
section.
(i) Other assets. (1) An Enterprise must assign a zero percent risk
weight to cash owned and held in the offices of an insured depository
institution or in transit.
(2) An Enterprise must assign a 20 percent risk weight to cash
items in the process of collection.
(3) An Enterprise must assign a 100 percent risk weight to DTAs
arising from temporary differences that the Enterprise could realize
through net operating loss carrybacks.
(4) An Enterprise must assign a 250 percent risk weight to the
portion of each of the following items to the extent it is not deducted
from common equity tier 1 capital pursuant to Sec. 1240.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the Enterprise
could not realize through net operating loss carrybacks.
(5) An Enterprise must assign a 100 percent risk weight to all
assets not specifically assigned a different risk weight under this
subpart and that are not deducted from tier 1 or tier 2 capital
pursuant to Sec. 1240.22.
(j) Insurance assets. (1) An Enterprise must risk-weight the
individual assets held in a separate account that does not qualify as a
non-guaranteed separate account as if the individual assets were held
directly by the Enterprise.
(2) An Enterprise must assign a zero percent risk weight to an
asset that is held in a non-guaranteed separate account.

Sec. 1240.33 Single-family mortgage exposures.

(a) Definitions. Subject to any additional instructions set forth
on table 1 to this paragraph (a), for purposes of this section:
Adjusted MTMLTV means, with respect to a single-family mortgage
exposure and as of a particular time, the amount equal to:
(i) The MTMLTV of the single-family mortgage exposure (or, if the
loan age of the single-family mortgage exposure is less than 6, the
OLTV of the single-family mortgage exposure); divided by
(ii) The amount equal to 1 plus the single-family countercyclical
adjustment as of that time.
Approved insurer means an insurance company that is currently
approved by an Enterprise to guarantee or insure single-family mortgage
exposures acquired by the Enterprise.
Cancelable mortgage insurance means a mortgage insurance policy
that, pursuant to its terms, may or will be terminated before the
maturity date of the insured single-family mortgage exposure, including
as required or permitted by the Homeowners Protection Act of 1998 (12
U.S.C. 4901).
Charter-level coverage means mortgage insurance that satisfies the
minimum requirements of the authorizing statute of an Enterprise.
Cohort burnout means the number of refinance opportunities since
the loan age of the single-family mortgage exposure was 6, categorized
into ranges pursuant to the instructions set forth on Table 1 to this
paragraph (a).
Coverage percent means the percent of the sum of the unpaid
principal balance, any lost interest, and any foreclosure costs that is
used to determine the benefit or other coverage under a mortgage
insurance policy.
COVID-19-related forbearance means a forbearance granted pursuant
to section 4022 of the Coronavirus Aid, Relief, and Economic Security
Act or under a program established by FHFA to provide forbearance to
borrowers adversely impacted by COVID-19.
Days past due means the number of days a single-family mortgage
exposure is past due.
Debt-to-income ratio (DTI) means the ratio of a borrower's total
monthly obligations (including housing expense)

[[Page 82217]]

divided by the borrower's monthly income, as calculated under the Guide
of the Enterprise.
Deflated HPI means, as of a particular time, the amount equal to:
(i) The national, not-seasonally adjusted Expanded-Data FHFA House
Price Index[supreg] as of the end of the preceding calendar quarter;
divided by
(ii) The average of the three monthly observations of the preceding
calendar quarter from the non-seasonally adjusted Consumer Price Index
for All Urban Consumers, U.S. City Average, All Items Less Shelter.
Guide means, as applicable, the Fannie Mae Single Family Selling
Guide, the Fannie Mae Single Family Servicing Guide and the Freddie Mac
Single-family Seller/Servicers Guide.
Guide-level coverage means mortgage insurance that satisfies the
requirements of the Guide of the Enterprise with respect to mortgage
insurance that has a coverage percent that exceeds charter-level
coverage.
Interest-only (IO) means a single-family mortgage exposure that
requires only payment of interest without any principal amortization
during all or part of the loan term.
Loan age means the number of scheduled payment dates since the
origination of a single-family mortgage exposure.
Loan-level credit enhancement means:
(i) Mortgage insurance; or
(ii) A participation agreement.
Loan documentation means the completeness of the documentation used
to underwrite a single-family mortgage exposure, as determined under
the Guide of the Enterprise.
Loan purpose means the purpose of a single-family mortgage exposure
at origination.
Long-term HPI trend means, as of a particular time, the amount
equal to: 0.66112295.

Where t = the number of quarters from the first quarter of 1975 to and
including the end of the preceding calendar quarter and where the first
quarter of 1975 is counted as one.\1\
---------------------------------------------------------------------------

\1\ FHFA will adjust the formula for the long-term HPI trend in
accordance with applicable law if two conditions are satisfied as of
the end of a calendar quarter that follows the last adjustment to
the long-term HPI trend: (i) The average of the long-term trend
departures over four consecutive calendar quarters has been less
than -5.0 percent; and (ii) after the end of the calendar quarter in
which the first condition is satisfied, the deflated HPI has
increased to an extent that it again exceeds the long-term HPI
trend. The point in time of the new trough used by FHFA to adjust
the formula for the long-term HPI trend will be identified by the
calendar quarter with the smallest deflated HPI in the period that
includes the calendar quarter in which the first condition is
satisfied and ends at the end of the calendar quarter in which the
second condition is first satisfied.

Long-term trend departure means, as of a particular time, the
percent amount equal to--
(i) The deflated HPI as of that time divided by the long-term HPI
trend as of that time; minus
(ii) 1.0.
MI cancelation feature means an indicator for whether mortgage
insurance is cancelable mortgage insurance or non-cancelable mortgage
insurance, assigned pursuant to the instructions set forth on Table 1
to this paragraph (a).
Modification means a permanent amendment or other change to the
interest rate, maturity date, unpaid principal balance, or other
contractual term of a single-family mortgage exposure or a deferral of
a required payment until the maturity or earlier payoff of the single-
family mortgage exposure. A modification does not include a repayment
plan with respect to any amounts that are past due or a COVID-19-
related forbearance.
Modified re-performing loan (modified RPL) means a single-family
mortgage exposure (other than an NPL) that is or has been subject to a
modification, excluding any single-family mortgage exposure that was
not 60 or more days past due at any time in a continuous 60-calendar
month period that begins at any time after the effective date of the
last modification.
Months since last modification means the number of scheduled
payment dates since the effective date of the last modification of a
single-family mortgage exposure.
Mortgage concentration risk means the extent to which a mortgage
insurer or other counterparty is exposed to mortgage credit risk
relative to other risks.
MTMLTV means, with respect to a single-family mortgage exposure,
the amount equal to:
(i) The unpaid principal balance of the single-family mortgage
exposure; divided by
(ii) The amount equal to:
(A) The unpaid principal balance of the single-family mortgage
exposure at origination; divided by
(B) The OLTV of the single-family mortgage exposure; multiplied by
(C) The most recently available FHFA Purchase-only State-level
House Price Index of the State in which the property securing the
single-family mortgage exposure is located; divided by
(D) The FHFA Purchase-only State-level House Price Index, as of
date of the origination of the single-family mortgage exposure, in
which the property securing the single-family mortgage exposure is
located.
Non-cancelable mortgage insurance means a mortgage insurance policy
that, pursuant to its terms, may not be terminated before the maturity
date of the insured single-family mortgage exposure.
Non-modified re-performing loan (non-modified RPL) means a single-
family mortgage exposure (other than a modified RPL or an NPL) that was
previously an NPL at any time in the prior 48 calendar months.
Non-performing loan (NPL) means a single-family mortgage exposure
that is 60 days or more past due.
Occupancy type means the borrowers' intended use of the property
securing a single-family mortgage exposure.
Original credit score means the borrower's credit score as of the
origination date of a single-family mortgage exposure.
OLTV means, with respect to a single-family mortgage exposure, the
amount equal to:
(i) The unpaid principal balance of the single-family mortgage
exposure at origination; divided by
(ii) The lesser of:
(A) The appraised value of the property securing the single-family
mortgage exposure; and
(B) The sale price of the property securing the single-family
mortgage exposure.
Origination channel means the type of institution that originated a
single-family mortgage exposure, assigned pursuant to the instructions
set forth on table 1 to this paragraph (a).
Participation agreement means, with respect to a single-family
mortgage exposure, any agreement between an Enterprise and the seller
of the single-family mortgage exposure pursuant to which the seller
retains a participation of not less than 10 percent in the single-
family mortgage exposure.
Past due means, with respect to a single-family mortgage exposure,
that any amount required to be paid by the borrower under the terms of
the single-family mortgage exposure has not been paid.
Payment change from modification means the amount, expressed as a
percent, equal to:
(i) The amount equal to:
(A) The monthly payment of a single-family mortgage exposure after
a modification; divided by
(B) The monthly payment of the single-family mortgage exposure
before the modification; minus
(ii) 1.0.
Performing loan means any single-family mortgage exposure that is
not an

[[Page 82218]]

NPL, a modified RPL, or a non-modified RPL.
Previous maximum days past due means the maximum number of days a
modified RPL or non-modified RPL was past due in the prior 36 calendar
months.
Product type means an indicator reflecting the contractual terms of
a single-family mortgage exposure as of the origination date, assigned
pursuant to the instructions set forth on Table 1 to this paragraph
(a).
Property type means the physical structure of the property securing
a single-family mortgage exposure.
Refinance opportunity means, with respect to a single-family
mortgage exposure, any calendar month in which the Primary Mortgage
Market Survey (PMMS) rate for the month and year of the origination of
the single-family mortgage exposure exceeds the PMMS rate for that
calendar month by more than 50 basis points.
Refreshed credit score means the borrower's most recently available
credit score.
Single-family countercyclical adjustment means, as of a particular
time, zero percent except:
(i) If the long-term trend departure as of that time is greater
than 5 percent, the percent amount equal to:
(A) 1.05 multiplied by the long-term HPI trend, as of that time,
divided by the deflated HPI, as of that time, minus
(B) 1.0.
(ii) If the long-term trend departure as of that time is less than
-5 percent, the percent amount equal to:
(A) 0.95 multiplied by the long-term HPI trend, as of that time,
divided by the deflated HPI, as of that time, minus
(B) 1.0.
Streamlined refi means a single-family mortgage exposure that was
refinanced through a streamlined refinance program of an Enterprise,
including the Home Affordable Refinance Program, Relief Refi, and Refi-
Plus.
Subordination means, with respect to a single-family mortgage
exposure, the amount equal to the original unpaid principal balance of
any second lien single-family mortgage exposure divided by the lesser
of the appraised value or sale price of the property that secures the
single-family mortgage exposure.

Table 1 to Paragraph (a): Permissible Values and Additional Instructions
------------------------------------------------------------------------
Additional
Defined term Permissible values instructions
------------------------------------------------------------------------
Cohort burnout.............. ``No burnout,'' if High if unable to
the single-family determine.
mortgage exposure
has not had a
refinance
opportunity since
the loan age of the
single-family
mortgage exposure
was 6.
``Low,'' if the
single-family
mortgage exposure
has had 12 or fewer
refinance
opportunities since
the loan age of the
single-family
mortgage exposure
was 6.
``Medium,'' if the
single-family
mortgage exposure
has had between 13
and 24 refinance
opportunities since
the loan age of the
single-family
mortgage exposure
was 6.
``High,'' if the
single-family
mortgage exposure
has had more than
24 refinance
opportunities since
the loan age of the
single-family
mortgage exposure
was 6.
Coverage percent............ 0 percent <= 0 percent if outside
coverage percent <= of permissible
100 percent. range or unable to
determine.
Days past due............... Non-negative integer 210 if negative or
unable to
determine.
Debt-to-income (DTI) ratio.. 0 percent < DTI < 42 percent if
100 percent. outside of
permissible range
or unable to
determine.
Interest-only (IO).......... Yes, no............. Yes if unable to
determine.
Loan age.................... 0 <= loan age <= 500 500 if outside of
permissible range
or unable to
determine.
Loan documentation.......... None, low, full..... None if unable to
determine.
Loan purpose................ Purchase, cashout Cashout refinance if
refinance, rate/ unable to
term refinance. determine.
MTMLTV...................... 0 percent < MTMLTV If the property
<= 300 percent. securing the single-
family mortgage
exposure is located
in Puerto Rico or
the U.S. Virgin
Islands, use the
FHFA House Price
Index of the United
States.
If the property
securing the single-
family mortgage
exposure is located
in Guam, use the
FHFA Purchase-only
State-level House
Price Index of
Hawaii.
If the single-family
mortgage exposure
was originated
before 1991, use
the Enterprise's
proprietary housing
price index.
Use geometric
interpolation to
convert quarterly
housing price index
data to monthly
data.
300 percent if
outside of
permissible range
or unable to
determine.
Mortgage concentration risk. High, not high...... High if unable to
determine.
MI cancellation feature..... Cancelable mortgage Cancelable mortgage
insurance, non- insurance, if
cancelable mortgage unable to
insurance. determine.
Occupancy type.............. Investment, owner- Investment if unable
occupied, second to determine.
home.
OLTV........................ 0 percent < OLTV <= 300 percent if
300 percent. outside of
permissible range
or unable to
determine.
Original credit score....... 300 <= original If there are credit
credit score <= 850. scores from
multiple credit
repositories for a
borrower, use the
following logic to
determine a single
original credit
score:
If there
are credit
scores from two
repositories,
take the lower
credit score.

[[Page 82219]]

If there
are credit
scores from
three
repositories,
use the middle
credit score.
If there
are credit
scores from
three
repositories and
two of the
credit scores
are identical,
use the
identical credit
score.
If there are
multiple borrowers,
use the following
logic to determine
a single original
credit score:
Using
the logic above,
determine a
single credit
score for each
borrower.
Select
the lowest
single credit
score across all
borrowers.
600 if outside of
permissible range
or unable to
determine.
Origination channel......... Retail, third-party TPO includes broker
origination (TPO). and correspondent
channels.
TPO if unable to
determine.
Payment change from -80 percent < If the single-family
modification. payment change from mortgage exposure
modification < 50 initially had an
percent. adjustable or step-
rate feature, the
monthly payment
after a permanent
modification is
calculated using
the initial
modified rate.
0 percent if unable
to determine.
-79 percent if less
than or equal to -
80 percent.
49 percent if
greater than or
equal to 50
percent.
Previous maximum days past Non-negative integer 181 months if
due. negative or unable
to determine.
Product type................ ``FRM30'' means a Product types other
fixed-rate single- than FRM30, FRM20,
family mortgage FRM15 or ARM 1/1
exposure with an should be assigned
original to FRM30.
amortization term Use the post-
greater than 309 modification
months and less product type for
than or equal to modified mortgage
429 months. exposures.
ARM 1/1 if unable to
determine.
``FRM20'' means a
fixed-rate single-
family mortgage
exposure with an
original
amortization term
greater than 189
months and less
than or equal to
309 months.
``FRM15'' means a
fixed-rate single-
family mortgage
exposure with an
original
amortization term
less than or equal
to 189 months.
``ARM 1/1'' is an
adjustable-rate
single-family
mortgage exposure
that has a mortgage
rate and required
payment that adjust
annually.
Property type............... 1-unit, 2-4 units, Use condominium for
condominium, cooperatives.
manufactured home. 2-4 units if unable
to determine.
Refreshed credit score...... 300 <= refreshed If there are credit
credit score <= 850. scores from
multiple credit
repositories for a
borrower, use the
following logic to
determine a single
refreshed credit
score:
If there
are credit
scores from two
repositories,
take the lower
credit score.
If there
are credit
scores from
three
repositories,
use the middle
credit score.
If there
are credit
scores from
three
repositories and
two of the
credit scores
are identical,
use the
identical credit
score.
If there are
multiple borrowers,
use the following
logic to determine
a single Original
Credit Score:
Using
the logic above,
determine a
single credit
score for each
borrower.
Select
the lowest
single credit
score across all
borrowers.
600 if outside of
permissible range
or unable to
determine.
Streamlined refi............ Yes, no............. No if unable to
determine.
Subordination............... 0 percent <= 80 percent if
Subordination <= 80 outside permissible
percent. range.
------------------------------------------------------------------------

(b) Risk weight--(1) In general. Subject to paragraph (b)(2) of
this section, an Enterprise must assign a risk weight to a single-
family mortgage exposure equal to:
(i) The base risk weight for the single-family mortgage exposure as
determined under paragraph (c) of this section; multiplied by
(ii) The combined risk multiplier for the single-family mortgage
exposure as determined under paragraph (d) of this section; multiplied
by
(iii) The adjusted credit enhancement multiplier for the single-
family mortgage exposure as determined under paragraph (e) of this
section.
(2) Minimum risk weight. Notwithstanding the risk weight determined
under paragraph (b)(1) of this section, the risk weight assigned to a
single-family mortgage exposure may not be less than 20 percent.

[[Page 82220]]

(c) Base risk weight--(1) Performing loan. The base risk weight for
a performing loan is set forth on Table 2 to this paragraph (c)(1). For
purposes of this paragraph (c)(1), credit score means, with respect to
a single-family mortgage exposure:
(i) The original credit score of the single-family mortgage
exposure, if the loan age of the single-family mortgage exposure is
less than 6; or
(ii) The refreshed credit score of the single-family mortgage
exposure.
BILLING CODE 8070-01-P
[GRAPHIC] [TIFF OMITTED] TR17DE20.012

(2) Non-modified RPL. The base risk weight for a non-modified RPL
is set forth on Table 3 to this paragraph (c)(2). For purposes of this
paragraph (c)(2), re-performing duration means, with respect to a non-
modified RPL, the number of scheduled payment dates since the non-
modified RPL was last an NPL.
[GRAPHIC] [TIFF OMITTED] TR17DE20.013

(3) Modified RPL. The base risk weight for a modified RPL is set
forth on Table 4 to paragraph (c)(3)(ii) of this section. For purposes
of this paragraph (c)(3), re-performing duration means, with respect to
a modified RPL, the lesser of:
(i) The months since last modification of the modified RPL; and
(ii) The number of scheduled payment dates since the modified RPL
was last an NPL.

[[Page 82221]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.014

(4) NPL. The base risk weight for an NPL is set forth on Table 5 to
this paragraph (c)(4).
[GRAPHIC] [TIFF OMITTED] TR17DE20.015

(d) Combined risk multiplier--(1) In general. Subject to paragraph
(d)(2) of this section, the combined risk multiplier for a single-
family mortgage exposure is equal to the product of each of the
applicable risk multipliers set forth under the applicable single-
family segment on Table 6 to paragraph (d)(2) of this section.
(2) Maximum combined risk multiplier. Notwithstanding the combined
risk multiplier determined under paragraph (d)(1) of this section, the
combined risk multiplier for a single-family mortgage exposure may not
exceed 3.0.

Table 6 to Paragraph (d)(2): Risk Multipliers
----------------------------------------------------------------------------------------------------------------
Single-family segment
---------------------------------------------------------------
Risk factor Value or range Performing Non-modified
loan RPL Modified RPL NPL
----------------------------------------------------------------------------------------------------------------
Loan Purpose.................. Purchase........ 1.0 1.0 1.0 ..............
Cashout 1.4 1.4 1.4 ..............
refinance.
Rate/term 1.3 1.2 1.3 ..............
refinance.
Occupancy Type................ Owner-occupied 1.0 1.0 1.0 1.0
or second home.
Investment...... 1.2 1.5 1.3 1.2
Property Type................. 1-unit.......... 1.0 1.0 1.0 1.0
2-4 unit........ 1.4 1.4 1.3 1.1
Condominium..... 1.1 1.0 1.0 1.0
Manufactured 1.3 1.8 1.6 1.2
home.
Origination Channel........... Retail.......... 1.0 1.0 1.0 1.0
TPO............. 1.1 1.1 1.1 1.0
DTI........................... DTI <= 25%...... 0.8 0.9 0.9 ..............
25% < DTI <= 40% 1.0 1.0 1.0 ..............
DTI >40%........ 1.2 1.2 1.1 ..............
Product Type.................. FRM30........... 1.0 1.0 1.0 1.0
ARM1/1.......... 1.7 1.1 1.0 1.1
FRM15........... 0.3 0.3 0.5 0.5
FRM20........... 0.6 0.6 0.5 0.8
Subordination................. No subordination 1.0 1.0 1.0 ..............
30% < OLTV <= 1.1 0.8 1.0 ..............
60% and 0%
5%.
OLTV >60% and 0% 1.1 1.2 1.1 ..............
60% and 1.4 1.5 1.3 ..............
subordination
>5%.
Loan Age...................... Loan age <= 24 1.0 .............. .............. ..............
months.

[[Page 82222]]

24 months 60 0.75 .............. .............. ..............
months.
Cohort Burnout................ No burnout...... 1.0 .............. .............. ..............
Low............. 1.2 .............. .............. ..............
Medium.......... 1.3 .............. .............. ..............
High............ 1.4 .............. .............. ..............
Interest-only................. No IO........... 1.0 1.0 1.0 ..............
Yes IO.......... 1.6 1.4 1.1 ..............
Loan Documentation............ Full............ 1.0 1.0 1.0 ..............
None or low..... 1.3 1.3 1.2 ..............
Streamlined Refi.............. No.............. 1.0 1.0 1.0 ..............
Yes............. 1.0 1.2 1.1 ..............
Refreshed Credit Score for Refreshed credit .............. 1.6 1.4 ..............
Modified RPLs and Non- score <620. .............. 1.3 1.2 ..............
modified RPLs. 620 <= refreshed
credit score
<640.
640 <= refreshed .............. 1.2 1.1 ..............
credit score
<660.
660 <= refreshed .............. 1.0 1.0 ..............
credit score
<700.
700 <= refreshed .............. 0.7 0.8 ..............
credit score
<720.
720 <= refreshed .............. 0.6 0.7 ..............
credit score
<740.
740 <= refreshed .............. 0.5 0.6 ..............
credit score
<760.
760 <= refreshed .............. 0.4 0.5 ..............
credit score
<780.
Refreshed credit .............. 0.3 0.4 ..............
score >= 780.
Payment Change from Payment change .............. .............. 1.1 ..............
Modification. >= 0%.
-20% <= payment .............. .............. 1.0 ..............
change <0%.
-30% <= payment .............. .............. 0.9 ..............
change < -20%.
Payment change < .............. .............. 0.8 ..............
-30%.
Previous Maximum Days Past Due 0-59 days....... .............. 1.0 1.0 ..............
60-90 days...... .............. 1.2 1.1 ..............
91-150 days..... .............. 1.3 1.1 ..............
151+ days....... .............. 1.5 1.1 ..............
Refreshed Credit Score for Refreshed credit .............. .............. .............. 1.2
NPLs. score <580.
580 <= refreshed .............. .............. .............. 1.1
credit score
<640.
640 <= refreshed .............. .............. .............. 1.0
credit score
<700.
700 <= refreshed .............. .............. .............. 0.9
credit score
<720.
720 <= refreshed .............. .............. .............. 0.8
credit score
<760.
760 <= refreshed .............. .............. .............. 0.7
credit score
<780.
Refreshed credit .............. .............. .............. 0.5
score >= 780.
----------------------------------------------------------------------------------------------------------------

(e) Credit enhancement multiplier--(1) Amount--(i) In general. The
adjusted credit enhancement multiplier for a single-family mortgage
exposure that is subject to loan-level credit enhancement is equal to
1.0 minus the product of:
(A) 1.0 minus the credit enhancement multiplier for the single-
family mortgage exposure as determined under paragraph (e)(2) of this
section; multiplied by
(B) 1.0 minus the counterparty haircut for the loan-level credit
enhancement as determined under paragraph (e)(3) of this section.
(ii) No loan-level credit enhancement. The adjusted credit
enhancement multiplier for a single-family mortgage exposure that is
not subject to loan-level credit enhancement is equal to 1.0.
(2) Credit enhancement multiplier. (i) The credit enhancement
multiplier for a single-family mortgage exposure that is subject to a
participation agreement is 1.0.
(ii) Subject to paragraph (e)(2)(iii) of this section, the credit
enhancement multiplier for--
(A) A performing loan, non-modified RPL, or modified RPL that is
subject to non-cancelable mortgage insurance is set forth on Table 7 to
paragraph (e)(2)(iii)(E) of this section;
(B) A performing loan or non-modified RPL that is subject to
cancelable mortgage insurance is set forth on Table 8 to paragraph
(e)(2)(iii)(E) of this section;
(C) A modified RPL with a 30-year post-modification amortization
that is subject to cancelable mortgage insurance is set forth on Table
9 to paragraph (e)(2)(iii)(E) of this section;
(D) A modified RPL with a 40-year post-modification amortization
that is subject to cancelable mortgage insurance is set forth on Table
10 to paragraph (e)(2)(iii)(E) of this section; and
(E) NPL, whether subject to non-cancelable mortgage insurance or
cancelable mortgage insurance, is set forth on Table 11 to paragraph
(e)(2)(iii)(E) of this section.
(iii) Notwithstanding anything to the contrary in this paragraph
(e), for purposes of paragraph (e)(2)(ii) of this section:
(A) The OLTV of a single-family mortgage exposure will be deemed to
be 80 percent if the single-family mortgage exposure has an OLTV less
than or equal to 80 percent.
(B) If the single-family mortgage exposure has an interest-only
feature, any cancelable mortgage insurance will be deemed to be non-
cancelable mortgage insurance.
(C) If the coverage percent of the mortgage insurance is greater
than charter-level coverage and less than guide-level coverage, the
credit enhancement multiplier is the amount equal to a linear
interpolation between the credit enhancement multiplier of the single-
family mortgage exposure for charter-level coverage and the credit

[[Page 82223]]

enhancement multiplier of the single-family mortgage exposure for
guide-level coverage.
(D) If the coverage percent of the mortgage insurance is less than
charter-level coverage, the credit enhancement multiplier is the amount
equal to the midpoint of a linear interpolation between a credit
enhancement multiplier of 1.0 and the credit enhancement multiplier of
the single-family mortgage exposure for charter-level coverage.
(E) If the coverage percent of the mortgage insurance is greater
than guide-level coverage, the credit enhancement multiplier is
determined as if the coverage percent were guide-level coverage.
BILLING CODE 8070-01-P
[GRAPHIC] [TIFF OMITTED] TR17DE20.018

[[Page 82224]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.019

[[Page 82225]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.020

[[Page 82226]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.021

[[Page 82227]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.022

(3) Credit enhancement counterparty haircut--(i) Counterparty
rating--(A) In general. For purposes of this paragraph (e)(3), the
counterparty rating for a counterparty is--
(1) 1, if the Enterprise has determined that the counterparty has
extremely strong capacity to perform its financial obligations in a
severely adverse stress;
(2) 2, if the Enterprise has determined that the counterparty has
very strong capacity to perform its financial obligations in a severely
adverse stress;
(3) 3, if the Enterprise has determined that the counterparty has
strong capacity to perform its financial obligations in a severely
adverse stress;
(4) 4, if the Enterprise has determined that the counterparty has
adequate capacity to perform its financial obligations in a severely
adverse stress;
(5) 5, if the Enterprise has determined that the counterparty does
not have adequate capacity to perform its financial obligations in a
severely adverse stress but does have adequate capacity to perform its
financial obligations in an adverse stress;
(6) 6, if the Enterprise has determined that the counterparty does
not have adequate capacity to perform its financial obligations in an
adverse stress;
(7) 7, if the Enterprise has determined that the counterparty's
capacity to perform its financial obligations is questionable under
prevailing economic conditions;
(8) 8, if the Enterprise has determined that the counterparty is in
default on a material contractual obligation (including any obligation
with respect to collateral requirements) or is under a resolution
proceeding or similar regulatory proceeding.
(B) Required considerations. (1) In determining the capacity of a
counterparty to perform its financial obligations, the Enterprise must
consider the likelihood that the counterparty will not perform its
material obligations with respect to the posting of collateral and the
payment of any amounts payable under its contractual obligations.
(2) A counterparty does not have an adequate capacity to perform
its financial obligations in a severely adverse stress if there is a
material risk that the counterparty would fail to timely perform any
financial obligation in a severely adverse stress.
(ii) Counterparty haircut. The counterparty haircut is set forth on
table 12 to this paragraph (e)(3)(ii). For purposes of this paragraph
(e)(3)(ii), RPL means either a modified RPL or a non-modified RPL.

[[Page 82228]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.023

(f) COVID-19-related forbearances--(1) During forbearance.
Notwithstanding anything to the contrary under paragraph (c)(4) of this
section, the base risk weight for an NPL is equal to the product of
0.45 and the base risk weight that would otherwise be assigned to the
NPL under paragraph (c)(4) of this section if the NPL--
(i) Is subject to a COVID-19-related forbearance; or
(ii) Was subject to a COVID-19-related forbearance at any time in
the prior 6 calendar months and is subject to a trial modification
plan.
(2) After forbearance. Notwithstanding the definition of ``past
due'' under paragraph (a) of this section, any period of time in which
a single-family mortgage exposure was past due while subject to a
COVID-19-related forbearance is to be disregarded for the purpose of
assigning a risk weight under this section if the entire amount past
due was repaid upon the termination of the COVID-19-related
forbearance.

Sec. 1240.34 Multifamily mortgage exposures.

(a) Definitions. Subject to any additional instructions set forth
on Table 1 to this paragraph (a), for purposes of this section:
Acquisition debt-service-coverage ratio (acquisition DSCR) means,
with respect to a multifamily mortgage exposure, the amount equal to:
(i) The net operating income (NOI) (or, if not available, the net
cash flow) of the multifamily property that secures the multifamily
mortgage exposure, at the time of the acquisition by the Enterprise
(or, if not available, at the time of the underwriting or origination)
of the multifamily mortgage exposure; divided by
(ii) The scheduled periodic payment on the multifamily mortgage
exposure (or, if interest-only, fully amortizing payment), at the time
of the acquisition by the Enterprise (or, if not available, at the time
of the origination) of the multifamily mortgage exposure.
Acquisition loan-to-value (acquisition LTV) means, with respect to
a multifamily mortgage exposure, the amount, determined as of the time
of the acquisition by the Enterprise (or, if not available, at the time
of the underwriting or origination) of the multifamily mortgage
exposure, equal to:
(i) The unpaid principal balance of the multifamily mortgage
exposure; divided by
(ii) The value of the multifamily property securing the multifamily
mortgage exposure.
Debt-service-coverage ratio (DSCR) means, with respect to a
multifamily mortgage exposure:
(i) The acquisition DSCR of the multifamily mortgage exposure if
the loan age of the multifamily mortgage exposure is less than 6; or
(ii) The MTMDSCR of the multifamily mortgage exposure.
Interest-only (IO) means a multifamily mortgage exposure that
requires only payment of interest without any principal amortization
during all or part of the loan term.
Loan age means the number of scheduled payment dates since the
origination of the multifamily mortgage exposure.
Loan term means the number of years until final loan payment (which
may be a balloon payment) under the terms of a multifamily mortgage
exposure.
LTV means, with respect to a multifamily mortgage exposure;
(i) The acquisition LTV of the multifamily mortgage exposure if the
loan age of the multifamily mortgage exposure is less than 6, or
(ii) The MTMLTV of the multifamily mortgage exposure.
Mark-to-market debt-service coverage ratio (MTMDSCR) means, with
respect to a multifamily mortgage exposure, the amount equal to--
(i) The net operating income (or, if not available, the net cash
flow) of the multifamily property that secures the multifamily mortgage
exposure, as reported on the most recently available property operating
statement; divided by
(ii) The scheduled periodic payment on the multifamily mortgage
exposure (or, for interest-only, fully amortizing payment), as reported
on the most recently available property operating statement.
Mark-to-market loan-to-value (MTMLTV) means, with respect to a
multifamily mortgage exposure, the amount equal to:
(i) The unpaid principal balance of the multifamily mortgage
exposure; divided by
(ii) The current value of the property security the multifamily
mortgage exposure, estimated using either:
(A) The acquisition property value adjusted using a multifamily
property value index; or

[[Page 82229]]

(B) The property value estimated based on net operating income and
capitalization rate indices.
Multifamily adjustable-rate exposure means a multifamily mortgage
exposure that is not, at that time, a multifamily fixed-rate exposure.
Multifamily fixed-rate exposure means a multifamily mortgage
exposure that, at that time, has an interest rate that may not then
increase or decrease based on a change in a reference index or other
methodology, including:
(i) A multifamily mortgage exposure that has an interest rate that
is fixed over the life of the loan; and
(ii) A multifamily mortgage exposure that has an interest rate that
may increase or decrease in the future, but is fixed at that time.
Net cash flow means, with respect to a multifamily mortgage
exposure, the amount equal to:
(i) The net operating income of the multifamily mortgage exposure;
minus
(ii) Reserves for capital improvements; minus
(iii) Other expenses not included in net operating income required
for the proper operation of the multifamily property securing the
multifamily mortgage exposure, including any commissions paid to
leasing agents in securing renters and special improvements to the
property to accommodate the needs of certain renters.
Net operating income means, with respect to a multifamily mortgage
exposure, the amount equal to:
(i) The rental income generated by the multifamily property
securing the multifamily mortgage exposure; minus
(ii) The vacancy and property operating expenses of the multifamily
property securing the multifamily mortgage exposure.
Original amortization term means the number of years, determined as
of the time of the origination of a multifamily mortgage exposure, that
it would take a borrower to pay a multifamily mortgage exposure
completely if the borrower only makes the scheduled payments, and
without making any balloon payment.
Original loan size means the dollar amount of the unpaid principal
balance of a multifamily mortgage exposure at origination.
Payment performance means the payment status of history of a
multifamily mortgage exposure, assigned pursuant to the instructions
set forth on table 1 to this paragraph (a).
Supplemental mortgage exposure means any multifamily fixed-rate
exposure or multifamily adjustable-rate exposure that is originated
after the origination of a multifamily mortgage exposure that is
secured by all or part of the same multifamily property.
Unpaid principal balance (UPB) means the outstanding loan amount of
a multifamily mortgage exposure.
[GRAPHIC] [TIFF OMITTED] TR17DE20.024

(b) Risk weight--(1) In general. Subject to paragraphs (b)(2) and
(3) of this section, an Enterprise must assign a risk weight to a
multifamily mortgage exposure equal to:
(i) The base risk weight for the multifamily mortgage exposure as
determined under paragraph (c) of this section; multiplied by
(ii) The combined risk multiplier for the multifamily mortgage
exposure as

[[Page 82230]]

determined under paragraph (d) of this section.
(2) Minimum risk weight. Notwithstanding the risk weight determined
under paragraph (b)(1) of this section, the risk weight assigned to a
multifamily mortgage exposure may not be less than 20 percent.
(3) Loan groups. If a multifamily property that secures a
multifamily mortgage exposure also secures one or more supplemental
mortgage exposures:
(i) A multifamily mortgage exposure-specific base risk weight must
be determined under paragraph (c) of this section using for each of
these multifamily mortgage exposures a single DSCR and single LTV, both
calculated as if all of the multifamily mortgage exposures secured by
the multifamily property were consolidated into a single multifamily
mortgage exposure; and
(ii) A multifamily mortgage exposure-specific combined risk
multiplier must be determined under paragraph (d) of this section based
on the risk characteristics of the multifamily mortgage exposure
(except with respect to the loan size multiplier, which would be
determined using the aggregate unpaid principal balance of these
multifamily mortgage exposures).
(c) Base risk weight--(1) Multifamily fixed-rate exposure. The base
risk weight for a multifamily fixed-rate exposure is set forth on table
2 to this paragraph (c)(1).
[GRAPHIC] [TIFF OMITTED] TR17DE20.025

(2) Multifamily adjustable-rate exposure. The base risk weight for
a multifamily adjustable-rate exposure is set forth on table 3 to this
paragraph (c)(2).

[[Page 82231]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.026

(d) Combined risk multiplier. The combined risk multiplier for a
multifamily mortgage exposure is equal to the product of each of the
applicable risk multipliers set forth on table 4 to this paragraph (d).

[[Page 82232]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.027

Sec. 1240.35 Off-balance sheet exposures.

(a) General. (1) An Enterprise must calculate the exposure amount
of an off-balance sheet exposure using the credit conversion factors
(CCFs) in paragraph (b) of this section.
(2) Where an Enterprise commits to provide a commitment, the
Enterprise may apply the lower of the two applicable CCFs.
(3) Where an Enterprise provides a commitment structured as a
syndication or participation, the Enterprise is only required to
calculate the exposure amount for its pro rata share of the commitment.
(4) Where an Enterprise provides a commitment or enters into a
repurchase agreement and such commitment or repurchase agreement, the
exposure amount shall be no greater than the maximum contractual amount
of the commitment or repurchase agreement, as applicable.
(b) Credit conversion factors--(1) Zero percent CCF. An Enterprise
must apply a zero percent CCF to the unused portion of a commitment
that is unconditionally cancelable by the Enterprise.

[[Page 82233]]

(2) 20 percent CCF. An Enterprise must apply a 20 percent CCF to
the amount of commitments with an original maturity of one year or less
that are not unconditionally cancelable by the Enterprise.
(3) 50 percent CCF. An Enterprise must apply a 50 percent CCF to
the amount of commitments with an original maturity of more than one
year that are not unconditionally cancelable by the Enterprise.
(4) 100 percent CCF. An Enterprise must apply a 100 percent CCF to
the amount of the following off-balance sheet items and other similar
transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance sheet component of
which equals the sum of the current fair values of all positions the
Enterprise has sold subject to repurchase);
(iii) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair
values of all positions the Enterprise has lent under the transaction);
(iv) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair
values of all non-cash positions the Enterprise has posted as
collateral under the transaction); and
(v) Forward agreements.

Sec. 1240.36 Derivative contracts.

(a) Exposure amount for derivative contracts. An Enterprise must
use the current exposure methodology (CEM) described in paragraph (b)
of this section to calculate the exposure amount for all its OTC
derivative contracts.
(b) Current exposure methodology exposure amount--(1) Single OTC
derivative contract. Except as modified by paragraph (c) of this
section, the exposure amount for a single OTC derivative contract that
is not subject to a qualifying master netting agreement is equal to the
sum of the Enterprise's current credit exposure and potential future
credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the fair value of the
OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative fair value, is
calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
paragraph (b)(1)(ii)(E) of this section.
(B) For purposes of calculating either the PFE under this paragraph
(b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this
section for exchange rate contracts and other similar contracts in
which the notional principal amount is equivalent to the cash flows,
notional principal amount is the net receipts to each party falling due
on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in table 1 to paragraph (b)(1)(ii)(E) of this
section, the PFE must be calculated using the appropriate ``other''
conversion factor.
(D) An Enterprise must use an OTC derivative contract's effective
notional principal amount (that is, the apparent or stated notional
principal amount multiplied by any multiplier in the OTC derivative
contract) rather than the apparent or stated notional principal amount
in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
[GRAPHIC] [TIFF OMITTED] TR17DE20.028

[[Page 82234]]

BILLING CODE 8070-01-C
(2) Multiple OTC derivative contracts subject to a qualifying
master netting agreement. Except as modified by paragraph (c) of this
section, the exposure amount for multiple OTC derivative contracts
subject to a qualifying master netting agreement is equal to the sum of
the net current credit exposure and the adjusted sum of the PFE amounts
for all OTC derivative contracts subject to the qualifying master
netting agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of the net sum of all positive and negative fair values of
the individual OTC derivative contracts subject to the qualifying
master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (b)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = the ratio of the net current credit
exposure to the gross current credit exposure. In calculating the NGR,
the gross current credit exposure equals the sum of the positive
current credit exposures (as determined under paragraph (b)(1)(i) of
this section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(c) Recognition of credit risk mitigation of collateralized OTC
derivative contracts. (1) An Enterprise may recognize the credit risk
mitigation benefits of financial collateral that secures an OTC
derivative contract or multiple OTC derivative contracts subject to a
qualifying master netting agreement (netting set) by using the simple
approach in Sec. 1240.39(b).
(2) As an alternative to the simple approach, an Enterprise may
recognize the credit risk mitigation benefits of financial collateral
that secures such a contract or netting set if the financial collateral
is marked-to-fair value on a daily basis and subject to a daily margin
maintenance requirement by applying a risk weight to the
uncollateralized portion of the exposure, after adjusting the exposure
amount calculated under paragraph (b)(1) or (2) of this section using
the collateral haircut approach in Sec. 1240.39(c). The Enterprise
must substitute the exposure amount calculated under paragraph (b)(1)
or (2) of this section for [Sigma]E in the equation in Sec.
1240.39(c)(2).
(d) Counterparty credit risk for credit derivatives--(1) Protection
purchasers. An Enterprise that purchases a credit derivative that is
recognized under Sec. 1240.38 as a credit risk mitigant for an
exposure is not required to compute a separate counterparty credit risk
capital requirement under this subpart provided that the Enterprise
does so consistently for all such credit derivatives. The Enterprise
must either include all or exclude all such credit derivatives that are
subject to a qualifying master netting agreement from any measure used
to determine counterparty credit risk exposure to all relevant
counterparties for risk-based capital purposes.
(2) Protection providers. (i) An Enterprise that is the protection
provider under a credit derivative must treat the credit derivative as
an exposure to the underlying reference asset. The Enterprise is not
required to compute a counterparty credit risk capital requirement for
the credit derivative under this subpart, provided that this treatment
is applied consistently for all such credit derivatives. The Enterprise
must either include all or exclude all such credit derivatives that are
subject to a qualifying master netting agreement from any measure used
to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (d)(2) apply to all relevant
counterparties for risk-based capital purposes.
(e) [Reserved]
(f) Clearing member Enterprise's exposure amount. (1) The exposure
amount of a clearing member Enterprise for a client-facing derivative
transaction or netting set of client-facing derivative transactions
equals the exposure amount calculated according to paragraph (b)(1) or
(2) of this section multiplied by the scaling factor the square root of
\1/2\ (which equals 0.707107). If the Enterprise determines that a
longer period is appropriate, the Enterprise must use a larger scaling
factor to adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR17DE20.029

Where H = the holding period greater than or equal to five days.
(2) Additionally, FHFA may require the Enterprise to set a longer
holding period if FHFA determines that a longer period is appropriate
due to the nature, structure, or characteristics of the transaction or
is commensurate with the risks associated with the transaction.

Sec. 1240.37 Cleared transactions.

(a) General requirements--(1) Clearing member clients. An
Enterprise that is a clearing member client must use the methodologies
described in paragraph (b) of this section to calculate risk-weighted
assets for a cleared transaction.
(2) Clearing members. An Enterprise that is a clearing member must
use the methodologies described in paragraph (c) of this section to
calculate its risk-weighted assets for a cleared transaction and
paragraph (d) of this section to calculate its risk-weighted assets for
its default fund contribution to a CCP.
(b) Clearing member client Enterprise--(1) Risk-weighted assets for
cleared transactions. (i) To determine the risk-weighted asset amount
for a cleared transaction, an Enterprise that is a clearing member
client must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (b)(2) of this
section, by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client Enterprise's total risk-weighted
assets for cleared transactions is the sum of the risk-weighted asset
amounts for all its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is
either a derivative contract or a netting set of derivative contracts,
the trade exposure amount equals:
(A) The exposure amount for the derivative contract or netting set
of derivative contracts, calculated using the methodology used to
calculate exposure amount for OTC derivative contracts under Sec.
1240.36; plus
(B) The fair value of the collateral posted by the clearing member
client Enterprise and held by the CCP, clearing member, or custodian in
a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, the trade exposure amount
equals:
(A) The exposure amount for the repo-style transaction calculated
using the methodologies under Sec. 1240.39(c); plus
(B) The fair value of the collateral posted by the clearing member
client Enterprise and held by the CCP, clearing member, or custodian in
a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client Enterprise must apply a risk
weight of:
(A) 2 percent if the collateral posted by the Enterprise to the
QCCP or clearing member is subject to an

[[Page 82235]]

arrangement that prevents any losses to the clearing member client
Enterprise due to the joint default or a concurrent insolvency,
liquidation, or receivership proceeding of the clearing member and any
other clearing member clients of the clearing member; and the clearing
member client Enterprise has conducted sufficient legal review to
conclude with a well-founded basis (and maintains sufficient written
documentation of that legal review) that in the event of a legal
challenge (including one resulting from an event of default or from
liquidation, insolvency, or receivership proceedings) the relevant
court and administrative authorities would find the arrangements to be
legal, valid, binding and enforceable under the law of the relevant
jurisdictions; or
(B) 4 percent if the requirements of Sec. 1240.37(b)(3)(i)(A) are
not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client Enterprise must apply the risk weight
appropriate for the CCP according to this subpart D.
(4) Collateral. (i) Notwithstanding any other requirements in this
section, collateral posted by a clearing member client Enterprise that
is held by a custodian (in its capacity as custodian) in a manner that
is bankruptcy remote from the CCP, clearing member, and other clearing
member clients of the clearing member, is not subject to a capital
requirement under this section.
(ii) A clearing member client Enterprise must calculate a risk-
weighted asset amount for any collateral provided to a CCP, clearing
member, or custodian in connection with a cleared transaction in
accordance with the requirements under this subpart D.
(c) Clearing member Enterprises--(1) Risk-weighted assets for
cleared transactions. (i) To determine the risk-weighted asset amount
for a cleared transaction, a clearing member Enterprise must multiply
the trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (c)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (c)(3) of this section.
(ii) A clearing member Enterprise's total risk-weighted assets for
cleared transactions is the sum of the risk-weighted asset amounts for
all of its cleared transactions.
(2) Trade exposure amount. A clearing member Enterprise must
calculate its trade exposure amount for a cleared transaction as
follows:
(i) For a cleared transaction that is either a derivative contract
or a netting set of derivative contracts, the trade exposure amount
equals:
(A) The exposure amount for the derivative contract, calculated
using the methodology to calculate exposure amount for OTC derivative
contracts under Sec. 1240.36; plus
(B) The fair value of the collateral posted by the clearing member
Enterprise and held by the CCP in a manner that is not bankruptcy
remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals:
(A) The exposure amount for repo-style transactions calculated
using methodologies under Sec. 1240.39(c); plus
(B) The fair value of the collateral posted by the clearing member
Enterprise and held by the CCP in a manner that is not bankruptcy
remote.
(3) Cleared transaction risk weight. (i) A clearing member
Enterprise must apply a risk weight of 2 percent to the trade exposure
amount for a cleared transaction with a QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member Enterprise must apply the risk weight appropriate for
the CCP according to this subpart D.
(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this
section, a clearing member Enterprise may apply a risk weight of zero
percent to the trade exposure amount for a cleared transaction with a
CCP where the clearing member Enterprise is acting as a financial
intermediary on behalf of a clearing member client, the transaction
offsets another transaction that satisfies the requirements set forth
in Sec. 1240.3(a), and the clearing member Enterprise is not obligated
to reimburse the clearing member client in the event of the CCP
default.
(4) Collateral. (i) Notwithstanding any other requirement in this
section, collateral posted by a clearing member Enterprise that is held
by a custodian in a manner that is bankruptcy remote from the CCP is
not subject to a capital requirement under this section.
(ii) A clearing member Enterprise must calculate a risk-weighted
asset amount for any collateral provided to a CCP, clearing member, or
a custodian in connection with a cleared transaction in accordance with
requirements under this subpart D.
(d) Default fund contributions--(1) General requirement. A clearing
member Enterprise must determine the risk-weighted asset amount for a
default fund contribution to a CCP at least quarterly, or more
frequently if, in the opinion of the Enterprise or FHFA, there is a
material change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
non-qualifying CCPs. A clearing member Enterprise's risk-weighted asset
amount for default fund contributions to CCPs that are not QCCPs equals
the sum of such default fund contributions multiplied by 1,250 percent,
or an amount determined by FHFA, based on factors such as size,
structure and membership characteristics of the CCP and riskiness of
its transactions, in cases where such default fund contributions may be
unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member Enterprise's risk-weighted asset amount for
default fund contributions to QCCPs equals the sum of its capital
requirement, KCM for each QCCP, as calculated under the
methodology set forth in paragraphs (d)(3)(i) through (iii) of this
section (Method 1), multiplied by 1,250 percent or in paragraphs
(d)(3)(iv) of this section (Method 2).
(i) Method 1. The hypothetical capital requirement of a QCCP
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TR17DE20.030

Where:
(A) EBRMi = the exposure amount for each transaction
cleared through the QCCP by clearing member i, calculated in
accordance with Sec. 1240.36 for OTC derivative contracts and Sec.
1240.39(c)(2) for repo-style transactions, provided that:
(1) For purposes of this section, in calculating the exposure
amount the Enterprise may replace the formula provided in Sec.
1240.36(b)(2)(ii) with the following: Anet = (0.15 x Agross) + (0.85
x NGR x Agross); and
(2) For option derivative contracts that are cleared
transactions, the PFE described in Sec. 1240.36(b)(1)(ii) must be
adjusted by multiplying the notional principal amount of

[[Page 82236]]

the derivative contract by the appropriate conversion factor in
Table 1 to paragraph (b)(1)(ii)(E) of Sec. 1240.36 and the absolute
value of the option's delta, that is, the ratio of the change in the
value of the derivative contract to the corresponding change in the
price of the underlying asset.
(3) For repo-style transactions, when applying Sec.
1240.39(c)(2), the Enterprise must use the methodology in Sec.
1240.39(c)(3);
(B) VMi = any collateral posted by clearing member i
to the QCCP that it is entitled to receive from the QCCP, but has
not yet received, and any collateral that the QCCP has actually
received from clearing member i;
(C) IMi = the collateral posted as initial margin by
clearing member i to the QCCP;
(D) DFi = the funded portion of clearing member i's
default fund contribution that will be applied to reduce the QCCP's
loss upon a default by clearing member i;
(E) RW = 20 percent, except when FHFA has determined that a
higher risk weight is more appropriate based on the specific
characteristics of the QCCP and its clearing members; and

(F) Where a QCCP has provided its KCCP, an Enterprise
must rely on such disclosed figure instead of calculating
KCCP under this paragraph (d), unless the Enterprise
determines that a more conservative figure is appropriate based on
the nature, structure, or characteristics of the QCCP.

(ii) For an Enterprise that is a clearing member of a QCCP with a
default fund supported by funded commitments, KCM equals:
[GRAPHIC] [TIFF OMITTED] TR17DE20.031

Subscripts 1 and 2 denote the clearing members with the two largest
ANet values. For purposes of this paragraph (d), for
derivatives ANet is defined in Sec. 1240.36(b)(2)(ii) and
for repo-style transactions, ANet means the exposure amount
as defined in Sec. 1240.39(c)(2) using the methodology in Sec.
1240.39(c)(3);
(B) N = the number of clearing members in the QCCP;
(C) DFCCP = the QCCP's own funds and other financial
resources that would be used to cover its losses before clearing
members' default fund contributions are used to cover losses;
(D) DFCM = funded default fund contributions from all
clearing members and any other clearing member contributed financial
resources that are available to absorb mutualized QCCP losses;
(E) DF = DFCCP + DFCM (that is, the total
funded default fund contribution);
(F) DFl = average DFl = the average funded default fund
contribution from an individual clearing member;
(G) DF'CM = DFCM-2 [middot] DFl = [Sigma]i DFi -2 [middot] DFl
(that is, the funded default fund contribution from surviving clearing
members assuming that two average clearing members have defaulted and
their default fund contributions and initial margins have been used to
absorb the resulting losses);
(H) DF' = DFCCP + DF'CM = DF-2 [middot] DFl (that is, the total
funded default fund contributions from the QCCP and the surviving
clearing members that are available to mutualize losses, assuming that
two average clearing members have defaulted);
[GRAPHIC] [TIFF OMITTED] TR17DE20.032

(that is, a decreasing capital factor, between 1.6 percent and 0.16
percent, applied to the excess funded default funds provided by
clearing members);
(J) c2 = 100 percent; and
(K) [mu] = 1.2;

(iii)(A) For an Enterprise that is a clearing member of a QCCP with
a default fund supported by unfunded commitments, KCM
equals;
[GRAPHIC] [TIFF OMITTED] TR17DE20.033

Where:

(1) DFi = the Enterprise's unfunded commitment to the
default fund;
(2) DFCM = the total of all clearing members'
unfunded commitment to the default fund; and
(3) K*CM as defined in paragraph (d)(3)(ii) of this
section.
(B) For an Enterprise that is a clearing member of a QCCP with a
default fund supported by unfunded commitments and is unable to
calculate KCM using the methodology described in paragraph
(d)(3)(iii) of this section, KCM equals:
[GRAPHIC] [TIFF OMITTED] TR17DE20.034

[[Page 82237]]

Where:
(1) IMi = the Enterprise's initial margin posted to the
QCCP;
(2) IMCM = the total of initial margin posted to the
QCCP; and
(3) K*CM as defined in paragraph (d)(3)(ii) of this
section.
(iii) Method 2. A clearing member Enterprise's risk-weighted asset
amount for its default fund contribution to a QCCP, RWADF,
equals:

RWADF = Min {12.5 * DF; 0.18 * TE{time}

Where:

(A) TE = the Enterprise's trade exposure amount to the QCCP,
calculated according to paragraph (c)(2) of this section;
(B) DF = the funded portion of the Enterprise's default fund
contribution to the QCCP.

(4) Total risk-weighted assets for default fund contributions.
Total risk-weighted assets for default fund contributions is the sum of
a clearing member Enterprise's risk-weighted assets for all of its
default fund contributions to all CCPs of which the Enterprise is a
clearing member.

Sec. 1240.38 Guarantees and credit derivatives: substitution
treatment.

(a) Scope--(1) General. An Enterprise may recognize the credit risk
mitigation benefits of an eligible guarantee or eligible credit
derivative by substituting the risk weight associated with the
protection provider for the risk weight assigned to an exposure, as
provided under this section.
(2) Applicability. This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or
eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a
basis in which the Enterprise and the protection provider share losses
proportionately) by an eligible guarantee or eligible credit
derivative.
(3) Tranching. Exposures on which there is a tranching of credit
risk (reflecting at least two different levels of seniority) generally
are securitization exposures subject to Sec. Sec. 1240.41 through
1240.46.
(4) Multiple guarantees or credit derivatives. If multiple eligible
guarantees or eligible credit derivatives cover a single exposure
described in this section, an Enterprise may treat the hedged exposure
as multiple separate exposures each covered by a single eligible
guarantee or eligible credit derivative and may calculate a separate
risk-weighted asset amount for each separate exposure as described in
paragraph (c) of this section.
(5) Single guarantees or credit derivatives. If a single eligible
guarantee or eligible credit derivative covers multiple hedged
exposures described in paragraph (a)(2) of this section, an Enterprise
must treat each hedged exposure as covered by a separate eligible
guarantee or eligible credit derivative and must calculate a separate
risk-weighted asset amount for each exposure as described in paragraph
(c) of this section.
(b) Rules of recognition. (1) An Enterprise may only recognize the
credit risk mitigation benefits of eligible guarantees and eligible
credit derivatives.
(2) An Enterprise may only recognize the credit risk mitigation
benefits of an eligible credit derivative to hedge an exposure that is
different from the credit derivative's reference exposure used for
determining the derivative's cash settlement value, deliverable
obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu with, or is
subordinated to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit
derivative are triggered when the obligated party of the hedged
exposure fails to pay under the terms of the hedged exposure.
(c) Substitution approach--(1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, an Enterprise may recognize the
guarantee or credit derivative in determining the risk-weighted asset
amount for the hedged exposure by substituting the risk weight
applicable to the guarantor or credit derivative protection provider
under this subpart D for the risk weight assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the exposure amount of the hedged exposure, the
Enterprise must treat the hedged exposure as two separate exposures
(protected and unprotected) in order to recognize the credit risk
mitigation benefit of the guarantee or credit derivative.
(i) The Enterprise may calculate the risk-weighted asset amount for
the protected exposure under this subpart D, where the applicable risk
weight is the risk weight applicable to the guarantor or credit
derivative protection provider.
(ii) The Enterprise must calculate the risk-weighted asset amount
for the unprotected exposure under this subpart D, where the applicable
risk weight is that of the unprotected portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraph (d), (e),
or (f) of this section.
(d) Maturity mismatch adjustment. (1) An Enterprise that recognizes
an eligible guarantee or eligible credit derivative in determining the
risk-weighted asset amount for a hedged exposure must adjust the
effective notional amount of the credit risk mitigant to reflect any
maturity mismatch between the hedged exposure and the credit risk
mitigant.
(2) A maturity mismatch occurs when the residual maturity of a
credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest
possible remaining time before the obligated party of the hedged
exposure is scheduled to fulfil its obligation on the hedged exposure.
If a credit risk mitigant has embedded options that may reduce its
term, the Enterprise (protection purchaser) must use the shortest
possible residual maturity for the credit risk mitigant. If a call is
at the discretion of the protection provider, the residual maturity of
the credit risk mitigant is at the first call date. If the call is at
the discretion of the Enterprise (protection purchaser), but the terms
of the arrangement at origination of the credit risk mitigant contain a
positive incentive for the Enterprise to call the transaction before
contractual maturity, the remaining time to the first call date is the
residual maturity of the credit risk mitigant.
(4) A credit risk mitigant with a maturity mismatch may be
recognized only if its original maturity is greater than or equal to
one year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the Enterprise must apply the
following adjustment to reduce the effective notional amount of the
credit risk mitigant: Pm = E x (t-0.25)/(T-0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;

[[Page 82238]]

(iii) t = the lesser of T or the residual maturity of the credit
risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged
exposure, expressed in years.
(e) Adjustment for credit derivatives without restructuring as a
credit event. If an Enterprise recognizes an eligible credit derivative
that does not include as a credit event a restructuring of the hedged
exposure involving forgiveness or postponement of principal, interest,
or fees that results in a credit loss event (that is, a charge-off,
specific provision, or other similar debit to the profit and loss
account), the Enterprise must apply the following adjustment to reduce
the effective notional amount of the credit derivative: Pr = Pm x 0.60,
where:
(1) Pr = effective notional amount of the credit risk mitigant,
adjusted for lack of restructuring event (and maturity mismatch, if
applicable); and
(2) Pm = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch, if applicable).
(f) Currency mismatch adjustment. (1) If an Enterprise recognizes
an eligible guarantee or eligible credit derivative that is denominated
in a currency different from that in which the hedged exposure is
denominated, the Enterprise must apply the following formula to the
effective notional amount of the guarantee or credit derivative: Pc =
Pr x (1-HFX), where:
(i) Pc = effective notional amount of the credit risk mitigant,
adjusted for currency mismatch (and maturity mismatch and lack of
restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch and lack of restructuring event, if
applicable); and
(iii) HFX = haircut appropriate for the currency
mismatch between the credit risk mitigant and the hedged exposure.
(2) An Enterprise must set HFX equal to eight percent
unless it qualifies for the use of and uses its own internal estimates
of foreign exchange volatility based on a ten-business-day holding
period. An Enterprise qualifies for the use of its own internal
estimates of foreign exchange volatility if it qualifies for the use of
its own-estimates haircuts in Sec. 1240.39(c)(4).
(3) An Enterprise must adjust HFX calculated in
paragraph (f)(2) of this section upward if the Enterprise revalues the
guarantee or credit derivative less frequently than once every 10
business days using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR17DE20.035

where TM equals the greater of 10 or the number of days
between revaluation.

Sec. 1240.39 Collateralized transactions.

(a) General. (1) To recognize the risk-mitigating effects of
financial collateral (other than with respect to a retained CRT
exposure), an Enterprise may use:
(i) The simple approach in paragraph (b) of this section for any
exposure; or
(ii) The collateral haircut approach in paragraph (c) of this
section for repo-style transactions, eligible margin loans,
collateralized derivative contracts, and single-product netting sets of
such transactions.
(2) An Enterprise may use any approach described in this section
that is valid for a particular type of exposure or transaction;
however, it must use the same approach for similar exposures or
transactions.
(b) The simple approach--(1) General requirements. (i) An
Enterprise may recognize the credit risk mitigation benefits of
financial collateral that secures any exposure (other than a retained
CRT exposure).
(ii) To qualify for the simple approach, the financial collateral
must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at
least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral (other than gold) and the exposure must be
denominated in the same currency.
(2) Risk weight substitution. (i) An Enterprise may apply a risk
weight to the portion of an exposure that is secured by the fair value
of financial collateral (that meets the requirements of paragraph
(b)(1) of this section) based on the risk weight assigned to the
collateral under this subpart D. For repurchase agreements, reverse
repurchase agreements, and securities lending and borrowing
transactions, the collateral is the instruments, gold, and cash the
Enterprise has borrowed, purchased subject to resale, or taken as
collateral from the counterparty under the transaction. Except as
provided in paragraph (b)(3) of this section, the risk weight assigned
to the collateralized portion of the exposure may not be less than 20
percent.
(ii) An Enterprise must apply a risk weight to the unsecured
portion of the exposure based on the risk weight applicable to the
exposure under this subpart.
(3) Exceptions to the 20 percent risk-weight floor and other
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
(i) An Enterprise may assign a zero percent risk weight to an
exposure to an OTC derivative contract that is marked-to-market on a
daily basis and subject to a daily margin maintenance requirement, to
the extent the contract is collateralized by cash on deposit.
(ii) An Enterprise may assign a 10 percent risk weight to an
exposure to an OTC derivative contract that is marked-to-market daily
and subject to a daily margin maintenance requirement, to the extent
that the contract is collateralized by an exposure to a sovereign that
qualifies for a zero percent risk weight under Sec. 1240.32.
(iii) An Enterprise may assign a zero percent risk weight to the
collateralized portion of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure to a sovereign that
qualifies for a zero percent risk weight under Sec. 1240.32, and the
Enterprise has discounted the fair value of the collateral by 20
percent.
(c) Collateral haircut approach--(1) General. An Enterprise may
recognize the credit risk mitigation benefits of financial collateral
that secures an eligible margin loan, repo-style transaction,
collateralized derivative contract, or single-product netting set of
such transactions, by using the collateral haircut approach in this
section. An Enterprise may use the standard supervisory haircuts in
paragraph (c)(3) of this section or, with prior written notice to FHFA,
its own estimates of haircuts according to paragraph (c)(4) of this
section.
(2) Exposure amount equation. An Enterprise must determine the
exposure amount for an eligible margin loan, repo-style transaction,
collateralized derivative contract, or a single-product netting set of
such transactions by setting the exposure amount equal to max {0,
[([Sigma]E - [Sigma]C) + [Sigma](Es x Hs) + [Sigma](Efx x Hfx)]{time} ,
where:
(i)(A) For eligible margin loans and repo-style transactions and
netting sets thereof, [Sigma]E equals the value of the exposure (the
sum of the current fair values of all instruments, gold, and cash the
Enterprise has lent, sold subject to repurchase, or posted as
collateral to the counterparty under the transaction (or netting set));
and
(B) For collateralized derivative contracts and netting sets
thereof, [Sigma]E equals the exposure amount of the OTC derivative
contract (or netting set) calculated under Sec. 1240.36(b)(1) or (2).
(ii) [Sigma]C equals the value of the collateral (the sum of the
current fair

[[Page 82239]]

values of all instruments, gold and cash the Enterprise has borrowed,
purchased subject to resale, or taken as collateral from the
counterparty under the transaction (or netting set));
(iii) Es equals the absolute value of the net position in a given
instrument or in gold (where the net position in the instrument or gold
equals the sum of the current fair values of the instrument or gold the
Enterprise has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current fair values
of that same instrument or gold the Enterprise has borrowed, purchased
subject to resale, or taken as collateral from the counterparty);
(iv) Hs equals the market price volatility haircut appropriate to
the instrument or gold referenced in Es;
(v) Efx equals the absolute value of the net position of
instruments and cash in a currency that is different from the
settlement currency (where the net position in a given currency equals
the sum of the current fair values of any instruments or cash in the
currency the Enterprise has lent, sold subject to repurchase, or posted
as collateral to the counterparty minus the sum of the current fair
values of any instruments or cash in the currency the Enterprise has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty); and
(vi) Hfx equals the haircut appropriate to the mismatch between the
currency referenced in Efx and the settlement currency.
(3) Standard supervisory haircuts. (i) An Enterprise must use the
haircuts for market price volatility (Hs) provided in table 1 to this
paragraph (c)(3)(i), as adjusted in certain circumstances in accordance
with the requirements of paragraphs (c)(3)(iii) and (iv) of this
section.
BILLING CODE 8070-01-P
[GRAPHIC] [TIFF OMITTED] TR17DE20.037

BILLING CODE 8070-01-C
(ii) For currency mismatches, an Enterprise must use a haircut for
foreign exchange rate volatility (Hfx) of 8.0 percent, as adjusted in
certain circumstances under paragraphs (c)(3)(iii) and (iv) of this
section.
(iii) For repo-style transactions and client-facing derivative
transactions, an Enterprise may multiply the standard supervisory
haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by
the square root of \1/2\ (which equals 0.707107). For client-facing
derivative transactions, if a larger scaling factor is applied under
Sec. 1240.36(f), the same factor must be used to adjust the
supervisory haircuts.
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must

[[Page 82240]]

adjust the supervisory haircuts provided in paragraphs (c)(3)(i) and
(ii) of this section upward on the basis of a holding period of twenty
business days for the following quarter except in the calculation of
the exposure amount for purposes of Sec. 1240.37. If a netting set
contains one or more trades involving illiquid collateral or an OTC
derivative that cannot be easily replaced, an Enterprise must adjust
the supervisory haircuts upward on the basis of a holding period of
twenty business days. If over the two previous quarters more than two
margin disputes on a netting set have occurred that lasted more than
the holding period, then the Enterprise must adjust the supervisory
haircuts upward for that netting set on the basis of a holding period
that is at least two times the minimum holding period for that netting
set. An Enterprise must adjust the standard supervisory haircuts upward
using the following formula:
[GRAPHIC] [TIFF OMITTED] TR17DE20.038

where

(A) TM equals a holding period of longer than 10
business days for eligible margin loans and derivative contracts other
than client-facing derivative transactions or longer than 5 business
days for repo-style transactions and client-facing derivative
transactions;
(B) HS equals the standard supervisory haircut; and
(C) TS equals 10 business days for eligible margin loans
and derivative contracts other than client-facing derivative
transactions or 5 business days for repo-style transactions and client-
facing derivative transactions.
(v) If the instrument an Enterprise has lent, sold subject to
repurchase, or posted as collateral does not meet the definition of
``financial collateral,'' the Enterprise must use a 25.0 percent
haircut for market price volatility (Hs).
(4) Own internal estimates for haircuts. With the prior written
notice to FHFA, an Enterprise may calculate haircuts (Hs and Hfx) using
its own internal estimates of the volatilities of market prices and
foreign exchange rates:
(i) To use its own internal estimates, an Enterprise must satisfy
the following minimum standards:
(A) An Enterprise must use a 99th percentile one-tailed confidence
interval.
(B) The minimum holding period for a repo-style transaction and
client-facing derivative transaction is five business days and for an
eligible margin loan and a derivative contract other than a client-
facing derivative transaction is ten business days except for
transactions or netting sets for which paragraph (c)(4)(i)(C) of this
section applies. When an Enterprise calculates an own-estimates haircut
on a TN-day holding period, which is different from the
minimum holding period for the transaction type, the applicable haircut
(HM) is calculated using the following square root of time
formula:
[GRAPHIC] [TIFF OMITTED] TR17DE20.039

where

(1) TM equals 5 for repo-style transactions and client-
facing derivative transactions and 10 for eligible margin loans and
derivative contracts other than client-facing derivative transactions;
(2) TN equals the holding period used by the Enterprise
to derive HN; and
(3) HN equals the haircut based on the holding period
TN.
(C) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, an Enterprise must calculate the haircut using a
minimum holding period of twenty business days for the following
quarter except in the calculation of the exposure amount for purposes
of Sec. 1240.37. If a netting set contains one or more trades
involving illiquid collateral or an OTC derivative that cannot be
easily replaced, an Enterprise must calculate the haircut using a
minimum holding period of twenty business days. If over the two
previous quarters more than two margin disputes on a netting set have
occurred that lasted more than the holding period, then the Enterprise
must calculate the haircut for transactions in that netting set on the
basis of a holding period that is at least two times the minimum
holding period for that netting set.
(D) An Enterprise is required to calculate its own internal
estimates with inputs calibrated to historical data from a continuous
12-month period that reflects a period of significant financial stress
appropriate to the security or category of securities.
(E) An Enterprise must have policies and procedures that describe
how it determines the period of significant financial stress used to
calculate the Enterprise's own internal estimates for haircuts under
this section and must be able to provide empirical support for the
period used. The Enterprise must provide prior written notice to FHFA
if the Enterprise makes any material changes to these policies and
procedures.
(F) Nothing in this section prevents FHFA from requiring an
Enterprise to use a different period of significant financial stress in
the calculation of own internal estimates for haircuts.
(G) An Enterprise must update its data sets and calculate haircuts
no less frequently than quarterly and must also reassess data sets and
haircuts whenever market prices change materially.
(ii) With respect to debt securities that are investment grade, an
Enterprise may calculate haircuts for categories of securities. For a
category of securities, the Enterprise must calculate the haircut on
the basis of internal volatility estimates for securities in that
category that are representative of the securities in that category
that the Enterprise has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral. In determining relevant categories, the Enterprise must at
a minimum take into account:
(A) The type of issuer of the security;
(B) The credit quality of the security;
(C) The maturity of the security; and
(D) The interest rate sensitivity of the security.
(iii) With respect to debt securities that are not investment grade
and equity securities, an Enterprise must calculate a separate haircut
for each individual security.
(iv) Where an exposure or collateral (whether in the form of cash
or securities) is denominated in a currency that differs from the
settlement currency, the Enterprise must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(v) An Enterprise's own estimates of market price and foreign
exchange rate volatilities may not take into account the correlations
among securities and foreign exchange rates on either the exposure or
collateral side of a transaction (or netting set) or the correlations
among securities and foreign exchange rates between the exposure and
collateral sides of the transaction (or netting set).

Risk-Weighted Assets for Unsettled Transactions

Sec. 1240.40 Unsettled transactions.

(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or
commodities transaction in which the buyer is obligated to make payment
only if the seller has made delivery of the securities or commodities
and the seller is obligated to deliver the securities or

[[Page 82241]]

commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign
exchange transaction in which each counterparty is obligated to make a
final transfer of one or more currencies only if the other counterparty
has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual
settlement period for the transaction is equal to or less than the
market standard for the instrument underlying the transaction and equal
to or less than five business days.
(4) Positive current exposure of an Enterprise for a transaction is
the difference between the transaction value at the agreed settlement
price and the current market price of the transaction, if the
difference results in a credit exposure of the Enterprise to the
counterparty.
(b) Scope. This section applies to all transactions involving
securities, foreign exchange instruments, and commodities that have a
risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are marked-to-market daily and
subject to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style
transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is
longer than the normal settlement period (which are treated as OTC
derivative contracts as provided in Sec. 1240.36).
(c) System-wide failures. In the case of a system-wide failure of a
settlement, clearing system or central counterparty, FHFA may waive
risk-based capital requirements for unsettled and failed transactions
until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP)
transactions. An Enterprise must hold risk-based capital against any
DvP or PvP transaction with a normal settlement period if the
Enterprise's counterparty has not made delivery or payment within five
business days after the settlement date. The Enterprise must determine
its risk-weighted asset amount for such a transaction by multiplying
the positive current exposure of the transaction for the Enterprise by
the appropriate risk weight in table 1 to this paragraph (d).
[GRAPHIC] [TIFF OMITTED] TR17DE20.040

(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-
versus-payment) transactions. (1) An Enterprise must hold risk-based
capital against any non-DvP/non-PvP transaction with a normal
settlement period if the Enterprise has delivered cash, securities,
commodities, or currencies to its counterparty but has not received its
corresponding deliverables by the end of the same business day. The
Enterprise must continue to hold risk-based capital against the
transaction until the Enterprise has received its corresponding
deliverables.
(2) From the business day after the Enterprise has made its
delivery until five business days after the counterparty delivery is
due, the Enterprise must calculate the risk-weighted asset amount for
the transaction by treating the current fair value of the deliverables
owed to the Enterprise as an exposure to the counterparty and using the
applicable counterparty risk weight under this subpart D.
(3) If the Enterprise has not received its deliverables by the
fifth business day after counterparty delivery was due, the Enterprise
must assign a 1,250 percent risk weight to the current fair value of
the deliverables owed to the Enterprise.
(f) Total risk-weighted assets for unsettled transactions. Total
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP
transactions.

Risk-Weighted Assets for CRT and Other Securitization Exposures

Sec. 1240.41 Operational requirements for CRT and other
securitization exposures.

(a) Operational criteria for traditional securitizations. An
Enterprise that transfers exposures it has purchased or otherwise
acquired to a securitization SPE or other third party in connection
with a traditional securitization may exclude the exposures from the
calculation of its risk-weighted assets only if each condition in this
section is satisfied. An Enterprise that meets these conditions must
hold risk-based capital against any credit risk it retains in
connection with the securitization. An Enterprise that fails to meet
these conditions must hold risk-based capital against the transferred
exposures as if they had not been securitized and must deduct from
common equity tier 1 capital any after-tax gain-on-sale resulting from
the transaction. The conditions are:
(1) The exposures are not reported on the Enterprise's consolidated
balance sheet under GAAP;
(2) The Enterprise has transferred to one or more third parties
credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls; and
(4) The securitization does not:

[[Page 82242]]

(i) Include one or more underlying exposures in which the borrower
is permitted to vary the drawn amount within an agreed limit under a
line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For
synthetic securitizations, an Enterprise may recognize for risk-based
capital purposes the use of a credit risk mitigant to hedge underlying
exposures only if each condition in this paragraph (b) is satisfied. An
Enterprise that meets these conditions must hold risk-based capital
against any credit risk of the exposures it retains in connection with
the synthetic securitization. An Enterprise that fails to meet these
conditions or chooses not to recognize the credit risk mitigant for
purposes of this section must instead hold risk-based capital against
the underlying exposures as if they had not been synthetically
securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria as set forth in the
definition of ``eligible guarantee'' in Sec. 1240.2, except for the
criteria in paragraph (3) of that definition; or
(iii) A credit derivative that meets all criteria as set forth in
the definition of ``eligible credit derivative'' in Sec. 1240.2,
except for the criteria in paragraph (3) of the definition of
``eligible guarantee'' in Sec. 1240.2.
(2) The Enterprise transfers credit risk associated with the
underlying exposures to one or more third parties, and the terms and
conditions in the credit risk mitigants employed do not include
provisions that:
(i) Allow for the termination of the credit protection due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the Enterprise to alter or replace the underlying
exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Enterprise's cost of credit protection in
response to deterioration in the credit quality of the underlying
exposures;
(iv) Increase the yield payable to parties other than the
Enterprise in response to a deterioration in the credit quality of the
underlying exposures; or
(v) Provide for increases in a retained first loss position or
credit enhancement provided by the Enterprise after the inception of
the securitization;
(3) The Enterprise obtains a well-reasoned opinion from legal
counsel that confirms the enforceability of the credit risk mitigant in
all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible
clean-up calls.
(c) Operational criteria for credit risk transfers. For credit risk
transfers, an Enterprise may recognize for risk-based capital purposes,
the use of a credit risk transfer only if each condition in this
paragraph (c) is satisfied (or, for a credit risk transfer entered into
before February 16, 2021, only if each condition in paragraphs (c)(2)
and (3) of this section is satisfied). An Enterprise that meets these
conditions must hold risk-based capital against any credit risk of the
exposures it retains in connection with the credit risk transfer. An
Enterprise that fails to meet these conditions or chooses not to
recognize the credit risk transfer for purposes of this section must
instead hold risk-based capital against the underlying exposures as if
they had not been subject to the credit risk transfer. The conditions
are:
(1) The credit risk transfer is any of the following--
(i) An eligible funded synthetic risk transfer;
(ii) An eligible reinsurance risk transfer;
(iii) An eligible single-family lender risk share;
(iv) An eligible multifamily lender risk share; or
(v) An eligible senior-subordinated structure.
(2) The credit risk transfer has been approved by FHFA as effective
in transferring the credit risk of one or more mortgage exposures to
another party, taking into account any counterparty, recourse, or other
risk to the Enterprise and any capital, liquidity, or other
requirements applicable to counterparties;
(3) The Enterprise transfers credit risk associated with the
underlying exposures to one or more third parties, and the terms and
conditions in the credit risk transfer employed do not include
provisions that:
(i) Allow for the termination of the credit risk transfer due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the Enterprise to alter or replace the underlying
exposures to improve the credit quality of the underlying exposures;
(iii) Increase the Enterprise's cost of credit protection in
response to deterioration in the credit quality of the underlying
exposures;
(iv) Increase the yield payable to parties other than the
Enterprise in response to a deterioration in the credit quality of the
underlying exposures; or
(v) Provide for increases in a retained first loss position or
credit enhancement provided by the Enterprise after the inception of
the credit risk transfer;
(4) The Enterprise obtains a well-reasoned opinion from legal
counsel that confirms the enforceability of the credit risk transfer in
all relevant jurisdictions;
(5) Any clean-up calls relating to the credit risk transfer are
eligible clean-up calls; and
(6) The Enterprise includes in its periodic disclosures under the
Federal securities laws, or in other appropriate public disclosures, a
reasonably detailed description of--
(i) The material recourse or other risks that might reduce the
effectiveness of the credit risk transfer in transferring the credit
risk on the underlying exposures to third parties; and
(ii) Each condition under paragraph (a) of this section (governing
traditional securitizations) or paragraph (b) of this section
(governing synthetic securitizations) that is not satisfied by the
credit risk transfer and the reasons that each such condition is not
satisfied.
(d) Due diligence requirements for securitization exposures. (1)
Except for exposures that are deducted from common equity tier 1
capital and exposures subject to Sec. 1240.42(h), if an Enterprise is
unable to demonstrate to the satisfaction of FHFA a comprehensive
understanding of the features of a securitization exposure that would
materially affect the performance of the exposure, the Enterprise must
assign the securitization exposure a risk weight of 1,250 percent. The
Enterprise's analysis must be commensurate with the complexity of the
securitization exposure and the materiality of the exposure in relation
to its capital.
(2) An Enterprise must demonstrate its comprehensive understanding
of a securitization exposure under paragraph (d)(1) of this section,
for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a
securitization exposure prior to acquiring the exposure, and
documenting such analysis within three business days after acquiring
the exposure, considering:
(A) Structural features of the securitization that would materially
impact the performance of the exposure, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity enhancements, fair value triggers, the performance of
organizations that service the exposure, and deal-specific definitions
of default;

[[Page 82243]]

(B) Relevant information regarding the performance of the
underlying credit exposure(s), for example, the percentage of loans 30,
60, and 90 days past due; default rates; prepayment rates; loans in
foreclosure; property types; occupancy; average credit score or other
measures of creditworthiness; average loan-to-value ratio; and industry
and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-
ask spread, most recent sales price and historic price volatility,
trading volume, implied market rating, and size, depth and
concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the
underlying securitization exposures, for example, the issuer name and
credit quality, and the characteristics and performance of the
exposures underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly),
evaluating, reviewing, and updating as appropriate the analysis
required under paragraph (d)(1) of this section for each securitization
exposure.

Sec. 1240.42 Risk-weighted assets for CRT and other securitization
exposures.

(a) Securitization risk weight approaches. Except as provided
elsewhere in this section or in Sec. 1240.41:
(1) An Enterprise must deduct from common equity tier 1 capital any
after-tax gain-on-sale resulting from a securitization and apply a
1,250 percent risk weight to the portion of a CEIO that does not
constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section, an Enterprise may assign a risk
weight to the securitization exposure either using the simplified
supervisory formula approach (SSFA) in accordance with Sec. 1240.43(a)
through (d) for a securitization exposure that is not a retained CRT
exposure or an acquired CRT exposure or using the credit risk transfer
approach (CRTA) in accordance with Sec. 1240.44 for a retained CRT
exposure, and in either case, subject to the limitation under paragraph
(e) of this section.
(3) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and the Enterprise cannot, or chooses
not to apply the SSFA or the CRTA to the exposure, the Enterprise must
assign a risk weight to the exposure as described in Sec. 1240.45.
(4) If a securitization exposure is a derivative contract (other
than protection provided by an Enterprise in the form of a credit
derivative) that has a first priority claim on the cash flows from the
underlying exposures (notwithstanding amounts due under interest rate
or currency derivative contracts, fees due, or other similar payments),
an Enterprise may choose to set the risk-weighted asset amount of the
exposure equal to the amount of the exposure as determined in paragraph
(c) of this section.
(b) Total risk-weighted assets for securitization exposures. An
Enterprise's total risk-weighted assets for securitization exposures
equals the sum of the risk-weighted asset amount for securitization
exposures that the Enterprise risk weights under Sec. 1240.41(d),
Sec. 1240.42(a)(1), Sec. 1240.43, Sec. 1240.44, or Sec. 1240.45,
and paragraphs (e) through (h) of this section, as applicable.
(c) Exposure amount of a CRT or other securitization exposure--(1)
On-balance sheet securitization exposures. Except as provided for
retained CRT exposures in Sec. 1240.44(f), the exposure amount of an
on-balance sheet securitization exposure (excluding a repo-style
transaction, eligible margin loan, OTC derivative contract, or cleared
transaction) is equal to the carrying value of the exposure.
(2) Off-balance sheet securitization exposures. Except as provided
in paragraph (h) of this section or as provided for retained CRT
exposures in Sec. 1240.44(f), the exposure amount of an off-balance
sheet securitization exposure that is not a repo-style transaction,
eligible margin loan, cleared transaction (other than a credit
derivative), or an OTC derivative contract (other than a credit
derivative) is the notional amount of the exposure.
(3) Repo-style transactions, eligible margin loans, and derivative
contracts. The exposure amount of a securitization exposure that is a
repo-style transaction, eligible margin loan, or derivative contract
(other than a credit derivative) is the exposure amount of the
transaction as calculated under Sec. 1240.36 or Sec. 1240.39, as
applicable.
(d) Overlapping exposures. If an Enterprise has multiple
securitization exposures that provide duplicative coverage to the
underlying exposures of a securitization, the Enterprise is not
required to hold duplicative risk-based capital against the overlapping
position. Instead, the Enterprise may apply to the overlapping position
the applicable risk-based capital treatment that results in the highest
risk-based capital requirement.
(e) Implicit support. If an Enterprise provides support to a
securitization (including a CRT) in excess of the Enterprise's
contractual obligation to provide credit support to the securitization
(implicit support):
(1) The Enterprise must include in risk-weighted assets all of the
underlying exposures associated with the securitization as if the
exposures had not been securitized and must deduct from common equity
tier 1 capital any after-tax gain-on-sale resulting from the
securitization; and
(2) The Enterprise must disclose publicly:
(i) That it has provided implicit support to the securitization;
and
(ii) The risk-based capital impact to the Enterprise of providing
such implicit support.
(f) Interest-only mortgage-backed securities. Regardless of any
other provisions in this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than
100 percent.
(g) Nth-to-default credit derivatives--(1) Protection provider. An
Enterprise may assign a risk weight using the SSFA in Sec. 1240.43 to
an nth-to-default credit derivative in accordance with this paragraph
(g). An Enterprise must determine its exposure in the nth-to-default
credit derivative as the largest notional amount of all the underlying
exposures.
(2) Attachment and detachment points. For purposes of determining
the risk weight for an nth-to-default credit derivative using the SSFA,
the Enterprise must calculate the attachment point and detachment point
of its exposure as follows:
(i) The attachment point (parameter A) is the ratio of the sum of
the notional amounts of all underlying exposures that are subordinated
to the Enterprise's exposure to the total notional amount of all
underlying exposures. The ratio is expressed as a decimal value between
zero and one. In the case of a first-to-default credit derivative,
there are no underlying exposures that are subordinated to the
Enterprise's exposure. In the case of a second-or-subsequent-to-default
credit derivative, the smallest (n-1) notional amounts of the
underlying exposure(s) are subordinated to the Enterprise's exposure.
(ii) The detachment point (parameter D) equals the sum of parameter
A plus the ratio of the notional amount of the Enterprise's exposure in
the nth-to-default credit derivative to the total notional amount of
all underlying exposures. The ratio is expressed as a decimal value
between zero and one.

[[Page 82244]]

(3) Risk weights. An Enterprise that does not use the SSFA to
determine a risk weight for its nth-to-default credit derivative must
assign a risk weight of 1,250 percent to the exposure.
(4) Protection purchaser--(i) First-to-default credit derivatives.
An Enterprise that obtains credit protection on a group of underlying
exposures through a first-to-default credit derivative that meets the
rules of recognition of Sec. 1240.38(b) must determine its risk-based
capital requirement for the underlying exposures as if the Enterprise
synthetically securitized the underlying exposure with the smallest
risk-weighted asset amount and had obtained no credit risk mitigant on
the other underlying exposures. An Enterprise must calculate a risk-
based capital requirement for counterparty credit risk according to
Sec. 1240.36 for a first-to-default credit derivative that does not
meet the rules of recognition of Sec. 1240.38(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) An
Enterprise that obtains credit protection on a group of underlying
exposures through a nth-to-default credit derivative that meets the
rules of recognition of Sec. 1240.38(b) (other than a first-to-default
credit derivative) may recognize the credit risk mitigation benefits of
the derivative only if:
(1) The Enterprise also has obtained credit protection on the same
underlying exposures in the form of first-through-(n-1)-to-default
credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If an Enterprise satisfies the requirements of paragraph
(i)(4)(ii)(A) of this section, the Enterprise must determine its risk-
based capital requirement for the underlying exposures as if the
Enterprise had only synthetically securitized the underlying exposure
with the nth smallest risk-weighted asset amount and had obtained no
credit risk mitigant on the other underlying exposures.
(C) An Enterprise must calculate a risk-based capital requirement
for counterparty credit risk according to Sec. 1240.36 for a nth-to-
default credit derivative that does not meet the rules of recognition
of Sec. 1240.38(b).
(h) Guarantees and credit derivatives other than nth-to-default
credit derivatives--(1) Protection provider. For a guarantee or credit
derivative (other than an nth-to-default credit derivative) provided by
an Enterprise that covers the full amount or a pro rata share of a
securitization exposure's principal and interest, the Enterprise must
risk weight the guarantee or credit derivative as if it holds the
portion of the reference exposure covered by the guarantee or credit
derivative.
(2) Protection purchaser. (i) An Enterprise that purchases a
guarantee or OTC credit derivative (other than an nth-to-default credit
derivative) that is recognized under Sec. 1240.46 as a credit risk
mitigant (including via collateral recognized under Sec. 1240.39) is
not required to compute a separate counterparty credit risk capital
requirement under Sec. 1240.31, in accordance with Sec. 1240.36(c).
(ii) If an Enterprise cannot, or chooses not to, recognize a
purchased credit derivative as a credit risk mitigant under Sec.
1240.46, the Enterprise must determine the exposure amount of the
credit derivative under Sec. 1240.36.
(A) If the Enterprise purchases credit protection from a
counterparty that is not a securitization SPE, the Enterprise must
determine the risk weight for the exposure according to this subpart D.
(B) If the Enterprise purchases the credit protection from a
counterparty that is a securitization SPE, the Enterprise must
determine the risk weight for the exposure according to Sec. 1240.42,
including Sec. 1240.42(a)(4) for a credit derivative that has a first
priority claim on the cash flows from the underlying exposures of the
securitization SPE (notwithstanding amounts due under interest rate or
currency derivative contracts, fees due, or other similar payments).

Sec. 1240.43 Simplified supervisory formula approach (SSFA).

(a) General requirements for the SSFA. To use the SSFA to determine
the risk weight for a securitization exposure, an Enterprise must have
data that enables it to assign accurately the parameters described in
paragraph (b) of this section. Data used to assign the parameters
described in paragraph (b) of this section must be the most currently
available data; if the contracts governing the underlying exposures of
the securitization require payments on a monthly or quarterly basis,
the data used to assign the parameters described in paragraph (b) of
this section must be no more than 91 calendar days old. An Enterprise
that does not have the appropriate data to assign the parameters
described in paragraph (b) of this section must assign a risk weight of
1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a
securitization exposure using the SSFA, an Enterprise must have
accurate information on the following five inputs to the SSFA
calculation:
(1) KG is the weighted-average (with unpaid principal used as the
weight for each exposure) adjusted total capital requirement of the
underlying exposures calculated using this subpart. KG is expressed as
a decimal value between zero and one (that is, an average risk weight
of 100 percent represents a value of KG equal to 0.08).
(2) Parameter W is expressed as a decimal value between zero and
one. Parameter W is the ratio of the sum of the dollar amounts of any
underlying exposures of the securitization that meet any of the
criteria as set forth in paragraphs (b)(2)(i) through (vi) of this
section to the balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other
than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the
terms of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student
loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide
for period(s) of deferral that are not initiated based on changes in
the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which
represents the threshold at which credit losses will first be allocated
to the exposure. Except as provided in Sec. 1240.42(g) for nth-to-
default credit derivatives, parameter A equals the ratio of the current
dollar amount of underlying exposures that are subordinated to the
exposure of the Enterprise to the current dollar amount of underlying
exposures. Any reserve account funded by the accumulated cash flows
from the underlying exposures that is subordinated to the Enterprise's
securitization exposure may be included in the calculation of parameter
A to the extent that cash is present in the account. Parameter A is
expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which
represents the threshold at which credit losses of principal allocated
to the exposure would result in a total loss of principal. Except as
provided in Sec. 1240.42(g) for nth-to-default credit derivatives,
parameter D equals parameter A plus the ratio of the current dollar
amount of

[[Page 82245]]

the securitization exposures that are pari passu with the exposure
(that is, have equal seniority with respect to credit risk) to the
current dollar amount of the underlying exposures. Parameter D is
expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for
securitization exposures that are not resecuritization exposures and
equal to 1.5 for resecuritization exposures (except p is equal to 0.5
for resecuritization exposures secured by MBS guaranteed by an
Enterprise).
(c) Mechanics of the SSFA. KG and W are used to calculate KA, the
augmented value of KG, which reflects the observed credit quality of
the underlying exposures. KA is defined in paragraph (d) of this
section. The values of parameters A and D, relative to KA determine the
risk weight assigned to a securitization exposure as described in
paragraph (d) of this section. The risk weight assigned to a
securitization exposure, or portion of a securitization exposure, as
appropriate, is the larger of the risk weight determined in accordance
with this paragraph (c) or paragraph (d) of this section and a risk
weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization
exposure is less than or equal to KA, the exposure must be assigned a
risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a securitization
exposure is greater than or equal to KA, the Enterprise must calculate
the risk weight in accordance with paragraph (d) of this section.
(3) When A is less than KA and D is greater than KA, the risk
weight is a weighted-average of 1,250 percent and 1,250 percent times
KSSFA calculated in accordance with paragraph (d) of this
section. For the purpose of this weighted-average calculation:
(i) The weight assigned to 1,250 percent equals
[GRAPHIC] [TIFF OMITTED] TR17DE20.041

(ii) The weight assigned to 1,250 percent times KSSFA equals
[GRAPHIC] [TIFF OMITTED] TR17DE20.042

(iii) The risk weight will be set equal to:
[GRAPHIC] [TIFF OMITTED] TR17DE20.043

(d) SSFA equation. (1) The Enterprise must define the following
parameters:
[GRAPHIC] [TIFF OMITTED] TR17DE20.044

e = 2.71828, the base of the natural logarithms.
(2) Then the Enterprise must calculate KSSFA according to the
following equation:
[GRAPHIC] [TIFF OMITTED] TR17DE20.045

(3) The risk weight for the exposure (expressed as a percent) is
equal to KSSFA * 1,250.
(e) Limitations. Notwithstanding any other provision of this
section, an Enterprise must assign a risk weight of not less than 20
percent to a securitization exposure.

Sec. 1240.44 Credit risk transfer approach (CRTA).

(a) General requirements for the CRTA. To use the CRTA to determine
the risk weighted assets for a retained CRT exposure, an Enterprise
must have data that enables it to assign accurately the parameters
described in paragraph (b) of this section. Data used to assign the
parameters described in paragraph (b) of this section must be the most
currently available data; if the contracts governing the underlying
exposures of the credit risk transfer require payments on a monthly or
quarterly basis, the data used to assign the parameters described in
paragraph (b) of this section must be no more than 91 calendar days
old. An Enterprise that does not have the appropriate data to assign
the parameters described in paragraph (b) of this section must assign a
risk weight of 1,250 percent to the retained CRT exposure.
(b) CRTA parameters. To calculate the risk weighted assets for a
retained CRT exposure, an Enterprise must have accurate information on
the following ten inputs to the CRTA calculation.
(1) Parameter A is the attachment point for the exposure, which
represents the threshold at which credit losses will first be allocated
to the exposure. Parameter A equals the ratio of the current dollar
amount of underlying exposures that are subordinated to the exposure of
the Enterprise to the current dollar amount of underlying exposures.
Any reserve account funded by the accumulated cash flows from the
underlying exposures that is subordinated to the Enterprise's exposure
may be included in the calculation of parameter A to the extent that
cash is present in the account. Parameter A is expressed as a value
between 0 and 100 percent.
(2) Parameter AggUPB$ is the aggregate unpaid principal
balance of the underlying mortgage exposures.
(3) Parameter CM is the percentage of a tranche sold in the
capital markets. CM is expressed as a value between 0 and 100
percent.
(4) Parameter CollatRIF is the amount of financial
collateral posted by a counterparty under a loss sharing contract
expressed as a percentage of the risk in force. For multifamily lender
loss sharing transactions where an Enterprise has the contractual right
to receive future lender guarantee-fee revenue, the Enterprise may
include up to 12 months of estimated lender retained servicing fees in
excess of servicing costs on the multifamily mortgage exposures subject
to the loss sharing contract. CollatRIF is expressed as a value
between 0 and 100 percent.
(5) Parameter D is the detachment point for the exposure, which
represents the threshold at which credit losses of principal allocated
to the exposure would result in a total loss of principal. Parameter D
equals parameter A plus the ratio of the current dollar amount of the
exposures that are pari passu with the exposure (that is, have equal
seniority with respect to credit risk) to the current dollar amount of
the underlying exposures. Parameter D is expressed as a value between 0
and 100 percent.
(6) Parameter EL$ is the remaining lifetime net expected
credit risk losses of the underlying mortgage exposures. EL$
must be calculated internally by an Enterprise. If the contractual
terms of the CRT do not provide for the transfer of the counterparty
credit risk associated with any loan-level credit

[[Page 82246]]

enhancement or other loss sharing on the underlying mortgage exposures,
then the Enterprise must calculate EL$ assuming no
counterparty haircuts. Parameter EL$ is expressed in
dollars.
(7) Parameter HC is the haircut for the counterparty in contractual
loss sharing transactions.
(i) For a CRT with respect to single-family mortgage exposures, the
counterparty haircut is set forth in table 12 to paragraph (e)(3)(ii)
in Sec. 1240.33, determined as if the counterparty to the CRT were a
counterparty to loan-level credit enhancement (as defined in Sec.
1240.33(a)) and considering the counterparty rating and mortgage
concentration risk of the counterparty to the CRT and the single-family
segment and product of the underlying single-family mortgage exposures.
(ii) For a CRT with respect to multifamily mortgage exposures, the
counterparty haircut is set forth in table 1 to this paragraph
(b)(7)(ii), with counterparty rating and mortgage concentration risk
having the meaning given in Sec. 1240.33(a).
[GRAPHIC] [TIFF OMITTED] TR17DE20.046

(8) Parameter LS is the percentage of a tranche that is
either insured, reinsured, or afforded coverage through lender
reimbursement of credit losses of principal. LS is expressed as
a value between 0 and 100 percent.
(9) Parameter LTF is the loss timing factor which accounts
for maturity differences between the CRT and the underlying mortgage
exposures. Maturity differences arise when the maturity date of the CRT
is before the maturity dates of the underlying mortgage exposures.
LTF is expressed as a value between 0 and 100 percent.
(i) An Enterprise must have the following information to calculate
LTF for a CRT with respect to multifamily mortgage exposures:
(A) The remaining months to the contractual maturity of the CRT
(CRTRMM).
(B) The UPB-weighted-average remaining months to maturity of the
underlying multifamily mortgage exposures that have remaining months to
maturity greater than CRTRMM (MMERMM). If the underlying multifamily
mortgage exposures all have maturity dates less than or equal to
CRTRMM, MMERMM should equal CRTRMM.
(C) The sum of UPB on the underlying multifamily mortgage exposures
that have remaining loan terms less than or equal to CRTRMM expressed
as a percent of total UPB on the underlying multifamily mortgage
exposures (LTFUPB%).
(D) An Enterprise must use the following method to calculate LTF%
for multifamily CRTs:
[GRAPHIC] [TIFF OMITTED] TR17DE20.047

(ii) An Enterprise must have the following information to calculate
LTF% for a newly issued CRT with respect to single-family mortgage
exposures:
(A) The original closing date (or effective date) of the CRT and
the maturity date on the CRT.
(B) UPB share of single-family mortgage exposures that have
original amortization terms of less than or equal to 189 months
(CRTF15%).
(C) UPB share of single-family mortgage exposures that have
original amortization terms greater than 189 months and OLTVs of less
than or equal to 80 percent (CRT80NotF15%).
(D) The duration of seasoning.
(E) An Enterprise must use the following method to calculate
LTF for single-family CRTs: Calculate CRT months to maturity
(CRTMthstoMaturity) using one of the following methods:
(1) For single-family CRTs with reimbursement based upon occurrence
or resolution of delinquency, CRTMthstoMaturity is the difference
between the CRT's maturity date and original closing date, except for
the following:
(i) If the coverage based upon delinquency is between one and three
months, add 24 months to the difference between the CRT's maturity date
and original closing date; and

[[Page 82247]]

(ii) If the coverage based upon delinquency is between four and six
months, add 18 months to the difference between the CRT's maturity date
and original closing date.
(2) For all other single-family CRTs, CRTMthstoMaturity is the
difference between the CRT's maturity date and original closing date.
(i) If CRTMthstoMaturity is a multiple of 12, then an Enterprise
must use the first column of Table 2 to paragraph (b)(9)(ii)(E)(2)(iii)
of this section to identify the row matching CRTMthstoMaturity and take
a weighted average of the three loss timing factors in columns 2, 3,
and 4 as follows:
LTF = (CRTLT15 * CRTLT15) + (CRTLT80Not15 *
CRTLT80NotF15) + (CRTLTGT80Not15 * (1 - CRT80NotF15 -
CRTF15))

(ii) If CRTMthstoMaturity is not a multiple of 12, an Enterprise
must use the first column of Table 2 to paragraph (b)(9)(ii)(E)(2)(iii)
of this section to identify the two rows that are closest to
CRTMthstoMaturity and take a weighted average between the two rows of
loss timing factors using linear interpolation, where the weights
reflect CRTMthstoMaturity.
(iii) For seasoned single-family CRTs, the LTF% is calculated:
[GRAPHIC] [TIFF OMITTED] TR17DE20.049

where:

CRTLTM is the loss timing factor calculated under (ii) of
this subsection.
CRTLTS is the loss timing factor calculated under (ii) of
this subsection replacing CRTMthstoMaturity with the duration of
seasoning.
CRTMthstoMaturity is calculated as per (E) of this section.
CRTLT15 is the CRT loss timing factor for pool groups backed by
single-family mortgage exposures with original amortization terms <=
189 months.
CRTLT80Not15: is the CRT loss timing factor for pool groups backed
by single-family mortgage exposures with original amortization terms
> 189 months and OLTVs <=80 percent.
CRTLTGT80Not15 is the CRT loss timing factor for pool groups backed
by single-family mortgage exposures with original amortization terms
> 189 months and OLTVs > 80 percent.
BILLING CODE 8070-01-P

[[Page 82248]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.050

BILLING CODE 8070-01-C
(10) Parameter RWA$ is the aggregate credit risk-weighted assets
associated with the underlying mortgage exposures.
(11) Parameter CntptyRWA$ is the aggregate credit risk-weighted
assets due to counterparty haircuts from loan-level credit
enhancements. CntptyRWA$ is the difference between:
(i) Parameter RWA$; and
(ii) Aggregate credit risk-weighted assets associated with the
underlying mortgage exposures where the counterparty haircuts for loan-
level credit enhancements are set to zero.
(c) Mechanics of the CRTA. The risk weight assigned to a retained
CRT exposure, or portion of a retained CRT exposure, as appropriate, is
the larger of RW% determined in accordance with paragraph (d) of this
section and a risk weight of 10 percent.
(1) When the detachment point, parameter D, for a retained CRT
exposure is less than or equal to the sum of KA and AggEL%, the
exposure must be assigned a risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a retained CRT
exposure is greater than or equal to or equal to the sum of KA and
AggEL, determined in accordance with paragraph (d) of this
section, the exposure must be assigned a risk weight of 10 percent.
(3) When parameter A is less than or equal to the sum of KA and
AggEL, and parameter D is greater than the sum of KA and
AggEL, the Enterprise must calculate the risk weight
as the sum of:
(i) 1,250 percent multiplied by the ratio of (A) the sum of KA and
AggEL

[[Page 82249]]

minus parameter A to (B) the difference between parameter D and
parameter A; and
(ii) 10 percent multiplied by the ratio of (A) parameter D minus
the sum of KA and AggEL to (B) the difference
between parameter D and parameter A.
(d) CRTA equations.
[GRAPHIC] [TIFF OMITTED] TR17DE20.052

If the contractual terms of the CRT do not provide for the transfer
of the counterparty credit risk associated with any loan-level credit
enhancement or other loss sharing on the underlying mortgage exposures,
then the Enterprise shall calculate KA as follows:
[GRAPHIC] [TIFF OMITTED] TR17DE20.053

Otherwise the Enterprise shall calculate KA as follows:
[GRAPHIC] [TIFF OMITTED] TR17DE20.054

(e) Limitations. Notwithstanding any other provision of this
section, an Enterprise must assign an overall risk weight of not less
than 10 percent to a retained CRT exposure.
(f) Adjusted exposure amount (AEA)--(1) In general. The adjusted
exposure amount (AEA) of a retained CRT exposure is equal to:
[GRAPHIC] [TIFF OMITTED] TR17DE20.055

(2) Inputs--(i) Enterprise adjusted exposure. The adjusted exposure
(EAE) of an Enterprise with respect to a retained CRT exposure is as
follows:

EAE,Tranche = 100% - (CM,Tranche
* LTEA,Tranche,CM * OEA) -
(LS,Tranche * LSEA,Tranche *
LTEA,Tranche,LS * OEA),

Where the loss timing effectiveness adjustments (LTEA) for a retained
CRT exposure are determined under paragraph (g) of this section, the
loss sharing effectiveness adjustment (LSEA) for a retained CRT
exposure is determine under paragraph (h) of this section, and the
overall effectiveness adjustment (OEA) is determined under paragraph
(i) of this section.
(ii) Expected loss share. The expected loss share is the share of a
tranche that is covered by expected loss (ELS):
[GRAPHIC] [TIFF OMITTED] TR17DE20.056

(iii) Risk weight. The risk weight of a retained CRT exposure is
determined under paragraph (d) of this section.
(g) Loss timing effectiveness adjustments. The loss timing
effectiveness adjustments (LTEA) for a retained CRT exposure is
calculated according to the following calculation:

i[fnof] (SLS,Tranche -
ELS,Tranche) > 0 then

LTEA,Tranche,CM

[[Page 82250]]

[GRAPHIC] [TIFF OMITTED] TR17DE20.057

LTEA,Tranche,LS
[GRAPHIC] [TIFF OMITTED] TR17DE20.058

Otherwise LTEA,Tranche,CM = 100% and
LTEA,Tranche,LS = 100%

where KA adjusted for loss timing (LTKA) is as
follows:

LTKA,CM = max ((KA + AggEL) * LTF,CM - AggEL,
0%)
LTKA,LS = max ((KA + AggEL) * LTF,LS - AggEL,
0%)

and
LTF,CM is LTF calculated for the capital markets
component of the tranche,
LTF,LS is LTF calculated for the loss sharing
component of the tranche, and the share of the tranche that is covered
by expected loss (ELS) and the share of the tranche that is covered by
stress loss (SLS) are as follows:
[GRAPHIC] [TIFF OMITTED] TR17DE20.059

(h) Loss sharing effectiveness adjustment. The loss sharing
effectiveness adjustment (LSEA) for a retained CRT exposure is
calculated according to the following calculation:

if (RW,Tranche - ELS,Tranche * 1250%) > 0 then
[GRAPHIC] [TIFF OMITTED] TR17DE20.060

Otherwise
LSEA,Tranche = 100%

where

UnCollatUL,Tranche = max(0%,SLS,Tranche -
max(CollatRIF,Tranche, ELS,Tranche))

SRIF,Tranche = 100% - max(SLS,Tranche,
CollatRIF,Tranche)

and the share of the tranche that is covered by expected loss (ELS) and
the share of the tranche that is covered by stress loss (SLS) are as
follows:
[GRAPHIC] [TIFF OMITTED] TR17DE20.061

[[Page 82251]]

(i) Overall effectiveness adjustment. The overall effectiveness
adjustment (OEA) for a retained CRT exposure is calculated according to
the following calculation:
[GRAPHIC] [TIFF OMITTED] TR17DE20.062

(j) RWA supplement for retained loan-level counterparty credit
risk. If the Enterprise elects to use the CRTA for a retained CRT
exposure and if the contractual terms of the CRT do not provide for the
transfer of the counterparty credit risk associated with any loan-level
credit enhancement or other loss sharing on the underlying mortgage
exposures, then the Enterprise must add the following risk-weighted
assets supplement (RWASup$) to risk weighted assets for the
retained CRT exposure.

RWASup$,Tranche = CntptyRWA$ * (D-A)

Otherwise the Enterprise shall add an RWASup$,Tranche of $0.

(k) Retained CRT Exposure. Credit risk-weighted assets for the
retained CRT exposure are as follows:

RWA$,Tranche = AEA$,Tranche * RW,Tranche
+ RWASup$,Tranche

Sec. 1240.45 Securitization exposures to which the SSFA and the CRTA
do not apply.

An Enterprise must assign a 1,250 percent risk weight to any
acquired CRT exposure and all securitization exposures to which the
Enterprise does not apply the SSFA under Sec. 1240.43 or the CRTA
under Sec. 1240.44.

Sec. 1240.46 Recognition of credit risk mitigants for securitization
exposures.

(a) General. (1) An originating Enterprise that has obtained a
credit risk mitigant to hedge its exposure to a synthetic or
traditional securitization that satisfies the operational criteria
provided in Sec. 1240.41 may recognize the credit risk mitigant under
Sec. 1240.38 or Sec. 1240.39, but only as provided in this section.
(2) An investing Enterprise that has obtained a credit risk
mitigant to hedge a securitization exposure may recognize the credit
risk mitigant under Sec. 1240.38 or Sec. 1240.39, but only as
provided in this section.
(b) Mismatches. An Enterprise must make any applicable adjustment
to the protection amount of an eligible guarantee or credit derivative
as required in Sec. 1240.38(d) through (f) for any hedged
securitization exposure. In the context of a synthetic securitization,
when an eligible guarantee or eligible credit derivative covers
multiple hedged exposures that have different residual maturities, the
Enterprise must use the longest residual maturity of any of the hedged
exposures as the residual maturity of all hedged exposures.

Risk-Weighted Assets for Equity Exposures

Sec. 1240.51 Introduction and exposure measurement.

(a) General. (1) To calculate its risk-weighted asset amounts for
equity exposures, an Enterprise must use the Simple Risk-Weight
Approach (SRWA) provided in Sec. 1240.52.
(2) An Enterprise must treat an investment in a separate account
(as defined in Sec. 1240.2) as if it were an equity exposure to an
investment fund.
(b) Adjusted carrying value. For purposes of Sec. Sec. 1240.51 and
1240.52, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the
Enterprise's carrying value of the exposure;
(2) [Reserved]
(3) For the off-balance sheet component of an equity exposure that
is not an equity commitment, the effective notional principal amount of
the exposure, the size of which is equivalent to a hypothetical on-
balance sheet position in the underlying equity instrument that would
evidence the same change in fair value (measured in dollars) given a
small change in the price of the underlying equity instrument, minus
the adjusted carrying value of the on-balance sheet component of the
exposure as calculated in paragraph (b)(1) of this section; and
(4) For a commitment to acquire an equity exposure (an equity
commitment), the effective notional principal amount of the exposure is
multiplied by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of one
year or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of
over one year receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.

Sec. 1240.52 Simple risk-weight approach (SRWA).

(a) General. Under the SRWA, an Enterprise's total risk-weighted
assets for equity exposures equals the sum of the risk-weighted asset
amounts for each of the Enterprise's individual equity exposures as
determined under this section.
(b) SRWA computation for individual equity exposures. An Enterprise
must determine the risk-weighted asset amount for an individual equity
exposure by multiplying the adjusted carrying value of the equity
exposure by the lowest applicable risk weight in this section.
(1) Community development equity exposures. A 100 percent risk
weight is assigned to an equity exposure that was acquired with the
prior written approval of FHFA and is designed primarily to promote
community welfare, including the welfare of low- and moderate-income
communities or families, such as by providing services or employment,
and excluding equity exposures to an unconsolidated small business
investment company and equity exposures held through a small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682).
(2) Other equity exposures. A 400 percent risk weight is assigned
to an equity exposure to an operating company or an investment in a
separate account.

Sec. Sec. 1240.53-1240.60 [Reserved]

Subpart E--Risk-Weighted Assets--Internal Ratings-Based and
Advanced Measurement Approaches

Sec. 1240.100 Purpose, applicability, and principle of conservatism.

(a) Purpose. This subpart establishes:
(1) Minimum requirements for using Enterprise-specific internal
risk measurement and management processes for calculating risk-based
capital requirements; and

[[Page 82252]]

(2) Methodologies for the Enterprises to calculate their advanced
approaches total risk-weighted assets.
(b) Applicability. (1) This subpart applies to each Enterprise.
(2) An Enterprise must also include in its calculation of advanced
credit risk-weighted assets under this subpart all covered positions,
as defined in subpart F of this part.
(c) Principle of conservatism. Notwithstanding the requirements of
this subpart, an Enterprise may choose not to apply a provision of this
subpart to one or more exposures provided that:
(1) The Enterprise can demonstrate on an ongoing basis to the
satisfaction of FHFA that not applying the provision would, in all
circumstances, unambiguously generate a risk-based capital requirement
for each such exposure greater than that which would otherwise be
required under this subpart;
(2) The Enterprise appropriately manages the risk of each such
exposure;
(3) The Enterprise notifies FHFA in writing prior to applying this
principle to each such exposure; and
(4) The exposures to which the Enterprise applies this principle
are not, in the aggregate, material to the Enterprise.

Sec. 1240.101 Definitions.

(a) Terms that are set forth in Sec. 1240.2 and used in this
subpart have the definitions assigned thereto in Sec. 1240.2.
(b) For the purposes of this subpart, the following terms are
defined as follows:
Advanced internal ratings-based (IRB) systems means an Enterprise's
internal risk rating and segmentation system; risk parameter
quantification system; data management and maintenance system; and
control, oversight, and validation system for credit risk of exposures.
Advanced systems means an Enterprise's advanced IRB systems,
operational risk management processes, operational risk data and
assessment systems, operational risk quantification systems, and, to
the extent used by the Enterprise, the internal models methodology,
advanced CVA approach, double default excessive correlation detection
process, and internal models approach (IMA) for equity exposures.
Backtesting means the comparison of an Enterprise's internal
estimates with actual outcomes during a sample period not used in model
development. In this context, backtesting is one form of out-of-sample
testing.
Benchmarking means the comparison of an Enterprise's internal
estimates with relevant internal and external data or with estimates
based on other estimation techniques.
Business environment and internal control factors means the
indicators of an Enterprise's operational risk profile that reflect a
current and forward-looking assessment of the Enterprise's underlying
business risk factors and internal control environment.
Dependence means a measure of the association among operational
losses across and within units of measure.
Economic downturn conditions means, with respect to an exposure
held by the Enterprise, those conditions in which the aggregate default
rates for that exposure's exposure subcategory (or subdivision of such
subcategory selected by the Enterprise) in the exposure's jurisdiction
(or subdivision of such jurisdiction selected by the Enterprise) are
significantly higher than average.
Eligible operational risk offsets means amounts, not to exceed
expected operational loss, that:
(i) Are generated by internal business practices to absorb highly
predictable and reasonably stable operational losses, including
reserves calculated consistent with GAAP; and
(ii) Are available to cover expected operational losses with a high
degree of certainty over a one-year horizon.
Expected operational loss (EOL) means the expected value of the
distribution of potential aggregate operational losses, as generated by
the Enterprise's operational risk quantification system using a one-
year horizon.
External operational loss event data means, with respect to an
Enterprise, gross operational loss amounts, dates, recoveries, and
relevant causal information for operational loss events occurring at
organizations other than the Enterprise.
Internal operational loss event data means, with respect to an
Enterprise, gross operational loss amounts, dates, recoveries, and
relevant causal information for operational loss events occurring at
the Enterprise.
Operational loss means a loss (excluding insurance or tax effects)
resulting from an operational loss event. Operational loss includes all
expenses associated with an operational loss event except for
opportunity costs, forgone revenue, and costs related to risk
management and control enhancements implemented to prevent future
operational losses.
Operational loss event means an event that results in loss and is
associated with any of the following seven operational loss event type
categories:
(i) Internal fraud, which means the operational loss event type
category that comprises operational losses resulting from an act
involving at least one internal party of a type intended to defraud,
misappropriate property, or circumvent regulations, the law, or company
policy excluding diversity- and discrimination-type events.
(ii) External fraud, which means the operational loss event type
category that comprises operational losses resulting from an act by a
third party of a type intended to defraud, misappropriate property, or
circumvent the law. All third-party-initiated credit losses are to be
treated as credit risk losses.
(iii) Employment practices and workplace safety, which means the
operational loss event type category that comprises operational losses
resulting from an act inconsistent with employment, health, or safety
laws or agreements, payment of personal injury claims, or payment
arising from diversity- and discrimination-type events.
(iv) Clients, products, and business practices, which means the
operational loss event type category that comprises operational losses
resulting from the nature or design of a product or from an
unintentional or negligent failure to meet a professional obligation to
specific clients (including fiduciary and suitability requirements).
(v) Damage to physical assets, which means the operational loss
event type category that comprises operational losses resulting from
the loss of or damage to physical assets from natural disaster or other
events.
(vi) Business disruption and system failures, which means the
operational loss event type category that comprises operational losses
resulting from disruption of business or system failures.
(vii) Execution, delivery, and process management, which means the
operational loss event type category that comprises operational losses
resulting from failed transaction processing or process management or
losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from inadequate
or failed internal processes, people, and systems or from external
events (including legal risk but excluding strategic and reputational
risk).
Operational risk exposure means the 99.9th percentile of the
distribution of potential aggregate operational losses, as generated by
the Enterprise's operational risk quantification system over a one-year
horizon (and not incorporating eligible operational risk

[[Page 82253]]

offsets or qualifying operational risk mitigants).
Risk parameter means a variable used in determining risk-based
capital requirements for exposures, such as probability of default,
loss given default, exposure at default, or effective maturity.
Scenario analysis means a systematic process of obtaining expert
opinions from business managers and risk management experts to derive
reasoned assessments of the likelihood and loss impact of plausible
high-severity operational losses. Scenario analysis may include the
well-reasoned evaluation and use of external operational loss event
data, adjusted as appropriate to ensure relevance to an Enterprise's
operational risk profile and control structure.
Unexpected operational loss (UOL) means the difference between the
Enterprise's operational risk exposure and the Enterprise's expected
operational loss.
Unit of measure means the level (for example, organizational unit
or operational loss event type) at which the Enterprise's operational
risk quantification system generates a separate distribution of
potential operational losses.

Sec. 1240.121 Minimum requirements.

(a) Process and systems requirements. (1) An Enterprise must have a
rigorous process for assessing its overall capital adequacy in relation
to its risk profile and a comprehensive strategy for maintaining an
appropriate level of capital.
(2) The systems and processes used by an Enterprise for risk-based
capital purposes under this subpart must be consistent with the
Enterprise's internal risk management processes and management
information reporting systems.
(3) Each Enterprise must have an appropriate infrastructure with
risk measurement and management processes that meet the requirements of
this section and are appropriate given the Enterprise's size and level
of complexity. The Enterprise must ensure that the risk parameters and
reference data used to determine its risk-based capital requirements
are representative of long run experience with respect to its credit
risk and operational risk exposures.
(b) Risk rating and segmentation systems for exposures. (1) An
Enterprise must have an internal risk rating and segmentation system
that accurately, reliably, and meaningfully differentiates among
degrees of credit risk for the Enterprise's exposures. When assigning
an internal risk rating, an Enterprise may consider a third-party
assessment of credit risk, provided that the Enterprise's internal risk
rating assignment does not rely solely on the external assessment.
(2) If an Enterprise uses multiple rating or segmentation systems,
the Enterprise's rationale for assigning an exposure to a particular
system must be documented and applied in a manner that best reflects
the obligor or exposure's level of risk. An Enterprise must not
inappropriately allocate exposures across systems to minimize
regulatory capital requirements.
(3) In assigning ratings to exposures, an Enterprise must use all
relevant and material information and ensure that the information is
current.
(c) Quantification of risk parameters for exposures. (1) The
Enterprise must have a comprehensive risk parameter quantification
process that produces accurate, timely, and reliable estimates of the
risk parameters on a consistent basis for the Enterprise's exposures.
(2) An Enterprise's estimates of risk parameters must incorporate
all relevant, material, and available data that is reflective of the
Enterprise's actual exposures and of sufficient quality to support the
determination of risk-based capital requirements for the exposures. In
particular, the population of exposures in the data used for estimation
purposes, the underwriting standards in use when the data were
generated, and other relevant characteristics, should closely match or
be comparable to the Enterprise's exposures and standards. In addition,
an Enterprise must:
(i) Demonstrate that its estimates are representative of long run
experience, including periods of economic downturn conditions, whether
internal or external data are used;
(ii) Take into account any changes in underwriting practice or the
process for pursuing recoveries over the observation period;
(iii) Promptly reflect technical advances, new data, and other
information as they become available;
(iv) Demonstrate that the data used to estimate risk parameters
support the accuracy and robustness of those estimates; and
(v) Demonstrate that its estimation technique performs well in out-
of-sample tests whenever possible.
(3) The Enterprise's risk parameter quantification process must
produce appropriately conservative risk parameter estimates where the
Enterprise has limited relevant data, and any adjustments that are part
of the quantification process must not result in a pattern of bias
toward lower risk parameter estimates.
(4) The Enterprise's risk parameter estimation process should not
rely on the possibility of U.S. government financial assistance.
(5) Default, loss severity, and exposure amount data must include
periods of economic downturn conditions, or the Enterprise must adjust
its estimates of risk parameters to compensate for the lack of data
from periods of economic downturn conditions.
(6) If an Enterprise uses internal data obtained prior to becoming
subject to this subpart or external data to arrive at risk parameter
estimates, the Enterprise must demonstrate to FHFA that the Enterprise
has made appropriate adjustments if necessary to be consistent with the
Enterprise's definition of default. Internal data obtained after the
Enterprise becomes subject to this subpart must be consistent with the
Enterprise's definition of default.
(7) The Enterprise must review and update (as appropriate) its risk
parameters and its risk parameter quantification process at least
annually.
(8) The Enterprise must, at least annually, conduct a comprehensive
review and analysis of reference data to determine relevance of the
reference data to the Enterprise's exposures, quality of reference data
to support risk parameter estimates, and consistency of reference data
to the Enterprise's definition of default.
(d) Operational risk--(1) Operational risk management processes. An
Enterprise must:
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
(B) Is responsible for designing, implementing, and overseeing the
Enterprise's operational risk data and assessment systems, operational
risk quantification systems, and related processes;
(ii) Have and document a process (which must capture business
environment and internal control factors affecting the Enterprise's
operational risk profile) to identify, measure, monitor, and control
operational risk in the Enterprise's products, activities, processes,
and systems; and
(iii) Report operational risk exposures, operational loss events,
and other relevant operational risk information to business unit
management, senior management, and the board of directors (or a
designated committee of the board).
(2) Operational risk data and assessment systems. An Enterprise
must

[[Page 82254]]

have operational risk data and assessment systems that capture
operational risks to which the Enterprise is exposed. The Enterprise's
operational risk data and assessment systems must:
(i) Be structured in a manner consistent with the Enterprise's
current business activities, risk profile, technological processes, and
risk management processes; and
(ii) Include credible, transparent, systematic, and verifiable
processes that incorporate the following elements on an ongoing basis:
(A) Internal operational loss event data. The Enterprise must have
a systematic process for capturing and using internal operational loss
event data in its operational risk data and assessment systems.
(1) The Enterprise's operational risk data and assessment systems
must include a historical observation period of at least five years for
internal operational loss event data (or such shorter period approved
by FHFA to address transitional situations, such as integrating a new
business line).
(2) The Enterprise must be able to map its internal operational
loss event data into the seven operational loss event type categories.
(3) The Enterprise may refrain from collecting internal operational
loss event data for individual operational losses below established
dollar threshold amounts if the Enterprise can demonstrate to the
satisfaction of FHFA that the thresholds are reasonable, do not exclude
important internal operational loss event data, and permit the
Enterprise to capture substantially all the dollar value of the
Enterprise's operational losses.
(B) External operational loss event data. The Enterprise must have
a systematic process for determining its methodologies for
incorporating external operational loss event data into its operational
risk data and assessment systems.
(C) Scenario analysis. The Enterprise must have a systematic
process for determining its methodologies for incorporating scenario
analysis into its operational risk data and assessment systems.
(D) Business environment and internal control factors. The
Enterprise must incorporate business environment and internal control
factors into its operational risk data and assessment systems. The
Enterprise must also periodically compare the results of its prior
business environment and internal control factor assessments against
its actual operational losses incurred in the intervening period.
(3) Operational risk quantification systems. The Enterprise's
operational risk quantification systems:
(i) Must generate estimates of the Enterprise's operational risk
exposure using its operational risk data and assessment systems;
(ii) Must employ a unit of measure that is appropriate for the
Enterprise's range of business activities and the variety of
operational loss events to which it is exposed, and that does not
combine business activities or operational loss events with
demonstrably different risk profiles within the same loss distribution;
(iii) Must include a credible, transparent, systematic, and
verifiable approach for weighting each of the four elements, described
in paragraph (d)(2)(ii) of this section, that an Enterprise is required
to incorporate into its operational risk data and assessment systems;
(iv) May use internal estimates of dependence among operational
losses across and within units of measure if the Enterprise can
demonstrate to the satisfaction of FHFA that its process for estimating
dependence is sound, robust to a variety of scenarios, and implemented
with integrity, and allows for uncertainty surrounding the estimates.
If the Enterprise has not made such a demonstration, it must sum
operational risk exposure estimates across units of measure to
calculate its total operational risk exposure; and
(v) Must be reviewed and updated (as appropriate) whenever the
Enterprise becomes aware of information that may have a material effect
on the Enterprise's estimate of operational risk exposure, but the
review and update must occur no less frequently than annually.
(e) Data management and maintenance. (1) An Enterprise must have
data management and maintenance systems that adequately support all
aspects of its advanced systems and the timely and accurate reporting
of risk-based capital requirements.
(2) An Enterprise must retain data using an electronic format that
allows timely retrieval of data for analysis, validation, reporting,
and disclosure purposes.
(3) An Enterprise must retain sufficient data elements related to
key risk drivers to permit adequate monitoring, validation, and
refinement of its advanced systems.
(f) Control, oversight, and validation mechanisms. (1) The
Enterprise's senior management must ensure that all components of the
Enterprise's advanced systems function effectively and comply with the
minimum requirements in this section.
(2) The Enterprise's board of directors (or a designated committee
of the board) must at least annually review the effectiveness of, and
approve, the Enterprise's advanced systems.
(3) An Enterprise must have an effective system of controls and
oversight that:
(i) Ensures ongoing compliance with the minimum requirements in
this section;
(ii) Maintains the integrity, reliability, and accuracy of the
Enterprise's advanced systems; and
(iii) Includes adequate governance and project management
processes.
(4) The Enterprise must validate, on an ongoing basis, its advanced
systems. The Enterprise's validation process must be independent of the
advanced systems' development, implementation, and operation, or the
validation process must be subjected to an independent review of its
adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the advanced systems;
(ii) An ongoing monitoring process that includes verification of
processes and benchmarking; and
(iii) An outcomes analysis process that includes backtesting.
(5) The Enterprise must have an internal audit function or
equivalent function that is independent of business-line management
that at least annually:
(i) Reviews the Enterprise's advanced systems and associated
operations, including the operations of its credit function and
estimations of risk parameters;
(ii) Assesses the effectiveness of the controls supporting the
Enterprise's advanced systems; and
(iii) Documents and reports its findings to the Enterprise's board
of directors (or a committee thereof).
(6) The Enterprise must periodically stress test its advanced
systems. The stress testing must include a consideration of how
economic cycles, especially downturns, affect risk-based capital
requirements (including migration across rating grades and segments and
the credit risk mitigation benefits of double default treatment).
(g) Documentation. The Enterprise must adequately document all
material aspects of its advanced systems.

Sec. 1240.122 Ongoing qualification.

(a) Changes to advanced systems. An Enterprise must meet all the
minimum requirements in Sec. 1240.121 on an ongoing basis. An
Enterprise must notify FHFA when the Enterprise makes

[[Page 82255]]

any change to an advanced system that would result in a material change
in the Enterprise's advanced approaches total risk-weighted asset
amount for an exposure type or when the Enterprise makes any
significant change to its modeling assumptions.
(b) Failure to comply with qualification requirements. (1) If FHFA
determines that an Enterprise fails to comply with the requirements in
Sec. 1240.121, FHFA will notify the Enterprise in writing of the
Enterprise's failure to comply.
(2) The Enterprise must establish and submit a plan satisfactory to
FHFA to return to compliance with the qualification requirements.
(3) In addition, if FHFA determines that the Enterprise's advanced
approaches total risk-weighted assets are not commensurate with the
Enterprise's credit, market, operational, or other risks, FHFA may
require such an Enterprise to calculate its advanced approaches total
risk-weighted assets with any modifications provided by FHFA.

Sec. 1240.123 Advanced approaches credit risk-weighted asset
calculations.

(a) An Enterprise must use its advanced systems to determine its
credit risk capital requirements for each of the following exposures:
(1) General credit risk (including for mortgage exposures);
(2) Cleared transactions;
(3) Default fund contributions;
(4) Unsettled transactions;
(5) Securitization exposures;
(6) Equity exposures; and
(7) The fair value adjustment to reflect counterparty credit risk
in valuation of OTC derivative contracts.
(b) The credit-risk-weighted assets calculated under this subpart E
equals the aggregate credit risk capital requirement under paragraph
(a) of this section multiplied by 12.5.

Sec. Sec. 1240.124--1240.160 [Reserved]

Sec. 1240.161 Qualification requirements for incorporation of
operational risk mitigants.

(a) Qualification to use operational risk mitigants. An Enterprise
may adjust its estimate of operational risk exposure to reflect
qualifying operational risk mitigants if:
(1) The Enterprise's operational risk quantification system is able
to generate an estimate of the Enterprise's operational risk exposure
(which does not incorporate qualifying operational risk mitigants) and
an estimate of the Enterprise's operational risk exposure adjusted to
incorporate qualifying operational risk mitigants; and
(2) The Enterprise's methodology for incorporating the effects of
insurance, if the Enterprise uses insurance as an operational risk
mitigant, captures through appropriate discounts to the amount of risk
mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancelation terms of the policy, where less than one year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged
operational loss event.
(b) Qualifying operational risk mitigants. Qualifying operational
risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that the Enterprise
deems to have strong capacity to meet its claims payment obligations
and the Enterprise assigns the company a probability of default equal
to or less than 10 basis points;
(ii) Has an initial term of at least one year and a residual term
of more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider
of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action
or for the receiver or liquidator of a failed depository institution;
and
(v) Is explicitly mapped to a potential operational loss event;
(2) In evaluating an operational risk mitigant other than
insurance, FHFA will consider whether the operational risk mitigant
covers potential operational losses in a manner equivalent to holding
total capital.

Sec. 1240.162 Mechanics of operational risk risk-weighted asset
calculation.

(a) If an Enterprise does not qualify to use or does not have
qualifying operational risk mitigants, the Enterprise's dollar risk-
based capital requirement for operational risk is its operational risk
exposure minus eligible operational risk offsets (if any).
(b) If an Enterprise qualifies to use operational risk mitigants
and has qualifying operational risk mitigants, the Enterprise's dollar
risk-based capital requirement for operational risk is the greater of:
(1) The Enterprise's operational risk exposure adjusted for
qualifying operational risk mitigants minus eligible operational risk
offsets (if any); or
(2) 0.8 multiplied by the difference between:
(i) The Enterprise's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The Enterprise's risk-weighted asset amount for operational
risk equals the greater of:
(1) The Enterprise's dollar risk-based capital requirement for
operational risk determined under paragraphs (a) or (b) multiplied by
12.5; and
(2) The Enterprise's adjusted total assets multiplied by 0.0015
multiplied by 12.5.
(d) After January 1, 2022, and until the compliance date for this
section under Sec. 1240.4, the Enterprise's risk weighted amount for
operational risk will equal the Enterprise's adjusted total assets
multiplied by 0.0015 multiplied by 12.5.

Subpart F--Risk-weighted Assets--Market Risk

Sec. 1240.201 Purpose, applicability, and reservation of authority.

(a) Purpose. This subpart F establishes risk-based capital
requirements for spread risk and provides methods for the Enterprises
to calculate their measure for spread risk.
(b) Applicability. This subpart applies to each Enterprise.
(c) Reservation of authority. Subject to applicable provisions of
the Safety and Soundness Act:
(1) FHFA may require an Enterprise to hold an amount of capital
greater than otherwise required under this subpart if FHFA determines
that the Enterprise's capital requirement for spread risk as calculated
under this subpart is not commensurate with the spread risk of the
Enterprise's covered positions.
(2) If FHFA determines that the risk-based capital requirement
calculated under this subpart by the Enterprise for one or more covered
positions or portfolios of covered positions is not commensurate with
the risks associated with those positions or portfolios, FHFA may
require the Enterprise to assign a different risk-based capital
requirement to the positions or portfolios that more accurately
reflects the risk of the positions or portfolios.
(3) In addition to calculating risk-based capital requirements for
specific positions or portfolios under this subpart, the Enterprise
must also calculate risk-based capital requirements for covered
positions under subpart D or subpart E of this part, as appropriate.
(4) Nothing in this subpart limits the authority of FHFA under any
other provision of law or regulation to take supervisory or enforcement
action, including action to address unsafe or unsound practices or
conditions,

[[Page 82256]]

deficient capital levels, or violations of law.

Sec. 1240.202 Definitions.

(a) Terms set forth in Sec. 1240.2 and used in this subpart have
the definitions assigned in Sec. 1240.2.
(b) For the purposes of this subpart, the following terms are
defined as follows:
Backtesting means the comparison of an Enterprise's internal
estimates with actual outcomes during a sample period not used in model
development. For purposes of this subpart, backtesting is one form of
out-of-sample testing.
Covered position means, any asset that has more than de minimis
spread risk (other than any intangible asset, such as any servicing
asset), including:
(i) Any NPL, RPL, reverse mortgage loan, or other mortgage exposure
that, in any case, does not secure an MBS guaranteed by the Enterprise;
(ii) Any MBS guaranteed by an Enterprise, MBS guaranteed by Ginnie
Mae, reverse mortgage security, PLS, commercial MBS, CRT exposure, or
other securitization exposure, regardless of whether the position is
held by the Enterprise for the purpose of short-term resale or with the
intent of benefiting from actual or expected short-term price
movements, or to lock in arbitrage profits; and
(iii) Any other trading asset or trading liability (whether on- or
off-balance sheet).\1\
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\1\ Securities subject to repurchase and lending agreements are
included as if they are still owned by the Enterprise.
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Market risk means the risk of loss on a position that could result
from movements in market prices, including spread risk.
Private label security (PLS) means any MBS that is collateralized
by a pool or pools of single-family mortgage exposures and that is not
guaranteed by an Enterprise or by Ginnie Mae.
Reverse mortgage means a mortgage loan secured by a residential
property in which a homeowner relinquishes equity in their home in
exchange for regular payments.
Reverse mortgage security means a security collateralized by
reverse mortgages.
Spread risk means the risk of loss on a position that could result
from a change in the bid or offer price of such position relative to a
risk free or funding benchmark, including when due to a change in
perceptions of performance or liquidity of the position.

Sec. 1240.203 Requirements for managing market risk.

(a) Management of covered positions--(1) Active management. An
Enterprise must have clearly defined policies and procedures for
actively managing all covered positions. At a minimum, these policies
and procedures must require:
(i) Marking covered positions to market or to model on a daily
basis;
(ii) Daily assessment of the Enterprise's ability to hedge position
and portfolio risks, and of the extent of market liquidity;
(iii) Establishment and daily monitoring of limits on covered
positions by a risk control unit independent of the business unit;
(iv) Routine monitoring by senior management of information
described in paragraphs (a)(1)(i) through (iii) of this section;
(v) At least annual reassessment of established limits on positions
by senior management; and
(vi) At least annual assessments by qualified personnel of the
quality of market inputs to the valuation process, the soundness of key
assumptions, the reliability of parameter estimation in pricing models,
and the stability and accuracy of model calibration under alternative
market scenarios.
(2) Valuation of covered positions. The Enterprise must have a
process for prudent valuation of its covered positions that includes
policies and procedures on the valuation of positions, marking
positions to market or to model, independent price verification, and
valuation adjustments or reserves. The valuation process must consider,
as appropriate, unearned credit spreads, close-out costs, early
termination costs, investing and funding costs, liquidity, and model
risk.
(b) Requirements for internal models. (1) A risk control unit
independent of the business unit must approve any internal model to
calculate its risk-based capital requirement under this subpart.
(2) An Enterprise must meet all of the requirements of this section
on an ongoing basis. The Enterprise must promptly notify FHFA when:
(i) The Enterprise plans to extend the use of a model to an
additional business line or product type;
(ii) The Enterprise makes any change to an internal model that
would result in a material change in the Enterprise's risk-weighted
asset amount for a portfolio of covered positions; or
(iii) The Enterprise makes any material change to its modeling
assumptions.
(3) FHFA may determine an appropriate capital requirement for the
covered positions to which a model would apply, if FHFA determines that
the model no longer complies with this subpart or fails to reflect
accurately the risks of the Enterprise's covered positions.
(4) The Enterprise must periodically, but no less frequently than
annually, review its internal models in light of developments in
financial markets and modeling technologies, and enhance those models
as appropriate to ensure that they continue to meet the Enterprise's
standards for model approval and employ risk measurement methodologies
that are most appropriate for the Enterprise's covered positions.
(5) The Enterprise must incorporate its internal models into its
risk management process and integrate the internal models used for
calculating its market risk measure into its daily risk management
process.
(6) The level of sophistication of an Enterprise's internal models
must be commensurate with the complexity and amount of its covered
positions. An Enterprise's internal models may use any of the generally
accepted approaches, including variance-covariance models, historical
simulations, or Monte Carlo simulations, to measure market risk.
(7) The Enterprise's internal models must properly measure all the
material risks in the covered positions to which they are applied.
(8) The Enterprise's internal models must conservatively assess the
risks arising from less liquid positions and positions with limited
price transparency under realistic market scenarios.
(9) The Enterprise must have a rigorous and well-defined process
for re-estimating, re-evaluating, and updating its internal models to
ensure continued applicability and relevance.
(c) Control, oversight, and validation mechanisms. (1) The
Enterprise must have a risk control unit that reports directly to
senior management and is independent from the business units.
(2) The Enterprise must validate its internal models initially and
on an ongoing basis. The Enterprise's validation process must be
independent of the internal models' development, implementation, and
operation, or the validation process must be subjected to an
independent review of its adequacy and effectiveness. Validation must
include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the internal models;
(ii) An ongoing monitoring process that includes verification of
processes

[[Page 82257]]

and the comparison of the Enterprise's model outputs with relevant
internal and external data sources or estimation techniques; and
(iii) An outcomes analysis process that includes backtesting.
(3) The Enterprise must stress test the market risk of its covered
positions at a frequency appropriate to each portfolio, and in no case
less frequently than quarterly. The stress tests must take into account
concentration risk (including concentrations in single issuers,
industries, sectors, or markets), illiquidity under stressed market
conditions, and risks arising from the Enterprise's trading activities
that may not be adequately captured in its internal models.
(4) The Enterprise must have an internal audit function independent
of business-line management that at least annually assesses the
effectiveness of the controls supporting the Enterprise's market risk
measurement systems, including the activities of the business units and
independent risk control unit, compliance with policies and procedures,
and calculation of the Enterprise's measures for spread risk under this
subpart. At least annually, the internal audit function must report its
findings to the Enterprise's board of directors (or a committee
thereof).
(d) Internal assessment of capital adequacy. The Enterprise must
have a rigorous process for assessing its overall capital adequacy in
relation to its market risk.
(e) Documentation. The Enterprise must adequately document all
material aspects of its internal models, management and valuation of
covered positions, control, oversight, validation and review processes
and results, and internal assessment of capital adequacy.

Sec. 1240.204 Measure for spread risk.

(a) General requirement--(1) In general. An Enterprise must
calculate its standardized measure for spread risk by following the
steps described in paragraph (a)(2) of this section. An Enterprise also
must calculate an advanced measure for spread risk by following the
steps in paragraph (a)(2) of this section.
(2) Measure for spread risk. An Enterprise must calculate the
standardized measure for spread risk, which equals the sum of the
spread risk capital requirements of all covered positions using one or
more of its internal models except as contemplated by paragraphs (b) or
(c) of this section. An Enterprise also must calculate the advanced
measure for spread risk, which equals the sum of the spread risk
capital requirements of all covered positions calculated using one or
more of its internal models.
(b) Single point approach--(1) General. For purposes of the
standardized measure for spread risk, the spread risk capital
requirement for a covered position that is an RPL, an NPL, a reverse
mortgage loan, or a reverse mortgage security is the amount equal to:
(i) The market value of the covered position; multiplied by
(ii) The applicable single point shock assumption for the covered
position under paragraph (b)(2) of this section.
(2) Applicable single point shock assumption. The applicable single
point shock assumption is:
(i) 0.0475 for an RPL or an NPL;
(ii) 0.0160 for a reverse mortgage loan; and
(iii) 0.0410 for a reverse mortgage security.
(c) Spread duration approach--(1) General. For purposes of the
standardized measure for spread risk, the spread risk capital
requirement for a covered position that is a multifamily mortgage
exposure, a PLS, or an MBS guaranteed by an Enterprise or Ginnie Mae
and secured by multifamily mortgage exposures is the amount equal to:
(i) The market value of the covered position; multiplied by
(ii) The spread duration of the covered position determined by the
Enterprise using one or more of its internal models; multiplied by
(iii) The applicable spread shock assumption under paragraph (c)(2)
of this section.
(2) Applicable spread shock assumption. The applicable spread shock
is:
(i) 0.0015 for a multifamily mortgage exposure;
(ii) 0.0265 for a PLS; and
(iii) 0.0100 for an MBS guaranteed by an Enterprise or by Ginnie
Mae and secured by multifamily mortgage exposures (other than IO
securities guaranteed by an Enterprise or Ginnie Mae).

Subpart G--Stability Capital Buffer

Sec. 1240.400 Stability capital buffer.

(a) Definitions. For purposes of this subpart:
(1) Mortgage assets means, with respect to an Enterprise, the
dollar amount equal to the sum of:
(i) The unpaid principal balance of its single-family mortgage
exposures, including any single-family loans that secure MBS guaranteed
by the Enterprise;
(ii) The unpaid principal balance of its multifamily mortgage
exposures, including any multifamily mortgage exposures that secure MBS
guaranteed by the Enterprise;
(iii) The carrying value of its MBS guaranteed by an Enterprise,
MBS guaranteed by Ginnie Mae, PLS, and other securitization exposures
(other than its retained CRT exposures); and
(iv) The exposure amount of any other mortgage assets.
(2) Residential mortgage debt outstanding means the dollar amount
of mortgage debt outstanding secured by one- to four-family residences
or multifamily residences that are located in the United States (and
excluding any mortgage debt outstanding secured by commercial or farm
properties).
(b) Amount. An Enterprise must calculate its stability capital
buffer under this section on an annual basis by December 31 of each
year. The stability capital buffer of an Enterprise is equal to:
(1) The ratio of:
(i) The mortgage assets of the Enterprise as of December 31 of the
previous calendar year; to
(ii) The residential mortgage debt outstanding as of December 31 of
the previous calendar year, as published by FHFA;
(2) Minus 0.05;
(3) Multiplied by 5;
(4) Divided by 100; and
(5) Multiplied by the adjusted total assets of the Enterprise, as
of December 31 of the previous calendar year.
(c) Effective date of an adjusted stability capital buffer--(1)
Increase in stability capital buffer. An increase in the stability
capital buffer of an Enterprise under this section will take effect
(i.e., be incorporated into the maximum payout ratio under table 1 to
paragraph (b)(5) in Sec. 1240.11) on January 1 of the year that is one
full calendar year after the increased stability capital buffer was
calculated.
(2) Decrease in stability capital buffer. A decrease in the
stability capital buffer of an Enterprise will take effect (i.e., be
incorporated into the maximum payout ratio under table 1 to paragraph
(b)(5) in Sec. 1240.11) on January 1 of the year immediately following
the calendar year in which the decreased stability capital buffer was
calculated.
(d) Initial stability capital buffer. Notwithstanding anything to
the contrary in this section, the stability capital buffer of an
Enterprise as of January 1, 2021, is equal to--
(1) The ratio of:
(i) The mortgage assets of the Enterprise as of December 31, 2020;
to
(ii) The residential mortgage debt outstanding as of December 31,
2020, as published by FHFA;

[[Page 82258]]

(2) Minus 0.05;
(3) Multiplied by 5;
(4) Divided by 100; and
(5) Multiplied by the adjusted total assets of the Enterprise as of
December 31, 2020.

Chapter XII--Federal Housing Finance Agency

Subchapter C--Safety and Soundness

PART 1750--[REMOVED]

0
6. Under the authority of 12 U.S.C. 4511 and 12 U.S.C. 4526, part 1750
is removed.

Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020-25814 Filed 12-16-20; 8:45 am]
BILLING CODE 8070-01-P