FDIC Board Approves NPR Regarding Safe-Harbor Protection

The board of directors of the Federal Deposit Insurance Corp. (FDIC) has approved a notice of proposed rulemaking (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.

In March, the FDIC board extended a transitional safe harbor that permanently grandfathered securitization or participations in process through Sept. 30, 2010. Earlier this year, the FDIC board approved for public comment an advanced NPR (ANPR) regarding what standards should be applied to securitizations seeking safe-harbor treatment for transactions created after Sept. 30. Conditions for safe-harbor treatment focused on greater clarity in the securitization capital structure, enhanced disclosure requirements, and risk retention and origination requirements, the FDIC says.

In response to comments from a wide variety of interested parties, the FDIC has proposed some changes to the standards in the NPR. Among the key proposed changes from the sample regulatory text included with the ANPR, the FDIC is proposing the following:

  • a 5% reserve fund for residential mortgage-backed securities in order to cover potential put-backs during the first year of the securitization, rather than the prior 12-month seasoning requirement;
  • required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and
  • requiring deferred compensation only for rating agencies, rather than for all service providers.

The NPR also includes clarifications of the prior text to simplify compliance. The FDIC's proposed disclosure and risk retention requirements are aligned with those proposed in April by the Securities and Exchange Commission (SEC). Upon final adoption by the SEC of the disclosure requirements in the new Regulation AB, the FDIC says it anticipates that compliance with those requirements will satisfy the disclosure requirements in the FDIC's proposed rule.

‘The market is clearly trying to find a new securitization model, with investors placing a premium on transparency throughout the process," says Sheila Bair, chairwoman of the FDIC, adding, ‘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.’

Two members of the FDIC Board, including Comptroller of the Currency John C. Dugan, voted against the NPR. In a statement, Dugan said he does not support the NPR because it only applies to bank securitizers. Provisions included in the Senate's reform bill, on the other hand, apply to all securitizers.

"Given how close Congress is to addressing this issue, I think the FDIC should wait to see what Congress directs the agencies to do before acting unilaterally – and frankly, I think the SEC should wait to finalize its proposed rule for the same reason," Dugan said.

He also faulted the NPR for taking an indirect approach to improving mortgage underwriting standards.

Separately, the FDIC has also issued for public comment a proposed rule that would require certain identified IDIs that are subsidiaries of large financial parent companies to submit to the FDIC analysis, information and contingent resolution plans that address and demonstrate each IDI's ability to be separated from its parent structure, and to be wound down or resolved in an orderly fashion.

The contingent resolution plan, gap analysis and mitigation efforts are intended to enable the FDIC to develop a reasonable strategy, plan or options for the orderly resolution of the institution, the FDIC says. The proposal would apply only to IDIs with greater than $10 billion in total assets that are owned or controlled by parent companies with more than $100 billion in total assets.

‘We must recognize that not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," Bair says. "There were significant shortcomings in our approach that permitted excessive risks to build in the system. Critically, the lack of an effective resolution process for the large, complex financial institutions limited regulators' ability to manage the crisis."



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