The Commercial Mortgage Securities Association and The Mortgage Bankers Association (MBA) filed a comment letter with banking regulators to address the proposed risk-based capital treatment of assets coming on the books of banks on January 1, 2010, as a result of FAS 166 and FAS 167.
FAS 166 and FAS 167 will require hundreds of billions of dollars of assets to come onto the banks’ balance sheets on January 1, 2010, which would immediately require an allocation of capital under the regulatory capital rules proposed.
In the joint letter, CMSA and MBA recommend that the regulators grant regulatory capital relief if a security meets certain structure criteria. The letter proposed that regulatory capital relief be given if the primary beneficiary is the transferor, the transfer meets all other criteria for sale accounting under FAS 166.
It also suggests that it be granted in the case where the beneficial interest holders of the Variable Interest Entity (VIE) have no recourse to the general credit of the primary beneficiary other than standard representations and warranties.
The letter said regulatory capital relief should also be granted in the case where the VIE’s assets can be used only to settle the obligations of the VIE and there are no explicit arrangements or implicit variable interests that could require the primary beneficiary to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to the VIE, other than servicing advances, which are only required if the servicer deems them to be collectible.
“While the International Accounting Standards Board hasn’t yet issued its FAS 166 and 167-equivalent reporting standards, there are significant differences in approach between FASB’s and the IASB’s exposure drafts,” said Dottie Cunningham, chief executive officer, CMSA. “This should serve as further reason to delay the regulatory capital impact of FAS 166 and FAS 167.”