Appendix A — Disclosures in Filings with the Commission
Registrants are individually responsible for determining the nature and extent of disclosures that are necessary to provide users of the financial statements with sufficient information to understand their business, financial condition, results of operations, and related risks and uncertainties. Registrants make judgments about the nature and extent of disclosures provided in filings with the Commission based on the disclosure objectives and minimum disclosure requirements outlined in the Commission's rules and generally accepted accounting principles. In order to meet those disclosure objectives and requirements, the Office of the Chief Accountant and the Division of Corporation Finance believe that registrants that have transferred subprime ARM loans to QSPEs should consider whether the following information should be included in filings with the Commission.
Disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
In order to meet the objective of the disclosures required in MD&A, the SEC staff would generally expect MD&A to include sufficient information regarding the nature of the ASF Framework, its impact on the loss mitigation strategies employed for subprime ARM loans that are included in QSPEs, and its impact on the level of servicer discretion related to subprime ARM loans that are included in QSPEs. To meet this objective, registrants that have transferred subprime ARM loans to QSPEs should consider whether to disclose the following information within the MD&A section of its filings with the Commission:
- A general description of the ASF Framework, including the criteria used by the registrant to define what constitutes a subprime mortgage and a statement that a uniform definition of a subprime mortgage does not exist, the subprime ARM loans that are included in the ASF Framework, and the borrower segmentation categories that are included in the ASF Framework.
- A statement that the adoption of the loss mitigation approaches in the ASF Framework did not impact the off-balance sheet accounting treatment of QSPEs that hold subprime ARM loans.
- The total dollar amount of assets owned by QSPEs that hold subprime ARM loans as of the date of the latest balance sheet. Additionally, the following supplemental information about major categories of assets is relevant when the registrant is also the servicer of the QSPE:
- The dollar amount of subprime ARM loans that fall within each of the three segments of the ASF Framework as of the latest balance sheet date;
- A description of the nature of loss mitigation activities for subprime ARM loans that fall within each of the three segments of the ASF Framework, including the dollar amounts of refinancings, modifications, and other loss mitigation activities for the quarterly and year-to-date periods; and
- The dollar amount of other assets (including re-possessed real estate) owned by QSPEs that hold subprime ARM loans as of the latest balance sheet, and a description of the change in the amount of those assets for the quarterly and year-to-date periods.
- The total principal amount of beneficial interests issued by QSPEs that hold subprime ARM loans (segregated by third party and retained interests) as of the date of the latest balance sheet, and the impact that loss mitigation efforts have had on the fair value of the registrant's retained interests and other forms of financial support provided by the registrant.
Registrants are encouraged to provide additional quantitative or qualitative disclosures necessary to facilitate a sufficient understanding of the activities of QSPEs that hold subprime ARM loans subject to the ASF Framework. Registrants should also consider including within the disclosures about critical accounting policies under FRR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, information about the permitted activities of QSPEs, including the loss mitigation approaches in the ASF Framework.
Disclosures in the Notes to the Financial Statements
In order to meet the disclosure requirements of APB Opinion No. 22, Disclosure of Accounting Policies, the SEC staff generally expects that a registrant's disclosure of its accounting policies would include a discussion of the permitted activities of off-balance sheet QSPEs, including the ability of the servicer to modify subprime mortgages when default is "reasonably foreseeable," and the adoption of the specific screening criteria in Segment 2 of the ASF Framework for purposes of determining the subprime ARM loans that are "reasonably foreseeable" of default.