American Securitization Forum (ASF) Executive Director Tom Deutsch released the following statement as a response to the Federal Deposit Insurance Corp.’s Notice of Proposed Rulemaking (NPR) regarding safe harbor in the event of a bank failure.
“ASF very much supports the FDIC’s goals to help restore securitization and the flow of credit to American businesses and consumers," Deutsch said. "We look forward to a full evaluation of today’s NPR and working with the FDIC through the comment process to achieve our mutual goals. We also are encouraged to hear that the FDIC has commit-ted to continue working closely with the SEC with their Reg AB NPR to ensure a level playing field for banks and non-banks."
According to him, the ASF appreciates the agency's modification of certain aspects of its previous proposals with respect to their safe harbor, but today's NPR still has some proposals that would create a lot of uncertainty for securitization investors as to whether the safe harbor has been achieved. These buyers, Deutsch said, need a clear bright line establishesing the application of the safe harbor, thus offering them the certainty to invest in new securitizations and generating the necessary credit to American businesses and consumers.
Tomorrow the ASF will hold a Sunset Seminar where participants will offer a first look at proposals in the NPR as well as seek to address many of the securitization industry's concerns and questions about the NPR's impact on the market.
Meanwhile, the Securities Industry and Financial Markets Association (SIFMA) also issued a statement from Richard Dorfman, managing director and head of the SIFMA Securitization Group (SSG), as a response to the FDIC's NPR.
“SIFMA strongly supports reasonable efforts to restore and reshape the securitization market. Securitization is essential to the provision of credit to American consumers and small businesses and therefore plays a critically important role in economic recovery," Dorfman said. "While we are pleased that the proposal issued today reflects changes to the initial proposal offered by the FDIC earlier this year, we have significant concerns that the proposed regulations could potentially hamper a recovery in the securitization markets."
He added that issuers, investors and credit rating agencies require certainty at the time of issuance, secondary trading and in financing transactions as to the treatment of bank securitizations in the event of insolvency. Some of the FDIC’s proposed rules might not iffer that certainty, said Dorfman. Thus, this could be detrimental to the re-establishment of well-functioning securitization markets.
The SIFMA, he said, is also concerned that the proposed safe harbor is not an appropriate way to regulate. Substantive regulation of securitization activities would be done via the FDIC's insolvency regime, which could potentially create an unlevel playing field for bank issuers, Dorfman said..
“In addition, SIFMA strongly believes that securitization reform should be coordinated and considered in the totality of the financial regulatory reform work currently being undertaken by Congress and the significant rule proposals recently published by the SEC.
Finally, he said the asociation looks forward to working with the FDIC and commenting on this proposal in greater detail during the formal comment period.
FDIC Release
In a release, the FDIC said its board of directors approved a NPR to clarify the safe harbor protection in a conservatorship or receivership for financial assets transferred by an insured depository institution (IDI) in connection with a securitization or participation.
The FDIC said this action was made necessary by the changes made by the Financial Accounting Standards Board in June 2009 to the accounting standards on which the FDIC's prior rule, 12 C.F.R. Part 360.6, was based.
In March, the FDIC Board extended a transitional safe harbor that permanently grandfathered securitization or participations in process through Sept. 30. Earlier in 2010, the FDIC Board approved for public comment an ANPR on what standards should be applied to securitizations seeking safe harbor treatment for transactions created after Sept. 30. Conditions for safe harbor treatment centered on increased clarity in the securitization capital structure, enhanced disclosure requirements, and risk retention and origination requirements.
According to the release, the FDIC received comments on the ANPR from a wide range of interested parties.
In response, the agency proposed some changes to the standards in the NPR, but has maintained a clear focus on improved transparency as well as a better alignment of incentives for strong underwriting in the securitization process.
Among the key proposed changes from the sample regulatory text included with the ANPR, the FDIC is proposing the following: 1) a 5% reserve fund for RMBS to cover potential put backs in the securitization's first year, instead of the prior 12 month seasoning requirement; 2) required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and 3) requiring deferred compensation only for rating agencies, rather than all service providers.
The NPR also includes clarifications of the prior text to simplify compliance. Tthe FDIC's proposed disclosure and risk retention requirements are aligned with those proposed in April by the Securities and Exchange Commission (SEC), the FDIC said in the release.
Upon final adoption by the SEC of the disclosure requirements in the new Regulation AB, the FDIC expects that compliance with those requirements will satisfy the disclosure requirements in the FDIC's proposed rule. The FDIC will continue to work closely with the SEC on these issues.
"The market is clearly trying to find a new securitization model, with investors placing a premium on transparency throughout the process," FDIC Chairman Sheila Bair said. "With the system awash in cash, investor appetite is coming back. Now is the time to act to put prudent controls in place before the significant issues we saw during the crisis return."
"We must acknowledge the role that the "originate to distribute" model played during the crisis. Insured institutions and our economy have lost many billions because our mortgage finance system broke down," Bair said.
She added that the proposed rule compliments other regulatory and legislative efforts to correct the securitization weaknesses that contributed to the crisis. The proposed NPR will help in supporting stronger, sustainable securitizations that are consistent with the industry's role as a funding spurce as well as risk management tool for insured banks.
The NPR will be open to public comment for 45 days following publication in the Federal Register.
