On December 15, 2009 the FDIC issued an Advance Notice of Proposed Rulemaking (the “ANPR”) seeking comments regarding proposed revisions to the safe harbor provided at 12 C.F.R. §360.6 (the “Safe Harbor”) from the FDIC’s ability, as conservator or receiver, to recover assets securitized or participated out by a federally insured depository institution (an “IDI”) and to impose a stay on the ability of third parties to enforce contracts with the IDI.
Revisions to the Safe Harbor became necessary because changes to the generally accepted accounting principles’ (“GAAP”) “true sale” accounting rules threatened the effectiveness and legal certainty of the Safe Harbor. Specifically, FAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“FAS 166”) and FAS No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”) are effective for reporting periods which begin after November 15, 2009. (For more information on FAS 166 and FAS 167, see the June 16, 2009 Alert.) In response, the FDIC issued on November 13, 2009 an interim rule (the “Interim Rule”) continuing on a transitional basis the Safe Harbor, which affords protections to transactions that had complied with the Safe Harbor under the prior accounting rules and is set to expire on March 31, 2010. (For more information on the Interim Rule and the need for revisions to the Safe Harbor, see the November 17, 2009 Alert.) The ANPR is intended to result in a permanent solution to the issues raised by the accounting rules changes and also to address recent performance issues in securitizations and, in particular, securitizations that include residential mortgage assets in their collateral pools.
The FDIC had originally indicated its intent to issue a Notice of Proposed Rulemaking (“NPR”) (as opposed to the ANPR) regarding proposed revisions to the Safe Harbor on December 15, 2009. However, two members of the FDIC’s Board of Directors, Comptroller of the Currency John Dugan and OTS Acting Director John Bowman, did not support issuing an NPR, taking the position that the planned proposal could hurt the securitization market and put banks at a competitive disadvantage. Comptroller Dugan and Acting Director Bowman also have noted that the proposal could conflict with legislation currently being contemplated by Congress. Accordingly, the FDIC issued the ANPR, which is not a formal rulemaking proposal and does not represent the FDIC’s formal position on these issues.
In the ANPR, the FDIC states its support for sustainable securitization to provide balance sheet liquidity and, where appropriate, off balance sheet transactions that enhance prudent credit availability. However, the FDIC also states in the ANPR that the defects in many subprime and other mortgages originated and sold into securitizations requires attention by the FDIC to fulfill its responsibilities as deposit insurer and receiver.
The ANPR poses 35 wide ranging questions about the impact of proposed revisions to the Safe Harbor. These questions cover various issues related to securitizations, including: (1) capital structure; (2) disclosure; (3) documentation and recordkeeping;(4) compensation; and (5) origination and retention requirements. These questions also seek comment on whether there should be changes to the Safe Harbor to address the impact of FAS 166 and FAS 167 on participations and whether it would be appropriate to make the conditions applicable to residential mortgage-backed loan securitizations (“RMBS”) more stringent than those applicable to other types of securitizations. Furthermore, the FDIC questions in the ANPR whether the general transition period extending to March 31, 2010 is sufficient.
In order to provide a basis for consideration of the ANPR’s questions and other considerations in revising the Safe Harbor, the ANPR includes a draft of sample regulatory text that would replace the Safe Harbor. This sample regulatory text, which the ANPR notes is not a proposal, addresses separately participations, securitizations that meet the new true sale requirements under the accounting guidelines, and securitizations that do not meet such new requirements. Highlights of the sample regulation include the following.
- With respect to participations, the FDIC is not proposing any changes to the Safe Harbor. This would have the effect of excluding all participations that do not meet GAAP true sale requirements under FAS 166 and FAS 167.
- With respect to all securitizations, regardless of whether they meet GAAP true sale requirements, the sample regulation proposes to clarify that the FDIC, acting as conservator or as receiver, would consent to regularly scheduled payments to investors in all covered securitizations, thereby negating any effect of the FDIC stay.
- Covered securitizations that meet GAAP true sale requirements would be within the sample regulation’s safe harbor and the FDIC would not, in the exercise of its statutory authority to disaffirm or repudiate contracts, reclaim, recover, or recharacterize as property of the IDI or the receivership such transferred financial assets.
- With respect to covered securitizations that do not meet GAAP true sale requirements but meet the sample regulation’s other requirements, the new regime would afford limited relief.
- Following a monetary default for at least ten business days after the delivery of a written request, the FDIC would consent to the exercise of contractual rights afforded a third party.
- If the FDIC, acting as receiver or conservator, repudiates the securitization agreements of a covered securitization and does not pay damages as required by the Federal Deposit Insurance Act within ten days of such repudiation, the FDIC would consent to the exercise of any contractual rights afforded a third party.
- In order to qualify as a covered securitization, a securitization would have to meet a stringent set of requirements, including: (1) the sponsor would be required to retain at least 5% of the asset pool’s credit risk, which may not be transferred or hedged during the term of the securitization; (2) not be a re-securitization (except in limited circumstances), or an unfunded or synthetic securitization; (3) have cash flows that are based primarily on the performance of the underlying financial assets and not contingent on market or independent credit events; (4) comply with new disclosure requirements, including Regulation AB regardless of whether publicly issued or not;and (5) comply with structure compensation and documentation requirements under the new regime.
Interested parties will have 45 days following the ANPR’s publication in the Federal Register to provide comments on the ANPR to the FDIC.