§ 6904 — Limitations

§ 6904. Limitations. (a) Financial guaranty insurance may be\ntransacted in this state only by a corporation licensed for such purpose\npursuant to section six thousand nine hundred two of this article.\n (b) Permissible guarantees. (1) The superintendent shall not permit\nthe writing of financial guaranty insurance except as defined in\nsubparagraph (A) of paragraph one of subsection (a) of section six\nthousand nine hundred one of this article, and a corporation may insure\nthe timely payment of United States dollar debt instruments, or other\nmonetary obligations, only in the following categories:\n (A) municipal obligation bonds;\n (B) special revenue bonds;\n (C) industrial development bonds;\n (D) obligations of corporations, trusts or other similar entities\nestablished under applicable law;\n (E) partnership obligations;\n (F) asset-backed securities, trust certificates and trust obligations\nother than mortgage-backed securities secured by first mortgages on real\nproperty which are insurable by a mortgage guaranty insurer authorized\nunder paragraph twenty-three of subsection (a) of section one thousand\none hundred thirteen of this chapter, unless:\n (i) such mortgages with loan-to-value ratios in excess of eighty\npercent are:\n (I) in the case of mortgages on property located in the state of New\nYork, insured by mortgage guaranty insurers authorized under paragraph\ntwenty-three of subsection (a) of section one thousand one hundred\nthirteen of this chapter;\n (II) in the case of mortgages on property located in a state other\nthan the state of New York, insured by mortgage guaranty insurers\nauthorized to do business in such other state; or\n (III) in an aggregate principal amount less than the single risk\nlimits prescribed in paragraph five of subsection (d) of this section;\nor\n (ii) additional mortgages with principal balances, other collateral\nwith a market value, or (provided the insured risk is investment grade)\nexcess spread in an amount, in each instance at least equal to the\ncoverage that would otherwise be provided by such mortgage guaranty\ninsurers in accordance with item (i) of this subparagraph are pledged as\nadditional security for the asset-backed securities;\n (G) installment purchase agreements executed as a condition of sale;\n (H) consumer debt obligations;\n (I) utility first mortgage obligations; and\n (J) any other debt instrument or financial obligation that the\nsuperintendent determines to be substantially similar to any of the\nforegoing or shall otherwise be approved by the superintendent.\n (2) An insurer may insure obligations enumerated in subparagraphs (A),\n(B), and (C) of paragraph one of this subsection that are not investment\ngrade so long as at least ninety-five percent of the insurer's aggregate\nnet liability on the kinds of obligations enumerated in subparagraphs\n(A), (B) and (C) of paragraph one of this subsection shall be investment\ngrade.\n (3) A corporation may insure the timely payment of monetary\nobligations in any category designated in this subsection\nnotwithstanding that such obligation may be insured by a financial\nguaranty insurance policy issued by another insurer. In the event that\nany obligation is insured by more than one financial guaranty insurance\npolicy, then each such insurance policy may by its terms specify its\npriority of payment in the event of a default under the obligation\ninsured or any other insurance policy; provided that an insurer shall be\nentitled to take into account payment under another policy insuring such\nobligation for purposes of establishing and maintaining loss reserves\nonly to the extent that the policy issued by such insurer provides for\npayment only in the event of payment default under both such obligation\nand the other policy.\n (4) A corporation may also write financial guaranty insurance as\ndefined in subparagraph (A) of paragraph one of subsection (a) of\nsection six thousand nine hundred one of this article to insure the\ntimely payment of non-United States dollar debt instruments or other\nmonetary obligations denominated or payable in foreign currency, only\nfor the categories listed in subparagraphs (A) through (J) of paragraph\none of this subsection, provided that:\n (A) such currency is that of an Organisation for Economic Co-operation\nand Development country or such other country (i) whose sovereign rating\nis investment grade or (ii) as shall not otherwise be disapproved by the\nsuperintendent within thirty days following receipt of written\nnotification. The superintendent shall not disapprove such notification\nupon demonstration that there is no undue risk associated with insuring\nthe timely payment of such instruments or obligations. In making such a\ndetermination the superintendent shall take into consideration the\ncorporation's outstanding liabilities on non-investment grade\ninstruments and obligations in relation to its outstanding liabilities\non all instruments and obligations and in relation to the amount of its\nsurplus to policyholders;\n (B) reserves required pursuant to section six thousand nine hundred\nthree of this article in regard to such obligations shall be established\nand adjusted quarterly based upon the then current foreign exchange\nrates;\n (C) such obligations shall not exceed twenty-five percent of an\ninsurer's aggregate net liability; and\n (D) the aggregate and single risk limitations prescribed by\nsubsections (c) and (d) of this section shall be determined by applying\nthe then current foreign exchange rates.\n (c) Aggregate risk limits. The corporation must at all times maintain\nsurplus to policyholders and contingency reserves in the aggregate no\nless than the sum of:\n (1)(A) 0.3333 percent or 1/300th of the aggregate net liability under\nguaranties of municipal bonds including obligations demonstrated to the\nsatisfaction of the superintendent to be the functional equivalent\nthereof and investment grade utility first mortgage obligations; plus\n (B) 0.6666 percent or 1/150th of the aggregate net liability under\nguaranties of investment grade asset-backed securities; plus\n (C) 1.0 percent or 1/100th of the aggregate net liability under\nguaranties, secured by collateral or having a term of seven years or\nless, of:\n (i) investment grade industrial development bonds,\n (ii) other investment grade obligations; plus\n (D) 1.5 percent or 1/66.67th of the aggregate net liability under\nguaranties of other investment grade obligations; plus\n (E) 2.0 percent or 1/50th of the aggregate net liability under\nguaranties of:\n (i) non-investment grade consumer debt obligations, and\n (ii) non-investment grade asset-backed securities; plus\n (F) 2.5 percent or 1/40th of the aggregate net liability under\nguaranties of non-investment grade obligations secured by first\nmortgages on commercial real estate and having loan-to-value ratios of\neighty percent or less; plus\n (G) 4.0 percent or 1/25th of the aggregate net liability under\nguaranties of other non-investment grade obligations; and\n (H) if the amount of collateral required by subparagraph (C) of this\nparagraph is no longer maintained, that proportion of the obligation\ninsured which is not so collateralized shall be subject to the aggregate\nlimits specified in subparagraph (D) of this paragraph; and\n (2) surplus to policyholders determined by the superintendent to be\nadequate to support the writing of residual value insurance, surety\ninsurance and credit insurance, if the corporation has elected to\ntransact such kinds of insurance pursuant to subsection (a) of section\nsix thousand nine hundred two of this article.\n (d) Single risk limits. A financial guaranty insurance corporation\nshall limit its exposure to loss on any one risk insured by policies\nproviding financial guaranty insurance, net of collateral and\nreinsurance, as follows:\n (1) for municipal obligation bonds, special revenue bonds, and\nobligations demonstrated to the satisfaction of the superintendent to be\nthe functional equivalent thereof:\n (A) the insured average annual debt service with respect to a single\nentity and backed by a single revenue source shall not exceed ten\npercent of the aggregate of the insurer's surplus to policyholders and\ncontingency reserve; and\n (B) the insured unpaid principal issued by a single entity and backed\nby a single revenue source shall not exceed the following percent of the\naggregate of the insurer's surplus to policyholders and contingency\nreserve based on the highest sovereign rating, by a nationally\nrecognized statistical rating organization acceptable to the\nsuperintendent, of the country of the applicable governmental unit:\n (i) seventy-five percent: any rating in one of the top two generic\nlettered rating classifications;\n (ii) fifty-nine percent: an A+, A1, or equivalent rating at the\nhighest grade of the third generic lettered rating classification;\n (iii) forty-three percent: an A, A2, or equivalent rating at the\nmiddle grade of the third generic lettered rating classification; and\n (iv) twenty-six percent: an A-, A3, or equivalent rating at the lowest\ngrade of the third generic lettered rating classification;\n (2) for each issue of asset-backed securities issued by a single\nentity and for each pool of consumer debt obligations, the lesser of:\n (A) insured average annual debt service; or\n (B) insured unpaid principal (reduced by the extent to which the\nunpaid principal of the supporting assets and, provided the insured risk\nis investment grade, excess spread exceed the insured unpaid principal)\ndivided by nine;\nshall not exceed ten percent of the aggregate of the insurer's surplus\nto policyholders and contingency reserve, provided that no asset in the\npool supporting the asset-backed securities exceeds the single risk\nlimits prescribed in paragraph five of this subsection, if directly\nguaranteed; and provided further that, if the issuer of such insured\nasset-backed securities is a special purpose corporation, trust or other\nentity and such issuer shall have indebtedness outstanding with respect\nto any other pool of assets, either such other indebtedness shall be\nentitled to the benefits of a financial guaranty policy of the same\ninsurer, or such other indebtedness shall: (i) be fully subordinated to\nthe insured obligation, with respect to, or be non-recourse with respect\nto, the pool of assets that supports the insured obligation, (ii) be\nnon-recourse to the issuer other than with respect to the asset pool\nsecuring such other indebtedness and proceeds in excess of the proceeds\nnecessary to pay the insured obligation ("excess proceeds") and (iii)\nnot constitute a claim against the issuer to the extent that the asset\npool securing such other indebtedness or excess proceeds are\ninsufficient to pay such other indebtedness;\n (3) for obligations issued by a single entity and secured by\ncommercial real estate, and not meeting the definition of asset-backed\nsecurities, the insured unpaid principal less fifty percent of the\nappraised value of the underlying real estate shall not exceed ten\npercent of the aggregate of the insurer's surplus to policyholders and\ncontingency reserve;\n (4) for utility first mortgage obligations, the insured average annual\ndebt service shall not exceed ten percent of the aggregate of the\ninsurer's surplus to policyholders and contingency reserve; and\n (5) for all other policies providing financial guaranty insurance with\nrespect to obligations issued by a single entity and backed by a single\nrevenue source, the insured unpaid principal shall not exceed ten\npercent of the aggregate of the insurer's surplus to policyholders and\ncontingency reserve.\n (e) Except as provided in subsection (f) of this section, if an\ninsurer at any time exceeds any limitation prescribed by subsection (c)\nor (d) of this section or paragraph two of subsection (b) of this\nsection, the insurer shall within thirty days after the limitations are\nbreached, submit a written plan to the superintendent detailing the\nsteps that it will take or has taken to reduce its exposure to loss to\nno more than the permitted amounts, and if after notice and hearing the\nsuperintendent determines that an insurer has exceeded any limitation\nprescribed by this section, he may order such insurer to cease\ntransacting any new financial guaranty insurance business until its\nexposure to loss no longer exceeds said limitations or with respect to\nthe limitations prescribed in paragraph two of subsection (b) of this\nsection, may order such insurer to limit its writing of the types of\nguaranties permitted under subparagraphs (A), (B) and (C) of paragraph\none of subsection (b) of this section to investment grade obligations\nuntil such time as it shall be in compliance with such limitations.\n (f) An insurer shall not be deemed in violation of any limitation\nprescribed by subsection (d) of this section with respect to any\nfinancial guaranty insurance outstanding prior to the effective date of\nthis article, if the insurer was in compliance with the applicable\nsingle risk limit in effect in this state at the time that the financial\nguaranty insurance policy was issued. If the insurer was not so in\ncompliance, such financial guaranty insurance shall comply with the\nlimitations prescribed by subsection (d) of this section no later than\nthree years after the effective date of this article.\n (g) No insurer authorized to transact the business of financial\nguaranty insurance shall pay any commission or make any gift of money,\nproperty or other valuable thing to any employee, agent or\nrepresentative of any potential purchaser of a financial guaranty\ninsurance policy, as an inducement to the purchase of such a policy, and\nno such employee, agent or representative of such potential purchaser\nshall receive any such payment or gift. Violation of the provisions of\nthis section shall not, however, have the effect of rendering void the\ninsurance policy issued by the insurer.\n