Question
By Email
B. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580
Re: HSR FilingExemption Applicable to Sale of Mortgage Servicing Rights
Dear Mike:
This letter is toconfirm the guidance and interpretation that you provided to us yesterday regardingthe applicability to a proposed asset divestitures of certain exemptions underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the"Act"), and the Commission's implementing regulations thereunder, andin particular the "ordinary course of business" exemption containedin Section7A(c)(1) of the Act and Rule 16 C.F.R. 802.1. The relevant factsregarding the proposed transaction and our analysis that we discussed aresummarized below.
Facts:
Assume size ofpersons and size of transaction tests are met.
The Parties:
Company A is alarge diversified financial services corporation that has, among othersubsidiaries, indirect wholly-owned subsidiaries Sub X and Sub Y.
Both Sub X, Sub Y,and other subsidiaries of Company A own portfolios of mortgage servicing rights("MSRs"), and have acquired or sold MSRs in the past. The MSRs thatare currently held by Sub X represent no more than 6% (depending on howmeasured) of the MSRs held by Company A through its various subsidiaries on aconsolidated basis.
Company Bspecializes in the servicing of mortgage loans. Company B has bought MSRs inthe past as part of its ordinary course of business. Indeed, because Company Bdoes not own or originate any mortgage loans, acquisition is the only way forCompany B to obtain MSRs.
The Transaction:
Company A hasdecided to re-organized its mortgage servicing operations with respect to SubX. Accordingly, it will: (a) sell some of the MSRs held by Sub X to certainthird party investors; (b) transfer some of the MSRs held by Sub X to Sub Y;and (3) sell some of the Sub X MSRs to Company B. The sale by Sub X of MSRs toCompany B will be for an amount in excess of $63.1 million. No other assets,such as offices, equipment. or employment relationships will be included in thesale. At the conclusion of these transactions, Sub X will remain in existencebut will no longer hold MSRs. Company A will remain in the business ofservicing mortgage loans through Sub Y and other of its subsidiaries after thetransaction.
Question at Issue:
Is the sale of MSRsby Sub X to Company B exempt as an ordinary course transaction?
HSR Rules:
The "ordinarycourse of business" exemption provided by 15 U.S.C. 18a (c)(l) and 16C.F.R. 802.1 applies to acquisitions of "goods and realty," whichthe PNO has interpreted to include the acquisition of loan servicingportfolios. [See, e.g., Letter to Richard Smith dated March17,1998,("[T]he sale of mortgage servicing rights would be treated by theStaff as the sale of 'goods' for the purposes of the ordinary course ofbusiness exemption.")] The 16 C.P.R. 802.1 exemption applies so long asthe acquiring person does not acquire "all or substantially all of theassets of an operating unit," defined as assets that are "operated asa business undertaking in a particular location or for a particular product orservice."
The ABA PremergerNotification Practice Manual (Fourth), 2007, at p. 13, notes that the PNO hastaken the position that unlike other ordinary course of business acquisitions,the PNO allows the ordinary course exemption for the sales of certain types offinancial portfolios, even if the portfolio represents all of the assets of asubsidiary of the acquired person.
Conclusion:Because Company Awill remain in the business of servicing mortgages, and is not disposing of allof its MSRs (indeed it is retaining 94% of them), the transaction as describedis exempt under 16 C.F.R. 802.1(a) as in the ordinary course of business. Thisis true even B. Michael Verne Premerger Notification Office January 8, 2009though Sub X, the entity in which Company A holds the MSRs that will beacquired by Company B, will itself no longer hold MSRs after the transaction iscomplete.
Based on theforegoing analysis and the conclusion that the transaction contemplated by themortgage servicing rights acquisition is not reportable under the Act, theparties do not intend to make an HSR filing. We understand that the PremergerNotification Office Staff concurs with this interpretation of the Act andRules.
If this descriptionof our conversation and the PNO's position is not consistent with either yourunderstanding or our telephone conversation yesterday, or if you havequestions, please do not hesitate to contact me.