The Federal Deposit Insurance Corp. (FDIC) adopted a notice of proposed rulemaking (NPR) to reduce credit risk to otherwise vulnerable securitizations, such as auto loan deals.
In the NPR, the FDIC recommended narrowing the broad reach of its Orderly Liquidation Authority (OLA) receivership powers under the Dodd-Frank Act. The OLA applies to nonbanks since Dodd-Frank grants OLA power to the FDIC as receiver for non-bank financial companies whose failure should have serious adverse impact on U.S. financial stability.
"This NPR provides clarity to the process by letting creditors know clearly how they can file a claim and how they will be paid for their claims," said FDIC Chairman Sheila Bair."This is an important step in providing certainty for the market in this new process."
The FDIC proposes to limit its discretion as receiver to claw back preferential transfers of certain assets to securitizations without a compensating payment to the ABS investors. This proposed amendment, Moody's Investors Service said, is credit positive for certain securitizations where sponsors might become candidates for OLA receivership.
"The NPR’s recommended amendments confirm our previous understanding that the FDIC would not use its preferential claw-back powers under OLA to adversely discriminate against certain ABS investors," Moody's analysts said.
They explained that, unlike the Bankruptcy Code, OLA, without the clarifying amendments, singles out ABS investors secured by chattel paper, including auto loans, and instruments as opposed to other types of property.
OLA, Moody's analysts said, includes language implying that the FDIC has the power to strip ABS investors of their ownership interests in securitized chattel paper and instruments just because the sole perfection method of their security interest in such property is a standalone UCC filing.
The proposed rule will be out for comment 60 days after publication in the Federal Register. Moody's analysts said that if it is adopted, the amendment would fulfill the Dodd-Frank's goal to harmonize the treatment of creditors under OLA with the agency's expected treatment under otherwise applicable insolvency laws.