FDIC Clarifies Securitization Safe Harbor Prompted by New FASB Standards

The Board of Directors of the FDIC on Tuesday 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 in connection with a securitization or participation. (Click here for prior JofA coverage.)

The action was necessitated by FASB’s changes in June 2009 to the accounting standards on which the FDIC’s prior rule, 12 C.F.R. § 360.6, was based. The changes are contained in FASB Statement no. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and Statement no. 167, Amendments to FASB Interpretation No. 46(R). The standards went into effect for annual financial reporting periods beginning after Nov. 15, 2009.

The changes affect whether a special-purpose entity (SPE) must be consolidated for financial reporting purposes, thereby subjecting many SPEs to GAAP consolidation requirements.

Late in 2009, the FDIC approved an Advanced Notice of Proposed Rulemaking (ANPR) regarding what standards should be applied to securitizations seeking safe harbor treatment for transactions created after March 31, 2010. However, in March 2010, the FDIC Board extended the transitional safe harbor that permanently grandfathered securitization or participations in process through Sept. 30, 2010.

Conditions for safe harbor treatment focus on greater clarity in the securitization capital structure, enhanced disclosure requirements, and risk retention and origination requirements. In response to comments on the ANPR, the FDIC proposed some changes to the standards in the NPR, but in a news release said it has retained a clear focus on improved transparency and a better alignment of incentives for strong underwriting in the securitization process. Among the key proposed changes from the sample regulatory text included with the ANPR, the FDIC is proposing: (1) a 5% reserve fund for residential mortgage-backed securitiesto cover potential put backs during the first year of the securitization, rather than the prior 12-month seasoning requirement; (2) required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and (3) requiring deferred compensation only for rating agencies, rather than all service providers.

The NPR is open to public comment for 45 days following publication in the Federal Register.