Name FirmMr. Gregg Silver 1 st Financial Funding & Investment Corp.PresidentMr. Tom Deutsch American Securitization ForumDeputy Executive Director

Mr. George P. Miller American Securtization ForumExecutive Director

Mr. George Ellison Banc of America Securities LLCManaginK DirectorMs. Amy Amsler Capital One

Senior DirectorMr. Steve Linehan Capital One

Executive Vice PresidentMr. James B. Muray CitiManaging DirectorMr. Ted Yarbrough CitiManaKing Director & Head of Global Securitized ProductsMs. Deborah A. Toennies JPMorgan Securities Inc.Managing DirectorMr. Robert Hugi Mayer Brown LLPPartnerMr. Jason H.P. Kravitt Mayer Brown LLPSenior PartnerMr. Andrew M Faulkner Skadden, Ars, Slate, Meagher & Flom LLPPartnerMr. Lawrence D. Rubenstein Wells FargoGeneral Counsel

Diane Citron CarngtonEVP, Government Affairs

Am

ericanSE

CR

mZ

AllO

NFO

RU

Me

Response to:

Notice of P

roposed Rulem

aking

Risk-B

ased Capital G

uidelines;C

apital Maintenance;

Regulatory C

apital

Term

Securitization Issues and R

ecomm

endations

December 2009

Executive S

umm

ary - Term

· The current risk based capital rules w

il cause issuers to hold increased amounts of regulatory risk-based capital

and loan loss allowances, w

hich in turn wil cause an increase in cost and reduction in supply of consum

er credit.W

hen applied against the existing $11.3 trilion of AB

S &

MB

S, the effect on the recovery of the U

S econom

y wil be

material.

· Capital should equal risk - w

hile the current linkage between regulatory and accounting off-balance sheet

treatment w

orked for accounting standards that were risk-focused, this no longer rem

ains the case and a revisedapproach is required that takes the tim

e to evaluate the true risk within each A

BS

and MB

S transaction.

· Securitization structures vary and some are m

ore prone to cause implicit recourse m

ore than others. These

structural differences should be recognized and a nuanced approach to the risk based capital rules applied.

· While there have been som

e recent cases where issuers have provided non-contractual support, there are

many instances w

here this has not happened and investors have suffered losses. Regulatory risk-based

capital rules should recognize that there have been many cases w

he.re risk has been transferred in an AB

S or

MB

S structure.

· The change in accounting treatm

ent wil also cause issuers to hold loan loss allow

ance for losses which they are

not contractually required to absorb. A reserve relating to a risk that an issuer does not bear should be treated as

capital.

· Issuance of a final rule should be delayed so that the structural nuances and accounting concerns can beaddressed m

ore comprehensively.

· The transition period should extend beyond 2010 to a point in the econom

y where unem

ployment is low

er andissuers are less capital constrained from

growing their balance sheet and providing credit.

While som

e banks recently provided non-contractual support to ASS, there are m

anyexam

ples, both current and historical, demonstrating that securitization does transfer risk

· MB

S and A

uto AB

S: there are virtually no exam

ples of issuer support being extended to these amortizing trusts

· Credit C

ard AB

S: trust support has recently been extended by some banks, but history show

s that issuers havetypically allow

ed troubled trusts to unwind, w

ith investors taking losses

Republic B

ankE

ntered into insolvency (late 1980s)

Southeast B

ank

Heilig-M

eyers

Entered into insolvency (1991)

Trust early am

ortized and investors in all classes (AA

-BB

B) experienced losses (2000)

NextC

ard

Spiegel

People's

First E

quity

Trust early am

ortized and almost half of B

BB

investors experienced losses (2002)

Trust early am

ortized (2003)

Trust early am

ortized

Trust early am

ortized, with investors taking losses

Advanta

First N

ational Bank of O

maha

Trust early am

ortized upon performance problem

s, with investors taking losses

First Financial

Capital

One

Several E

uropean & C

anadian banks, includingsom

e branches/subs of U.S

. banks

Issuers have withstood significant perform

ance degradation and ratings pressurew

ithout extending support to their card trusts

Risk-based capital rules should account for the structural nuances of a

transaction and the history of actions across issuers and asset-classes· T

he "Great R

ecession" has proved to be a robust testing ground for whether risk has truly been

transferred

- Issuers across asset classes have demonstrated a track-record during the highest loss period the industry has ever

witnessed and that history should not be overlooked

· Structural features can reduce the incentive to support

- MSS and A

uto ASS: am

ortizing trusts allow for m

atched funding

- These trusts have no refinance risk since there is no obligation to refinance assets that are m

aturing

- Card A

SS: revolving assets are not match funded

- Assets continuously revolve while the debt matures with a fixed term

- The need to refinance m

aturing debt increases the liquidity risk associated with a revolving trust

- Additionally, as m

any revolving trusts "share" credit enhancement across all trust issuance, the act of increasing

enhancement for new

deals will also cause enhancem

ent to increase for existing deals i.eo non-contractual support

- How

ever, structural alternatives exist that can eliminate the recourse risks caused by shared enhancem

ent.

· Recommendations

· Take a m

ore nuanced approach regarding capital requirements, taking into account structural features that im

pact theprobability of issuer support

· Develop risk-based capital rules that deal appropriately w

ith issuing banks who have not provided recourse, as w

ell as with

those that have

GA

AP

accounting will also require banks to hold loss allow

ance for assets thathave no contractual risk of loss

· Statem

ent of Financial A

ccounting Standard N

O.5 A

ccounting for Contingencies (F

AS

5) requires banks tohold loan loss allow

ance to protect their balance sheets from potential expected future losses

- The application of F

AS

5 following F

AS

166/167 implem

entation will result in allow

ance having to be built for all securitized assets onexactly the sam

e basis as if the assets were never securitized

- No distinction w

ill be made for the contractual term

s of a securitization and issuing banks will be obliged to hold reserves against all

losses associated with an asset, irrespective of w

ho owns the risk of loss

- If an asset suffers a loss, in most ASS structures an offsetting reduction in the security would ensure that there is no actual balance sheet

exposure to the issuer other than that stemm

ing from any retained interests it m

ight hold

· Given that banks w

il have to build allowance for assets w

hose losses they are not contractually obligated toabsorb, the allow

ance should be viewed as capital

- We recom

mend the agencies increase the T

ier 2 capital credit given for loan loss allowance created as a consequence of

consolidating assets post-FA

S 166/167 im

plementation and allow

for an add back of some portion of the allow

ance to Tier 1

capital

· Building allow

ance against newly consolidated assets during this recession w

il also result in the creation ofm

ore Deferred T

ax Assets (D

TA

s), exacerbating regulatory capital problems

- These D

T A

s are not only being built at the worst point in the econom

ic cycle, they are also being built in part for losses that banks are notcontractually required to absorb

- We suggest a blanket inclusion in the calculation of regulatory capital of D

rA balances that are specifically created as a

consequence of

the additional

loan loss reserves resulting from F

AS

166 and 167

The com

bination of loan loss allowance and regulatory capital required post

FA

S 166/167 w

ill result in banks holding reserves much in excess of actual risk

· If RA

P continues to be tied to G

AA

P follow

ing FA

S 166/167 im

plementation, issuing banks w

il have to holdreserves (capital and allow

ance) that are much higher than the risk they actually face

- The below

example dem

onstrates how m

uch the total reserve requirement for banks increases under the proposed FA

S 166 and 167 framew

orkrelative to today's F

AS

140 methodology, w

hich is based on actual risk-transfer and the financial components approach

10%I

$50$100

$100$200

$1504.0x

15%I

$50$100

$150$250

$2005.0x

20%I

$50$100

$200$300

$2506.0x

Assum

ptions:$1,000 portolio

$50 issuer retained interest100%

risk-weighting

10% "w

ell-capitalized" level

Worked E

xample:

$

Loan Loss Allowance under FAS 140

Regulatory C

apital under FA

S 140

50restricted to am

ount of total contractual risk (retained interest)

Total im

pact to Capital and R

eserves under FA

S 140

50

Loan Loss Allowance under FAS 166/167

Regulatory C

apital under FA

S 166/167

100100

$1,000 portolio at 10% losses x 12 m

onths$1,000 portfolio at 100%

risk weighting at

10% w

ell capitalized

Total im

pact to Capital and R

eserves under FA

S 166/167

200

The requirem

ent for higher reserves will result in the low

er availability andhigher cost of consum

er credit

· The regulatory capital im

pact of FA

S 166/167 w

il be a reduction in available credit and an increase in cost toconsum

ers

While the below

example dem

onstrates the impact relating to the credit card industry, the im

pact of FA

S 166/167 w

ill be felt across classes ofconsum

er credit, most notably in the m

ortgage arena where private M

BS

accounts for 9 times the am

ount of credit card securitizations

Exam

ple 1: Potential

Reduction in C

redit Availability

Exam

ple 2: Increased Costs

From

New

Capital R

equirements

(numbers in bilions)

RA

PG

AA

PT

otal

Total C

ard AB

S Outstanding

$307.50$307.50

Total O

ff-B/S C

ard AB

S$50.00

$307.50

Additional R

egulatory Capital

(at 10% "w

ell-capitalized" level)$5.00

$5.00

Additional L

oan Loss A

llowance

(assuming 12-m

onth losses of 10%)

$30.75$30.75-

Total A

dditional Capital R

equirement

$35.75

Reduction in C

redit Availability

$357.50

(numbers in billions)

Approxim

ate Cost of R

aising Tier I C

apital

ABS Cost of

Funds

12.00%

- 2.55%

Incremental C

ost of Raising C

apital9.45%

Total A

dditional Capital R

equirement

$35.75

Annual C

ost of Raising A

dditional Capital

$3.38

$972.73T

otal Credit C

ard Receivables O

utstanding

Potential Increase in APR

(all cardholders)0.35%

Potential Increase in APR

(new cardholders only)

3.47%

The source of

this data is SIFMA

as ofQ209.

Issuing banks that structured their securitization trusts as off-balance sheet vehicles butprovided optional support currently consolidate their trusts for R

AP purposes, but not under

GA

AP. Follow

ing recent support actions we have assum

ed the majority of credit card A

BS is

already back on-balance sheet for RA

P purposes but has remained off-balance sheet under

GA

AP.

Represents the shrinkage of credit card portfolios necessary to account for the additional

capital requirement, assum

ing the 10% "w

ell-capitalized" leveL.

Assum

ed Tier i com

mon capital raised at a required annual return of 12%

.A

ssumes sw

ap rate of 1.8% and spread of75bp.

Represents the difference betw

een cost of issuing comm

on equity and interest paidon A

SS issuance.Source: "C

redit Card O

utstandings - Market Share", T

he Nilson R

eport, April 2009.

Assum

es annual new origination volum

e equal to 10% of outstanding issuance.

· Any transition period that ends in 2010 w

il effectively force the above as unemploym

ent is expected to stay atits current high level through the next 12 m

onths

Am

erican

~~. FDIC Repudiation Risk

.. First Principles: Legal isolation of financial assets in a special-

purpose entity that is separate from the depository institution.

.. Under the F

DIC

's 2000 Securitization R

ule: "The F

DIC

shall not,by exercise of its authority to disaffirm

or repudiate contracts under 12U.S.C. 1821(e), reclaim, recover, or recharacterize as propert of

theinstitution or the receivership any financial assets transferred by aninsured depository institution in connection w

ith a securitization orparticipation, providetl-tht such transfer meets all

conditions forsale accounting treatm

ent under generally accepted accountingprinciples, other than the' legal isolation' condition as it applies toinstitutions for w

hich the FDIC

may be appointed as conservator or

receiver, which is addressed by this section."

Am

erica~iI. FDIC Legal Isolation Safe Harbor

~ S

umm

er 2009-FA

S 166/167 A

nnounced by FA

SB

~ Implementation date of

Novem

ber 15, 2009 for reporting periods thereafter

~ Majority of outstanding and future securitizations w

ill come back on-balance

sheet or will not receive off-balance sheet treatm

ent

~ ASF Sum

mer and Fall Proposals

.. Sale vs. S

ecurity Interests; "Respect for T

ransaction" v. "Rem

edies" Approach

-~F

D IC

Novem

ber 12t1'Action

.. Interim Final R

ule Grandfathering O

utstandings

~ At least until M

arch 31, 2009 for new transactions (T

AL

F expiration date)

.. ASF C

omm

ent Letter in Form

ulation; Extend G

randfathering until at least 3-6m

onths after finalization of the new FD

IC safe harbor

Am

ericaS

E~

. FD

IC Legal Isolation S

afe Harbor

~ D

ecember 15th, 2009 F

DIC

Board M

eeting~ "The FDIC is intending to publish in December 2009, a Notice of

ProposedR

ulemaking to am

end its regulations further regarding the treatment of

participations and securitizations issued after March 31, 2010."

~ New

Possible 'Preconditions' to Achieve Safe H

arbor~ A

ppropriate FDIC

Regulations/M

arket Intervention?~ L

egislative Process Underw

ay~ Risk Retention

----------------- -- - ---.A.ââifìofia:idìsc1ö~

al1"e- ana tra:nspa:rency- -------

~ Lim

it on number of tranches

~ Tie underw

riting and rating agency compensation to long-term

performance of

securities~ Servicing R

eforms-A

ct in best interest of all securityholders; serviceradvances

- n~No-R

ER

EM

ICS-orH

eÐO

swithoutadditional disclosure