1302001 Informal Interpretation

15USC 18A(c)(1) 7A(c)(1)
Michael Verne


Agree.  K
Walsh concurs.


From: (Redacted)

Sent: Tuesday, February 05, 2013 4:41AM

To:Verne, B. Michael; Walsh, Kathryn

Subject: Question Regarding "Ordinary Course" Exemption

Hi, Mikeand Kate-

I am writingto inquire whetherthe "ordinary course" exemption would apply to the sale of mortgage servicing rights in the followingsituation:

X1 is a subsidiaryof Xand is in the businessof acquiring, originating and funding residential mortgage loans. Xlacquires, originates and funds both"conforming" mortgageloans that are eligible for sale to government-sponsored enterprises such as FannieMae and FreddieMac, and "non-conforming" mortgageloans that are not eligible for such sale. These mortgageloans generate a monthlypayment that is composed of threeparts: (1) the monthly principalamount; (2) the monthly interest payment; and (3) the monthly servicingfee payment. Xl oftenpools a group ofconforming mortgage loans and sells the pool (a "GSE pool") to Fannie Mae or Freddie Mac. Inthis case, Xl essentially sells the monthlyprincipal and interest components and retains ownership of the monthlyservicing fee payment. Consequently, Xl remains the "servicer of record" per Fannie Mae and FreddieMac.

When one party (here, Xl) owns the right to receive the monthly servicing fee payments for apool of loans owned by a second party investor(here, Fannie Mae or FreddieMac), the rights to receive the monthlyservicing fee paymentsare called the "mortgage servicing rights" forthe pool.

Xl, however, doesnot service itself,and has never itself serviced, any mortgage loans. Xlhistorically has contracted out the mortgage servicing for both conforming and non- conforming loans to X2, a separatesubsidiary of X, or to third party sub-servicers. X2currently is a debtor-in-possession in bankruptcy and eventually will be sold or liquidated.

Xl intends to sell to a third party the mortgageservicing rights relatedto the GSE

pools. Subsequent to the sale of the mortgageservicing rights in the proposed transaction, Xl willcontinue in the business of acquiring and fundingnon-conforming residential mortgage loans. Xl will continue to own the right to receive cash flows that include amounts equivalent to the monthly servicingfee payments for these non-conforming loans, as well as the right in mostcases to receivethe remaining principal and interest collections, but will continueto contract out the mortgage servicingto third parties, as it historically has done. Xl also likelywill remain in the businessof acquiring and fundinga limited number of conforming residential mortgageloans, but it will not retain the rightsto receive monthly servicing fee payments for those conforming loans and it will reducesignificantly the amount ofconforming loans that it originates.

We understand that the"ordinary course of business" exemptionunder 7A(c)(1) and Section802.1will apply to the sale of mortgage servicingrights provided that the selleris not exiting the mortgage servicingbusiness as a result of the sale. See InformalStaff Opinions 1002001{02/23/10) and 0901004 {01/12/09). We believe that thereare two different means ofanalyzing this fact pattern, each of which supportsthe view that the "ordinary course" exemption should be available.

First, the level of X1's involvement with theservicing of mortgages is not changing. X1was never itself in the businessof servicing mortgages, although it did own the mortgage servicing rights for the GSE pools.Moreover, X2 is no longerconsidered part of X, as bankruptcy severs the chain of controlfor HSR purposes,so X cannot be consideredto be exiting the mortgage servicing business by virtue of X2's impending sale or liquidation. See Informal Staff Opinion 0212014 {12/24/02). Since neitherX1nor any subsidiary of X (other than X2, which is in bankruptcy and no longer considered part of X for HSR purposes) is engaged in themortgage servicing business, X1/X wouldnot be exiting the mortgageservicing business as aresult of the transaction.

Our second and alternative argumentis that, afterthe sale of the mortgageservicing rights for the GSE pools, X1will continueto hold rightsto receive cash flowsthat include amounts equivalent to monthly servicingfee payments. This is the case becauseX1will continue tooriginate non-conforming mortgageloans and to own the rights to receive interestcash flows that includeamounts equivalent to monthlyservicing fee paymentswith respect its ongoingmortgage loan production. Accordingly, X1cannot be said to have exitedthe mortgage servicing businessentirely taking into account the nature and extentof its previous involvement. Indeed, X1will continue to contract out the mortgageservicing for non-conforming loans as it has done historically {although the contracts will be with third parties).

Do you agreethat the proposed sale of mortgage servicing rightsis a sale in the ordinarycourse of X1's mortgage loan businessand thus exempt from HSR reporting since X1willcontinue to contract out the mortgageservicing for its non-conforming loan portfolio post transaction?

Furthermore, we understand that accrued servicing fees are considered akin to accounts receivable and thus, not exemptfrom HSR. Their value will need to be included in the HSR size-of-transaction. Unreimbursed advances or servicingadvances, however, are considered cash/cash equivalents whose acquisition is exemptfrom HSR reporting.

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