Question
From: (redacted)
Sent: Monday, July 03, 200611:30 AM
To: Verne, B.Michael
Cc: (redacted)
Subject: HSR ComplianceMatter - Application of Section 7A(c)(1) of the Act and Rule 802.1
Dear Mr. Verne:
Myclient proposes to enter into the acquisition described below, which appears tobe exempt from the premerger notification requirements of the Hart-Scott-RodinoAntitrust Improvements Act of 1976, as amended (the "Act). After you havehad the opportunity to review the description of the acquisition and myanalysis, I would appreciate the opportunity to correspond or speak with you toconfirm that the Staff of the Premerger Notification Office of the FederalTrade Commission (the "PNO") concurs with my analysis of the proposedacquisition.
Description of ProposedAcquisition
Myclient is a bank engaged in, among other things, the servicing of mortgageloans. The acquiror is a diversified financial services company that, amongother things, services mortgage loans. My client proposes to sell the right toservice approximately $175 million of mortgage loans to the acquiror. After theacquisition, my client will still have more than fifty percent (50%) of itscurrent portfolio of mortgage servicing rights.
Approximatelytwo-thirds of the mortgage loans to be sold in the proposed acquisition are oftypes of mortgage loans that my client will continue to service afterconsummation of the proposed acquisition. About one-third of the mortgageloans, however, are Federal Housing Administration (FHA)- and U.S Department ofVeteran's Affairs (VA)-guaranteed mortgage loans. The rights to service FHA-and VA-guaranteed mortgage loans to be sold by my client pursuant to theproposed acquisition are all of my client's rights to service FHA- andVA-guaranteed mortgage loans.
Furthermore,as part of the proposed acquisition, my client will lease to the acquiror anoffice from which it has serviced mortgage loans in the past. It also willarrange for the transfer to the acquiror of certain of its employees who haveserviced mortgage loans from that office in the past.
Theoffice and employees proposed to be transferred to the acquiror have servicedin the past all types of mortgage loans serviced by my client, including FHA-and VA-guaranteed mortgage loans. The FHA- and VA-guaranteed mortgage loansalso have been serviced in the past from other offices of my client along withthe other types of mortgage loans serviced by my client. The servicing of theFHA- and VA-guaranteed mortgage loans thus has not been conducted by a discretebusiness unit distinct from my client's other mortgage servicing operations,and the leasing of the office and the transfer of its employees to the acquiroraccordingly is not part of a transfer of such a business unit. Instead, therationale for the transfer of the office and its employees to the acquiror isthat my client will need less space and fewer people to service mortgage loansafter the proposed acquisition, whereas the acquiror will need more space andmore people to service mortgage loans after the acquisition.
Analysis
Based upon myreview of previous informal staff opinions of the PNO, it appears that the saleof mortgage servicing rights between parties that service those rights as partof their business qualifies as a sale of goods in the ordinary course ofbusiness for purposes of the sales of goods in the ordinary course of businessexemption under Section 7A(c)(1) of the Act and Rule 802.1. This exemptionapplies as long as (1) the seller will remain in the business of servicingmortgage loans after the acquisition and (2) the acquisition does notconstitute a sale of an operating unit within the meaning of Rule 802.1(a).
Regarding thefirst requirement, my client would remain in the mortgage servicing businessafter the proposed acquisition because it would retain and continue to provideservice for more than fifty percent (50%) of its current portfolio of mortgageservicing rights. Although my client would dispose of all of its rights toservice FHA- and VA-guaranteed mortgage loans, previous informal staff opinionsof the PNO indicate that ceasing to service certain types of mortgage loanswill not, by itself, make an acquisition ineligible for the sale of goods inthe ordinary course of business exemption as long as the seller will continueto service other types of mortgage loans after the acquisition. For example, inInformal Staff Opinion 9806012, a sale of first mortgages on residentialproperty, which was the first of two sales of all of the seller's firstmortgages on residential property, did not disqualify the parties from the saleof goods in the ordinary course of business exemption where the seller wouldcontinue to service commercial first and junior mortgage loans and residentialjunior mortgage loans after consummation of the contemplated acquisitions.
Regardingthe second requirement, the proposed acquisition does not constitute a sale ofan operating unit within the meaning of Rule 802.1(a). As discussed above, myclient is not disposing of assets that it operates as a business undertaking ina particular location or for particular products or services. Instead, it istransferring one location from which it has conducted its business for theservicing of all of the different types of mortgage loans that it has servicedin the past.
Forthese reasons, the proposed acquisition appears to be a sale of goods in theordinary course of business under Section 7A(c)(1) of the Act and Rule 802.1.It accordingly should be exempt from the premerger notification requirements ofthe Act. I would appreciate it if you could e-mail me at (redacted) or call meat (redacted) to either verify my analysis of the facts discussed in thise-mail or to alert me of any additional facts or legal considerations relevantto the analysis.