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FDIC proposal for amended safe harbor rules ushers era of on-balance sheet securitizations

 

Home > Securitization > News on Securitization > FDIC proposal for amended safe harbor rules ushers era of on-balance sheet securitizations

 

23 December, 2009:  

In line with new rules by Financial Accounting Standard Board (FASB) on accounting for securitised assets, Federal Deposit Insurance Corporation (FDIC) has issued draft of new rules for safe harbor to securitization transactions. “Safe harbor” is a sort of a promise that the FDIC, as receiver or conservator of FDIC-insured US banks, will not question the true sale inherent in securitization transactions. 

FDIC on 15th December, 2009 had issued its Advanced Notice on Proposed Rulemaking, regardingSafe Harbor Protection for Securitization.  

FDIC in 2000 had adopted a regulation codified at 12 C.F.R. 360.6 wherein it had clarified its scope of authority as a conservator or receiver to insured deposit institutions  with respect to transfer of financial assets in connection with securitization. As per this rule, if the transferred assets meet all the conditions for sale accounting treatment under the generally accepted accounting principles (GAAP), the assets would remain ‘isolated’ providing a ‘safe harbor’ to the sale inherent in securitization transactions.  With the implementation of Statement 166 and 167, for financial reporting purposes, most special purpose vehicles will get consolidated into the balance sheet of securitizers. This would have meant that the true sale nature of securitization transactions would also get questioned, and such transactions would alternatively get treated as secured financings. However, secured financings would depend upon ratings of the issuers, which would cause existing asset backed securities to suffer serious downgrades.  

The ANPR seeks to enact standards, whereby conforming transactions would be treated as true sales despite having come back on the balance sheets of originators.  

A summary of the standards that securitization transactions need to comply with to avail of the safe harbor is as follows [thanks to Martin Rosenblatt, Deloitte Touche Tohmatsu, for permitting us to use the matrix below] 

 

ALL SECURITIZATIONS

INCREMENTAL FOR RMBS

Capital Structure and Financial Assets (b)(1)

If re-securitization, the required loan level disclosures must be available for the underlying assets (A)(i)

No more than six credit tranches (B)(i)

 

Payment of principal and interest must be primarily based on the performance of the transferred financial assets and not contingent on unrelated market or credit events. Must be cash not synthetic and must be funded not unfunded. (ii)

No external credit support or guarantees of the obligations. (ii)

Disclosures (b) (2)

At time of offering and then monthly, compliance with REG AB and any successor REG required disclosures, at a minimum, even if private placement. (A)(i)

At time of offering, loan level information loan type, maturity, interest terms, and location of property (B) (i)

 

At time of offering, tranche structure, priority of payments, subordination, reps & warranties and remedies, repurchase provisions, liquidity facilities and credit enhancements, loss mitigation and write-off policies, servicer advances, substitutions and removals (ii)

At time of offering, affirmation by sponsor of compliance with all origination legal requirements and interagency guidance, that all loans underwritten at the fully indexed rate relying on documented income; the percentage of assets underwritten using discretion, and a third party due diligence report confirming compliance with standards. (ii)

 

Periodic and cumulative asset performance data, delinquencies and losses, servicer advances (iii)

 

 

Nature and amount of compensation paid to the originator, sponsor, rating agency, or third-party advisory, mortgage or other broker, servicer and the extent to which any risk of loss is retained by any of them (iv)

 

 

 

ALL SECURITIZATIONS

INCREMENTAL FOR RMBS

Documentation and Recordkeeping (b)(3)

Documentation must define all rights and responsibilities of each party, including reps & warranties consistent with industry best practices, ongoing disclosure requirements, and appropriate measure to avoid conflicts of interest (A)

Servicing agreement must provide servicers with full authority, subject to oversight, to mitigate losses consistent with maximizing NPV analysis for the benefit of all investors, not for any particular class. Servicers shall have authority to modify to address reasonably foreseeable default. Servicer must commence action to mitigate losses no later than 90 days after first becoming delinquent (B) (i)

 

 

Servicing agreement shall not require a primary servicer to advance delinquent payments more than three periods unless financing or reimbursement facilities are available (ii)

Vinod Kothari comments: The FDIC’s safe harbor rules create the ground for a departute between legal and accounting treatment for securitization transactions. In an ideal world, there is no reason for securitization transactions to be off-the-balance-sheet, for them to true sales, and therefore, to be originator-rating independent. FDIC rules woule ensure that ratings may still draw on legal robustness of the transaction, despite it being on the balance sheet. Hence, this ushers in a new era of on-balance sheet securitizations.  

See the text of the Advanced Notice on Proposed Rulemaking here

[Reported by: Nidhi Bothra]

 
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