Question
September 14, 2006
Michael B. Verne
Premerger NotificationOffice
Bureau of Competition
Federal Trade Commission
6th Street & Pennsylvania Ave., NW
Washington, DC 20580
Re: ExemptionsApplicable to Dispositions of Mortgage Servicing Rights Dear Michael:
This letter is written to confirm the guidance and interpretations thatyou have provided to us regarding the applicability to a proposed series ofasset divestitures of certain exemptions under the Hart-Scott-Rodino AntitrustImprovements Act of 1976, as amended (the "Act"), and theCommission's implementing regulations thereunder, and in particular the"ordinary course of business" exemption contained in Section 7A(c)(1)of the Act and Rule 802.1. The relevant facts regarding the proposedtransaction and our analysis that we have discussed are summarized below.
FACTS
Parent is a publicly traded bank holding company that provides throughits principal lines of business a broad range of financial services toconsumers and businesses in selected markets in the United States and Canada.Parent operates its business through several subsidiaries, including certaindirect and indirect wholly owned subsidiaries referred to in this letter as SubA, Sub B, and Sub C. Sub A is a state chartered bank that operates primarily inParent's home state. Sub A engages in typical banking depository, trust andlending activities, including the provision of first lien residential mortgageloans to consumers and the sale and servicing of such loans. Sub B is anon-bank operating subsidiary that, in conjunction with and as a line of businessof Sub A, engages in the mortgage lending and servicing business. While Sub Bfocuses on second lien residential mortgage lending, it also engages in firstlien residential mortgage lending in numerous states, and in the sale andservicing of such loans. Sub C has been engaged primarily in first lienresidential mortgage lending in numerous states, and in the sale and servicingof such loans.
While Parent has deemed it most efficient to conduct itsregional banking, national conventional mortgage and national home equitylending operations through distinct subsidiaries, the subsidiaries haveoperated cooperatively as necessary. Notably, Sub A provides the principalsource of mortgage acquisition funding for Sub B and Sub C; and Sub C regularly(approximately monthly) sells second mortgage loans on a servicing releasedbasis to Sub B.
In connection with the financial services offered byParent through its subsidiaries as described above, Parent holds mortgageservicing rights relating to third-party mortgages not held by the issuer, andcertain assets that support its mortgage servicing operations. Currently, eachof Sub A, Sub B, and Sub C owns mortgage servicing rights valued atapproximately $29.9 million, $3.8 million, and $285.6 million, respectively.Through the historic operation of its mortgaging servicing assets, Parent andits subsidiaries have participated in the robust national market for mortgageservicing rights, and have bought and sold mortgage servicing rights (includingseparate purchases and sales of servicing rights, and sales of whole mortgageloans accompanied by servicing rights on a "servicing released"basis) from and to other financial institutions on a periodic basis.
Parent recently entered into an agreement to sell SubC's conventional first mortgage loan production assets in a transaction thatwill likely be exempt from reporting obligations under the Act because thevalue of the non-exempt assets sold in the transaction will likely not exceed$56.7 million. (The vast majority of the assets sold in the transaction will beexempt under Section 7A(c)(2) of the Act.) (We do not purport to address thattransaction in this letter.) In that transaction, Sub C will not sell any ofits mortgage servicing rights, any of its assets that support its mortgageservicing operations (which assets include certain property, equipment,employees and systems) (the "Servicing Operations Assets"), nor anyof its assets related to the origination and acquisition of loans provided tofund planned or in-progress construction (the "Construction LoanAssets").
Parent isnow contemplating selling all of Sub C's mortgage servicing rights in a seriesof transactions (perhaps three or four) to separate, third-party financialinstitution purchasers. Parent and Sub C expect that all of these transactionswill be structured in a manner very similar to the sales of mortgage servicingrights to financial institutions effected in prior years and on terms consistentwith transfers of servicing rights in the general market. Parent furtheranticipates that each of the purchasers for the mortgage servicing rights willconsider the purchase and sale transactions as "ordinary course"purchases. Moreover, because Parent and Sub C expect to sell the mortgageservicing rights to financial institutions with existing mortgage servicingoperations, Sub C does not anticipate selling any of its Servicing OperationsAssets to the purchasers. It may subsequently transfer its Servicing OperationsAssets to a third party (in a separate transaction that we do not purport toaddress in this letter) or, if not, discontinue Sub C's servicing activitiesand transfer certain of the Servicing Operations Assets to Sub A or Sub B andliquidate others. Furthermore, in these transactions, Sub C will not bedivesting any of its Construction Loan Assets. While in the series oftransactions Parent expects to divest approximately $285.6 million in mortgageservicing rights, Parent is not exiting the mortgage servicing business.Through its operations in Sub A and Sub B, Parent will continue to compete inthe mortgage servicing business, will and continue to hold approximately $33.3million in mortgage servicing rights, and will continued to create, purchase,and sell mortgage servicing rights from time to time.
ANALYSIS
We understand that mortgage servicing rights relatedto third-party mortgages are not covered by the exemption provided in Section7A(c)(2) of the Act. However, it is our understanding that the PremergerNotification Office Staff does believe that sales of mortgage servicing rightsbetween financial institutions that service those rights as part of theirongoing business can qualify under Section 7A(c)(1) of the Act and Rule 802.1as assets "transferred in the ordinary course of business." Thisexemption applies as long as (1) the divesting entity will remain in thebusiness of servicing mortgage loans after the acquisition, and (2) thetransaction does not constitute an acquisition of an operating unit within themeaning of Rule 802.1(a). We believe that these conditions are satisfied inthe contemplated series of transactions.
First, the divesting entity is not exiting the mortgageloan or mortgage servicing business, but will remain in the business ofservicing mortgage loans following the proposed series of divestitures.Following each of the first few in the series of dispositions of mortgageserving rights, Sub C will continue to hold and operate mortgage servicingrights. Moreover, even following Sub C's final disposition of mortgageservicing rights, Parent, through its operations of Sub A and Sub B will remainin the business of servicing mortgage loans, albeit at a reduced level, andwill continue to create, purchase, and sell mortgage servicing rights in theordinary course of business.
Second, the proposed series of divestitures does notconstitute an acquisition of an operating unit within the meaning of Rule 802.1(a). In the series of mortgage servicing rights dispositions, no singlepurchaser will be acquiring substantially all of the assets of an operatingunit. Each purchaser merely will be acquiring a portion of Sub C's existingportfolio of mortgage servicing rights. Moreover, even considering the seriesof proposed divestitures taken as a whole, Sub C will not be disposing ofsubstantially all of its assets. Following the transactions, Sub C willcontinue to own and maintain the Construction Loan Assets and, at least for ashort period of time, the Servicing Operations Assets. (As noted above, Sub Cmay subsequently transfer its Servicing Operations Assets to a third party (ina separate transaction that we do not purport to address in this letter) or, ifnot, discontinue Sub C's servicing activities and transfer certain of theServicing Operations Assets to Sub A or Sub B and liquidate others.)
Based on the foregoing analysis and facts describedabove, we have concluded that none of the transactions contemplated by theseries of mortgage servicing rights dispositions is reportable under the Act,and accordingly the parties do not intend to make any filings thereunder. Weunderstand that the Premerger Notification Office Staff concurs with thisinterpretation of the Act and Rules.
Please let usknow if you have any questions concerning this letter or require any additionalinformation. As usual, we very much appreciate your attention to this matter.