On February 2, 2007, the staff of the Division of Corporate Finance (the “Division”) of the Securities and Exchange Commission responded via telephone interpretation to an inquiry posed by the American Securitization Forum (the “ASF”) and the Mortgage Bankers Association (the “MBA”) concerning whether “vendors” must separately submit an assessment of compliance with applicable servicing criteria and related accountant’s attestation under Item 1122 of Regulation AB to be included in an issuer’s annual report on Form 10-K. In a letter dated December 21, 2006, the ASF and MBA sought confirmation from the Division that vendors employed by servicers to perform very specific and limited activities or to perform scripted or other activities involving limited independent judgment are not parties “participating in the servicing function” as contemplated by Item 1122 of Regulation AB. The ASF and MBA noted that industry practice during 2006 has been consistent with this approach and most issuers have not included separate assessments of compliance with servicing criteria and related accountant’s attestations in their annual reports on Form 10-K for vendors of this type. Rather, issuers have relied on the servicer employing these vendors to report on its own compliance with establishing policies and procedures to monitor the vendors’ performance and compliance with applicable servicing activities, under Item 1122(d)(ii) of Regulation AB, and in turn, any instances of noncompliance by the vendors.

The Division generally agreed and responded with the following telephone interpretation:

“A vendor engaged by a servicer to perform specific and limited activities or to perform activities scripted by the servicer would not be viewed as a party participating in the servicing function separate and apart from the servicer engaging such vendor, and would not need to submit separate assessment and attestation reports for inclusion in the related asset-backed issuer’s Form 10-K report if:

• The vendor is not a “servicer” as defined in Item 1101(j) of Regulation AB;

• The servicer engaging and monitoring the vendor elects to take responsibility for assessing compliance with the servicing criteria applicable to that vendor in the servicer’s report regarding assessment of compliance with servicing criteria;

• The servicer engaging the vendor has policies and procedures in place designed to provide reasonable assurance that the vendor’s activities comply in all material respects with the servicing criteria applicable to the vendor; and

• The servicer’s report on assessment of compliance discloses:

– the servicing criteria or portion of servicing criteria applicable to the vendor’s activities for which the servicer is assuming responsibility;

– any material instance of noncompliance by the vendor that the servicer identifies or of which it is aware; and

– any material deficiency that is identified in the servicer’s policies and procedures to monitor the vendor’s compliance.

In this situation, consistent with Item 1122(d)(1)(ii) of Regulation AB and Instruction 2 to Item 1122 of Regulation AB, the requirement to assess compliance with the servicing criteria applicable to a vendor’s activities is satisfied if the servicer has instituted policies and procedures to monitor whether such vendor’s activities comply in all material respects with such criteria. Compliance with the applicable servicing criteria is achieved if those policies and procedures are designed to provide reasonable assurance that such vendor’s activities comply with such criteria and those policies and procedures are operating effectively.” 

It is important to note that the condition contained in the telephone interpretation that “[t]he servicer engaging the vendor has policies and procedures in place designed to provide reasonable assurance that the vendor’s activities comply in all material respects with the servicing criteria applicable to the vendor” is likely to be interpreted by the accounting firms engaged to provide attestations under Item 1122(b) of Regulation AB as requiring that such policies and procedures be in place and operating effectively during the entire review period. In the event that effective policies and procedures are not or were not continuously in place during the review period, the auditor’s attestation may indicate material instances of noncompliance notwithstanding the adequate performance of the vendor. For this reason, the issuer may determine that requesting the vendor to deliver its own assessment and attestation will result in a more accurate disclosure of servicing performance.