This morning the Federal Deposit Insurance Corp. (FDIC) Board unanimously approved an interim final transitional rule extending the FDIC Safe Harbor for securitizations through March 31, 2010.
But, the conditions for eligibility of the safe harbor for securitizations occurring after the said date are not yet ready for exposure. Interagency discussions will be taking place regarding the appropriate conditions designed to create a sustainable securitization market.
The aim is to seek approval of those conditions at the December 15, 2009 FDIC Board meeting and then later, issuance for public comment. The FDIC intends to publish a notice of proposed rulemaking to amend section 360.6 to address treatment of participations and securitizations issued after March 31, 2010.
Earlier, the American Securitization Forum (ASF) submitted two proposals to the FDIC. The most recent proposal carries a potential Sale Approach and a Security Interest Approach.
The safe harbor regulation covers the FDIC's treatment as conservator or receiver of financial assets transferred by an insured depository institution in relation to a securitization.
Under the current safe harbor regulation, a financial institution is required to treat a securitization as a sale for the Generally Accepted Accounting Principles (GAAP) purposes for the FDIC to treat the securitization as a legal sale when the FDIC acts as a conservator or receiver for insolvent banks.
FAS 166 implementation (GAAP standards for transfers, including securitizations, of financial assets) is expected to result in the consolidation of many off-balance sheet structures, such as credit card ABS.
This, according to Bank of America Merrill Lynch analysts, calls into question a securitization's legal isolation.
The ASF issued a statement in response to today’s FDIC Board vote about the extension of its securitization legal isolation rule.
“ASF welcomes the FDIC Board’s unanimous action this morning to extend application of the FDIC’s securitization rule to provide needed certainty to existing securitizations as well as those issued over the next few months," the ABS trade group said. "The application of this rule had been cast in doubt by accounting standards changes that will take effect for reporting periods after [Nov. 15]. Today's action by the FDIC Board will resolve this uncertainty and will allow bank securitizations of credit card and auto loans to resume, which in turn will make additional credit available to consumers at a critical time for the American economy.”
The industry group added that, “ASF and its members look forward to working with the interagency group of bank regulators and the SEC as they continue to develop best practices for securitization proposed to be published for comment in December 2009.”
Meanwhile, Fitch Ratings commented on the FDIC approving the interim rule addressing its treament as conservator or receiver of financial assets transferred by an insured depositary institution in connection with an ABS securitization or participation.
In the rating agency's view, this resolution provides enough clarity regarding the treatment of such assets that arose due to pending changes to accounting rules regarding off-balance sheet securitizations.
"As a result of today's action by the FDIC, bank sponsored securitizations issued prior to March 31, 2010 will be eligible to achieve ratings from Fitch higher than those of the originating entity," the rating agency said in a release.
The interim rule, which amends 12 C.F.R. - 360.6 (the securitization rule) allows for a 'transitional safe harbor' for securitizations issued before March 31, 2010.
As stated, the rule thus effectively grandfathers existing deals as well as those issued before March 31, 2010, if the transactions would have complied with the existing securitization rule, including that the transactions would qualify as a GAAP sale in effect for reporting periods before Nov. 15, the rating agency said.
Fitch will review the FDIC's notice of proposed rulemaking released in December 2009. The rating agency will also comment on how this will affect ratings on issuance taking place after the effective date.
The rating agency thinks the interim rule effectively addresses a key concern that results from existing deals losing GAAP sale status following implementation of the new accounting rules.
According to Fitch, before today's clarification, the comfort previously provided by the FDIC, which said it would not seek to recover financial assets transferred in connection with a securitization or participation, was jeopardized by SFAS 166. This is because one of the
preconditions of the securitization rule was that the transfer qualify as a sale under GAAP provisions.