Securitization Safe Harbor Rule
| Citation | 85 FR 12724 |
| Record Number | 2020-02936 |
| Published date | 04 March 2020 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 85 Issue 43 (Wednesday, March 4, 2020)
[Federal Register Volume 85, Number 43 (Wednesday, March 4, 2020)]
[Rules and Regulations]
[Pages 12724-12731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02936]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AF09
Securitization Safe Harbor Rule
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The FDIC is amending its securitization safe harbor rule,
which relates to the treatment of financial assets transferred in
connection with a securitization transaction, in order to eliminate a
requirement that the securitization documents require compliance with
Regulation AB of the Securities and Exchange Commission in
circumstances where Regulation AB by its terms would not apply to the
issuance of obligations backed by such financial assets.
DATES: Effective May 4, 2020.
FOR FURTHER INFORMATION CONTACT: Phillip E. Sloan, Counsel, Legal
Division, (703) 562-6137, [email protected]; George H. Williamson,
Manager, Division of Resolutions and Receiverships, (571) 858-8199,
[email protected].
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The policy objective of this final rule (final rule) is to remove
an unnecessary barrier to securitization transactions, in particular
the securitization of residential mortgages, without adverse effects on
the safety and soundness of insured depository institutions (IDIs).
The FDIC is revising the Securitization Safe Harbor Rule by
removing a disclosure requirement that was established by the
Securitization Safe Harbor Rule when it was amended and restated in
2010.\1\ As used in this final rule, ``Securitization Safe Harbor
Rule'' refers to the FDIC's securitization safe harbor rule titled
``Treatment of financial assets transferred in connection with a
securitization or participation'' and codified at 12 CFR 360.6.
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\1\ The prior version of the Securitization Safe Harbor Rule,
which the Securitization Safe Harbor Rule amended and restated, was
adopted in 2000.
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The Securitization Safe Harbor Rule addresses circumstances that
may arise if the FDIC is appointed receiver or conservator for an IDI
that has sponsored one or more securitization transactions.\2\ If a
securitization satisfies one of the sets of conditions established by
the Securitization Safe Harbor Rule, the Rule provides that, depending
on which set of conditions is satisfied, either (i) in the exercise of
its authority to repudiate or disclaim contracts, the FDIC shall not
reclaim, recover or recharacterize as property of the institution or
receivership the financial assets transferred as part of the
securitization transaction, or (ii) if the FDIC repudiates the
securitization agreement pursuant to which financial assets were
transferred and does not pay damages within a specified period, or if
the FDIC is in monetary default under a securitization for a specified
period due to its failure to pay or apply collections received by it
under the securitization documents, certain remedies will be available
to investors on an expedited basis.
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\2\ The Securitization Safe Harbor Rule also addresses transfers
of assets in connection with participation transactions. Since the
revision included in the Rule does not address participations, this
release does not include further reference to participations.
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The FDIC is removing the requirement of the Securitization Safe
Harbor Rule that the documents governing a securitization transaction
require compliance with Regulation AB of the Securities and Exchange
Commission, 17 CFR part 229, subpart 229.1100 (Regulation AB) in
circumstances where, under the terms of Regulation AB itself,
Regulation AB is not applicable to the transaction. As discussed below,
Regulation AB imposes significant asset-level disclosure requirements
in connection with registered securitization issuances. While the SEC
has not applied the Regulation AB disclosure requirements to private
placement transactions, the Securitization Safe Harbor Rule has
required (except for certain grandfathered transactions) that these
disclosures be required as a condition for eligibility for the
Securitization Safe Harbor Rule's benefits. The net effect appears to
have been a disincentive for IDIs to sponsor securitizations of
residential mortgages that are compliant with the Rule.
The FDIC's rationale for establishing the disclosure requirements
in 2010 was to reduce the likelihood of structurally opaque and
potentially risky mortgage securitizations or other securitizations
that could pose risks to IDIs. In the ensuing years, a number of other
regulatory changes have been implemented that have also contributed to
the same objective. As a result, it is no longer clear that compliance
with the public disclosure requirements of Regulation AB in a private
placement or in an issuance not otherwise required to be registered is
needed to achieve the
[[Page 12725]]
policy objective of preventing a buildup of opaque and potentially
risky securitizations such as occurred during the pre-crisis years,
particularly where the imposition of such a requirement may serve to
restrict overall liquidity.
II. Background
The Securitization Safe Harbor Rule sets forth criteria under
which, in its capacity as receiver or conservator of an IDI, the FDIC
will not, in the exercise of its authority to repudiate contracts,
recover or reclaim financial assets transferred in connection with
securitization transactions. Asset transfers that, under the
Securitization Safe Harbor Rule, are not subject to recovery or
reclamation through the exercise of the FDIC's repudiation authority
include those that pertain to certain grandfathered transactions, such
as, for example, asset transfers made on or prior to December 31, 2010,
that satisfied the conditions (except for the legal isolation condition
addressed by the Securitization Safe Harbor Rule as then in effect) for
sale accounting treatment under generally accepted accounting
principles (GAAP) in effect for reporting periods prior to November 15,
2009, and that satisfied certain other requirements. In addition, the
Securitization Safe Harbor Rule provides that asset transfers that are
not grandfathered, but that satisfy the conditions (except for the
legal isolation condition addressed by the Securitization Safe Harbor
Rule) for sale accounting treatment under GAAP in effect for reporting
periods after November 15, 2009, and that pertain to a securitization
transaction that satisfies all other conditions of the Securitization
Safe Harbor Rule (such asset transfers, together with grandfathered
asset transfers, are referred to collectively as Safe Harbor Transfers)
will not be subject to FDIC recovery or reclamation actions through the
exercise of the FDIC's repudiation authority. For any securitization
transaction in respect of which transfers of financial assets do not
qualify as Safe Harbor Transfers but which transaction satisfies all of
its other requirements, the Securitization Safe Harbor Rule provides
that, in the event the FDIC as receiver or conservator remains in
monetary default for a specified period under a securitization due to
its failure to pay or apply collections, or repudiates the
securitization asset transfer agreement and does not pay damages within
a specified period, certain remedies can be exercised by investors on
an expedited basis.
In adopting the amended and restated Securitization Safe Harbor
Rule in 2010, the FDIC stated that the conditions of the Rule were
designed to ``provide greater clarity and transparency to allow a
better ongoing evaluation of the quality of lending by banks and reduce
the risks to the DIF from opaque securitization structures and the
poorly underwritten loans that led to onset of the financial crisis.''
\3\ As part of its effort to achieve this goal, the FDIC included
paragraph (b)(2) in the Securitization Safe Harbor Rule, which imposes
extensive disclosure requirements relating to securitizations. These
requirements include paragraph (b)(2)(i)(A) which, prior to the
effectiveness of this final rule, mandates that the documents governing
a securitization require disclosure of information as to the
securitized financial assets on a financial asset or pool level and on
a security level that, at a minimum, complies with the requirements of
Regulation AB, whether or not the transaction is a registered issuance
otherwise subject to Regulation AB.
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\3\ 75 FR 60287, 60291 (Sept. 30, 2010).
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The SEC first adopted Regulation AB in 2004 as a new, principles-
based set of disclosure items specifically tailored to asset-backed
securities. The regulation was intended to form the basis of disclosure
for both Securities Act registration statements and Exchange Act
reports relating to asset-backed securities. In April 2010, the SEC
proposed significant revisions to Regulation AB and other rules
regarding the offering process, disclosure and reporting for asset-
backed securities. Among such revisions were the adoption of specified
asset-level disclosures for particular asset classes and the extension
of the Regulation AB disclosure requirements to exempt offerings and
exempt resale transactions for asset-backed securities (ABS). As
adopted in 2014, Regulation AB retained the majority of the proposed
asset-specific disclosure requirements but did not apply the disclosure
requirements to exempt offerings. The disclosure requirements of
Regulation AB vary, depending on the type of securitization issuance.
The most extensive disclosure requirements relate to residential
mortgage-backed securitizations (RMBS). These requirements became
effective in November 2016.
While the Securitization Safe Harbor Rule requirement for
compliance with Regulation AB applies to all securitizations, the
preamble to the amended and restated Securitization Safe Harbor Rule in
2010 makes clear that the FDIC was focused mostly on RMBS. The preamble
states that ``securitization as a viable liquidity tool in mortgage
finance will not return without greater transparency and clarity
because investors have experienced the difficulties provided by the
existing model of securitization. However, greater transparency is not
solely for investors, but will serve to more closely tie the
origination of loans to their long-term performance by requiring
disclosures of performance.'' \4\ In a different paragraph, the
preamble states that ``[t]he evident defects in many subprime and other
mortgages originated and sold into securitizations requires attention
by the FDIC to fulfill its responsibilities as deposit insurer . . .
The defects and misalignment of incentives in the securitization
process for residential mortgages were a significant contributor to the
erosion of underwriting standards throughout the mortgage finance
system.'' \5\
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\4\ Id. at 60291.
\5\ Id. at 60289.
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When the FDIC adopted the Securitization Safe Harbor Rule in 2010,
none of the regulatory reforms listed below had been adopted. In the
absence of the protection afforded by those and other regulations
adopted since 2010, the FDIC believed it was appropriate to include a
disclosure condition that would inhibit the proliferation of risky
securitizations, and thus required that, as a condition to safe harbor
protection, privately placed transactions comply with Regulation AB
disclosure requirements whether or not the SEC applied that regulation
to the transactions. Since the adoption of the Securitization Safe
Harbor Rule, there have been numerous regulatory developments that have
the effect of limiting or precluding poorly underwritten, risky
securitizations, particularly securitizations of residential
mortgages.\6\
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\6\ These include, among others, (i) liquidity regulations
adopted in 2014 by the FDIC, the Board of Governors of the Federal
Reserve System (FRB) and the Office of Comptroller of the Currency
(OCC) (12 CFR part 329, 12 CFR part 249, 12 CFR part 50); (ii)
capital rules adopted by the FDIC, the FRB and the OCC that became
effective in 2014 (12 CFR part 324, 12 CFR part 271, 12 CFR part 3);
(iii) the ability to repay rule adopted by the Bureau of Consumer
Financial Protection (CFPB) pursuant to section 129C of the Truth in
Lending Act (TILA) (15 U.S.C. 1639c); (iv) the Integrated Mortgage
Disclosures Rules adopted by the CFPB in 2013 pursuant to the Truth
in Lending Act, the Real Estate Settlement Procedures Act (RESPA),
and sections 1032(f), 1098, and 1100A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act); (v) the loan
originator compensation regulation adopted in 2013 by the CFPB
pursuant to sections 129B and 129C of TILA (15 U.S.C. 1639B &
1639C); (vi) the appraisal rule adopted by the FDIC and other
regulators in 2013 pursuant to Section 129H of TILA (15 U.S.C.
1639h); (vii) the requirements for residential mortgage loan
servicers adopted by the CFPB in 2013 pursuant to title XIV of the
Dodd-Frank Act, which amended Regulation X (implementing RESPA) and
Regulation Z (implementing TILA); and (viii) the interim final rule
establishing new requirements for appraisal independence adopted by
the FRB in 2010 pursuant to section 129E of TILA (15 U.S.C. 1639e).
Other provisions of the Securitization Safe Harbor Rule and
regulatory developments also reduce the risks of risky mortgage
securitizations and complex opaque structures. For example,
securitization credit risk retention requirements, compliance with
which is a condition set forth in a different section of the Rule,
have been adopted and become effective. The Securitization Safe
Harbor Rule also includes a specific disclosure requirement relating
to re-securitizations.
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[[Page 12726]]
The other disclosure requirements of paragraph (b)(2) of the
Securitization Safe Harbor Rule are unaffected by the final rule and
continue to strongly promote the Rule's goal of preventing opaque and
poorly underwritten securitizations. Among these are Sec.
360.6(b)(2)(ii)(A), which is applicable to RMBS and requires that prior
to issuance of the RMBS obligations, the sponsor must disclose loan
level information about the underlying mortgages including, but not
limited to, loan type, loan structure, interest rate, maturity and
location of property; Sec. 360.6(b)(2)(i)(B), which requires that the
securitization documents mandate that on or prior to issuance of
obligations there is disclosure of numerous matters, including the
credit and payment performance of the obligations and the structure of
the securitization, the capital or tranche structure of the
securitization, priority of payments and subordination features,
representations and warranties made with respect to the financial
assets, the remedies and time permitted for breach of the
representations and warranties, liquidity facilities and any credit
enhancements permitted by the Securitization Safe Harbor Rule, any
waterfall triggers or priority of payment reversal features, and
policies governing delinquencies, servicer advances loss mitigation and
write-offs of financial assets; Sec. 360.6(b)(2)(i)(D), which
requires, in connection with the issuance of the securitization
obligations, that the documents require disclosure of the nature and
amount of compensation paid to originators, the sponsor, rating
agencies, and certain other parties, and the extent to which any risk
of loss on the underlying assets is retained by any of them; Sec.
360.6(b)(ii)(B), which requires that prior to issuance of the
securitization obligations in an RMBS transaction, the sponsors affirm
compliance with applicable statutory and regulatory standards for
origination of mortgage loans, including that the mortgages are
underwritten at the fully indexed rate relying on documented income,
and that sponsors disclose a third party due diligence report on
compliance with the representations and warranties made with respect to
the financial assets; Section 360.6(b)(ii)(C), which requires that the
documents governing RMBS transactions require that prior to the
issuance of obligations (and while the obligations are outstanding),
servicers disclose any ownership interest by the servicer or an
affiliate of the servicer in other whole loans secured by the same real
property that secures a loan included in the financial asset pool; and
Sec. 360.6(b)(i)(C), which requires ongoing provision of information
relating to the credit performance of the financial assets. Other
provisions of the Securitization Safe Harbor Rule limit the capital
structure of RMBS to six credit tranches; prohibit most forms of
external credit enhancement of obligations issued in an RMBS; in the
case of RMBS, require that servicing and other agreements provide
servicers with authority, subject to oversight, to mitigate losses on
the financial assets and to modify assets and take other action to
maximize the value and minimize losses on the securitized mortgage
loans, and in general require that servicers take action to mitigate
losses not later than 90 days after an asset first becomes delinquent;
require that RMBS documents include incentives for servicing, including
loan restructuring and loss mitigation activities that maximize the net
present value of the financial assets; in the case of RMBS, require
that the securitization documents mandate that fees and other
compensation to rating agencies are payable over the five-year period
after first issuance of the securitization obligations based on the
performance of surveillance services, with no more than 60 percent of
the total estimated compensation due at closing; and in the case of
RMBS, require that the documents require the sponsor to establish a
reserve fund, for one year, equal to five percent of cash proceeds of
the securitization payable to the sponsor, to cover repurchases of
financial assets required due to the breach of representations and
warranties.
As noted in the NPR (as defined below) and discussed in more detail
under III. Discussion of Comments, FDIC staff has been told that
potential IDI sponsors of RMBS have found that it is difficult to
provide certain information required by Regulation AB, either because
the information is not readily available to them or because there is
uncertainty as to the information requested to be disclosed and, thus,
uncertainty as to whether the disclosure would be deemed accurate. FDIC
staff was also advised that due to the provision of Sec.
360.6(b)(2)(i)(A) that requires that the securitization documents
require compliance with Regulation AB in private transactions, private
offerings of RMBS obligations that are compliant with the
Securitization Safe Harbor Rule are similarly challenging for sponsors,
and that the net effect has been to discourage IDIs from participating
in the securitization of residential mortgages, apart from selling the
mortgages to, or with a guarantee from, the government-sponsored
housing enterprises.
On August 22, 2019, the FDIC published in the Federal Register a
notice of proposed rulemaking (NPR) in which it proposed to amend Sec.
360.6(b)(2)(i)(A) by removing, in circumstances where under the terms
of Regulation AB itself, Regulation AB is not applicable to the
transaction, the requirement that the documents governing
securitization transactions require disclosure of information as to the
securitized financial assets on a financial asset or pool level and on
a security level that, at a minimum, complies with Regulation AB. As
amended, such disclosure is required under Sec. 360.6(b)(2)(i)(A) only
for an issuance of obligations that, pursuant to Regulation AB itself,
is subject to Regulation AB.
The comment period under the NPR ended on October 21, 2019. The
FDIC received ten comment letters in total: Five from trade
organizations; one from an IDI; two from individuals; one from a
financial reform advocacy group; and one from a financial market public
interest group. These comment letters are available on the FDIC's
website. The FDIC considered all of the comments it received when
developing the final rule, which is unchanged from the rule proposed in
the NPR.
III. Discussion of Comments
A majority of the comment letters support the amendment to the
Securitization Safe Harbor Rule. All of the trade group and IDI letters
support removing the requirement to impose Regulation AB compliance on
transactions where Regulation AB is not otherwise applicable. This
requirement was characterized by the letters as ``an insurmountable
obstacle'', a ``barrier'', ``a regulatory impediment'', a
``disincentive'' to IDI sponsorship of RMBS, and a ``roadblock'' to
increased
[[Page 12727]]
RMBS issuance by IDIs. In addition, three of the letters observed that
aligning the Regulation AB disclosure requirement contained in the
Securitization Safe Harbor Rule with the SEC rule as to the scope of
transactions to which Regulation AB disclosure applies would level the
playing field for sponsorship of securitizations between IDIs, which
prior to the final rule are required by the Securitization Safe Harbor
Rule to comply with Regulation AB in private transactions, and
securitization sponsors not subject to the Securitization Safe Harbor
Rule, which are not required to comply with Regulation AB in connection
with private transactions.\7\ Indeed, the lack of alignment of the
disclosure rules governing private IDI securitization sponsors and non-
IDI securitization sponsors was viewed as so significant that one trade
organization indicated that although its investor members would prefer
obtaining Regulation AB disclosure in private transactions, the
investor members generally joined with its other members in supporting
the amendment ``based on the principle that the regulations applicable
to industry participants should be consistent.''
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\7\ As noted below, National Credit Union Administration Rules
also require compliance with Regulation AB in private transactions.
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Several of the letters expressed the view that removal of this
Regulation AB requirement would help promote an increase in credit
available to the mortgage market. Some of the letters also maintained
that this amendment to the Securitization Safe Harbor Rule would
increase liquidity for mortgage and other asset classes and lower costs
and improve choices for consumers.
One commenter stated that the proposal was consistent with
principles regarding the need for increased private securitization set
forth in a Treasury Department September 2019 report on capital markets
\8\ and in a separate Treasury Department paper on housing finance
reform.\9\ This letter also stated that the proposal would provide
benefits to the economy by weaning the mortgage market off of its
significant dependency on government backed securitization programs and
thus reduce the risk to taxpayers.
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\8\ www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
\9\ https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.
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The letters from the individuals, the financial reform advocacy
group and the public interest group were critical of the rule change.
One of the letters asserted that an expected result of the change, an
increase in RMBS, was not an appropriate goal since, according to the
letters, RMBS was a primary cause of the 2008 financial crisis.\10\ The
letter stated the FDIC should include a finding that adequate
safeguards protecting investors and the financial system remain in
place, and demonstrate a dire shortage of residential mortgage credit
sufficient to justify the need for the amendment. Another letter argued
that while the NPR identified certain risks that could arise from the
amendment to the Securitization Safe Harbor Rule, it did not adequately
explain why these risks (reduced information flow to investors, a less
efficient allocation of credit, increased risk of potential losses to
investors, and, if private placements increased and became more risky,
an increase in vulnerability of the mortgage market to a period of
financial stress) were minimized by reference to post-financial crisis
regulatory changes that were not specifically identified in the NPR.
This letter also criticized the NPR for not explaining how such
regulatory changes would prevent the amendment to the Securitization
Safe Harbor Rule from leading to the conditions that led to the
financial crisis.
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\10\ One of the letters cited two chapters of an FDIC
publication (FDIC, Crisis and Response: An FDIC History, 2008-2013,
Chapters 1 and 4 (2017) (avail. at https://www.fdic.gov/bank/historical/crisis/)) as support for the view that excessive RMBS
issuance was a leading cause of the 2008 financial crisis. In fact,
while noting that increased RMBS issuance was one of several causes
of the financial crisis, the applicable parts of the chapters
focused on subprime and other high-risk alternative type mortgages,
as well as relaxed lending standards, as significant contributors to
the problems it discussed.
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The FDIC did note that a possible effect of removing an unnecessary
barrier to IDI sponsorship of RMBS was an increase in RMBS issuance,
but it does not follow that the FDIC is attempting with the final rule
to cure a deficiency of mortgage credit. The FDIC believes that the
reasons articulated in support of the rule are sound, and do not
require a further demonstration of a shortage of mortgage credit. In
addition, as for the claim that the NPR did not address the risks
identified in the NPR, such as a possible increase in the vulnerability
of the mortgage market to a period of financial stress in the event
that the amendment results in an increase in risky, privately placed
securitizations, the NPR explained that ``[i]n this respect, a
significant part of the problems experienced with RMBS during the
crisis were attributable to the proliferation of subprime and so-called
alternative mortgages as underlying assets for those RMBS. The FDIC
believes that a number of post-crisis regulatory changes make it
unlikely that substantial growth of similar types of RMBS would occur
again.'' \11\ This analysis applies equally to the other potential
risks cited in the preceding paragraph that were noted in the NPR.
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\11\ 84 FR 43732, 43735.
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One of these letters also asserted that the proposal did not
address the danger that the amendment could increase activity in other
potentially risky asset classes and did not adequately quantify the
effects of the proposed rule. This letter also stated that the FDIC's
suggestion that the amendment would increase the willingness of IDIs to
sponsor securitizations was speculative, that any reduction of burden
is irrelevant because it is not the FDIC's mission to reduce burden,
and that the likely impact of the proposal included in the NPR must be
evaluated in light of the other current deregulatory efforts.\12\
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\12\ A letter also stated the amendment would result in an
inconsistency with regulations of the National Credit Union
Administration (NCUA), which adopted a securitization safe harbor in
2017 which includes the Regulation AB requirement. The FDIC was
pleased that the NCUA adopted a securitization safe harbor rule that
was consistent with the Securitization Safe Harbor Rule, and notes,
in response to this letter, that the NCUA is free to maintain that
consistency, if it chooses to do so, by adopting an amendment
similar to the final rule.
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While the FDIC appreciates the concerns as to the effect of the
final rule expressed in these letters, it does not believe that the
concerns are justified. In adopting the final rule, the FDIC evaluated
the numerous other significant disclosure requirements identified in
II. Background and has concluded that the Securitization Safe Harbor
Rule continues to require robust and adequate disclosure to investors.
As noted in the NPR, a significant part of the problems experienced
with RMBS during the financial crisis was attributable to the
proliferation of subprime and alternative mortgages (sometimes referred
to as ``nontraditional mortgages''). As further noted in the NPR, a
major part of the problems with RMBS that surfaced during the financial
crisis arose from poorly underwritten loans and a significant portion
of these problems was attributable to relaxed lending standards and the
making of mortgages to persons who were unable to repay the loans. As
also noted in the FDIC study referenced in one of the letters,\13\ the
originate to distribute model, under which sponsoring institutions
retained limited or no exposure to the mortgages that they sold to
securitization vehicles, was a major source of the proliferation of
poorly underwritten mortgage loans and risky RMBS issuances. The
[[Page 12728]]
regulatory developments mentioned in II. Background, which (among other
items) strongly motivate lenders to ascertain a borrower's ability to
pay, require that sponsors retain a portion of the risk of mortgages
that they securitize, imposed new appraisal requirements and mandated
more easily understandable disclosures, address these problems and
other objections from commenters cited above, and have made it very
unlikely that substantial growth of similar types of RMBS securitized
in risky transactions will re-occur.\14\
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\13\ See footnote 10, supra.
\14\ Several of these regulatory developments (the ability to
pay regulation and the capital and liquidity regulations) are
presumably well-recognized by investors, as they are discussed in
two of the comment letters that were critical of the NPR.
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The FDIC agrees with the comment that the NPR did not offer an
analysis of whether the amendment to the Securitization Safe Harbor
Rule could increase activity in other ``potentially risky asset
classes.'' The discussion in the NPR, as well as the discussion in this
final rule, has focused on RMBS because FDIC staff found no evidence
that the Regulation AB compliance requirement of the Securitization
Safe Harbor Rule had prevented would-be IDI sponsors from sponsoring
securitizations of other asset classes that are subject to Regulation
AB.
The comment letters reinforced the FDIC's understanding that RMBS
market participants have found it difficult or impossible to comply
with several requirements of Regulation AB, with the result that the
Securitization Safe Harbor Rule requirement for compliance with
Regulation AB in private transactions has posed an obstacle to IDI
sponsorship of RMBS. The Regulation AB disclosure requirements
identified in the comment letters as difficult or impossible to comply
with include the back-end debt-to-equity income ratio disclosure
requirement, the requirements for disclosure of appraisals, automated
valuation model results and credit scores obtained by any credit party
or credit party affiliate, and the inconsistency of data elements with
the standards set forth in the Mortgage Industry Standards Maintenance
Organization. In addition, according to one of the trade association
letters, some of the required Regulation AB disclosure fields cannot be
included in publicly accessible securities filings without creating
``unacceptable and reputational risks for RMBS sponsors and privacy
risks to borrowers.''
Comment letters that criticized the change to the Regulation AB
provision of the Securitization Safe Harbor Rule suggested that the
amendment to the Securitization Safe Harbor Rule was intended to
enhance proliferation of RMBS. It is important to note that by removing
a regulatory requirement that poses an obstacle to IDI access to a
segment of the capital markets, and acknowledging that such removal can
be expected to increase RMBS sponsorship (and possibly other asset
class sponsorship) by IDIs, the FDIC should not be interpreted as
enunciating a policy goal to increase such IDI participation. The
amendment should be viewed as clearing or leveling the field from
unnecessary regulatory interference, rather than as an action whose
goal is the increase of such activity.\15\ If such an increase occurs,
it will occur due to individual decisions of market participants, and
all such issuances will be subject to the suite of post-2010
regulations mentioned in II. Background. The FDIC believes that if such
market decisions result in increased RMBS activity, the remaining
disclosure requirements of the Securitization Safe Harbor Rule together
with the other requirements of the Rule, when coupled with the other
post-crisis regulatory developments, will promote sustainable, prudent
securitization sponsorship by IDIs to at least the same extent as such
goals were promoted by the Securitization Safe Harbor Rule Regulation
AB requirement when it was adopted in 2010.
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\15\ As noted above, one letter critical of the amendment
referred to the analysis in the NPR that the amendment would reduce
costs for IDIs and stated that reduction of compliance costs should
not be considered an element of the FDIC's mission. The NPR cited,
and this Supplementary Information cites, the reduction in costs as
part of its analysis of expected effects. While a policy to remove
unnecessary regulatory requirements is indeed reflected in the NPR
(and in this Supplementary Information), it is not the case (and the
NPR and this Supplementary Information do not suggest) that the
FDIC's mission is to generally reduce compliance costs, without
regard to the substance of the regulation necessitating such
compliance costs.
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As noted, one commenter asserted that the analysis that the
amendment will increase private RMBS is speculative. The FDIC notes
that the NPR did not predict an increase in RMBS. The NPR stated that
if market participants' perceptions are correct that the rule could
increase insured banks' willingness to participate in private RMBS
activity, then the proposed rule ``could (emphasis added) result in an
increase in the dollar volume of privately issued RMBS . . .'' \16\
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\16\ 84 FR 43732, 43735.
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One of the comment letters also asserted that the statement that
some associated increase in U.S. economic input would be expected to
accompany an increased volume of mortgage credit is a ``bold assertion
apparently based on speculation for which the FDIC offers no support''.
In fact, the NPR states that the possibility of increased economic
activity is, in part, because ``the imputed value of credit services
banks provides is a component of measured GDP. The purchase of a new
home also may be accompanied by the purchase of other household goods
and services that contribute to an increase in overall economic
activity.'' 84 FR 43732, 43735. This comment letter also states that
the FDIC must consider the impact of the proposal ``in light of the
deregulatory environment that currently prevails.'' As noted in the NPR
and as discussed in this Supplementary Information, an array of
important regulatory safeguards now exist that should minimize the
likelihood of a recurrence of a substantial volume of risky
securitizations backed by poorly underwritten mortgages.
The comment letters that criticized the amendment also asserted
that if the FDIC adopts the amendment to the Securitization Safe Harbor
Rule, the FDIC will be acting contrary to its mandate to protect the
Deposit Insurance Fund (DIF) and that, in not applying Regulation AB to
transactions to which Regulation AB does not otherwise apply, the FDIC
lost sight of the fact that it has a different mandate than the SEC.
The FDIC does not agree with these assertions. In adopting the final
rule, the FDIC carefully considered the risks to IDIs and to the DIF,
and also reviewed the array of disclosure requirements that will remain
part of the Securitization Safe Harbor Rule as well as the regulatory
safeguards described in II. Background. The FDIC also notes that the
final rule will enable IDIs to diversify their sources of funding and
enhance options for obtaining liquidity for mortgage loans. Comment
letters support this analysis. According to one letter, the amendment
would benefit ``IDIs, who would see additional risk management paths
that would allow them to maintain lending through a variety of economic
circumstances.'' Indeed, another letter evaluated the amendment to the
Regulation AB provision as ``an appropriate balance of protection of
the Deposit Insurance Fund and facilitation of insured institutions'
prudent participation in the private securitization markets.''
IV. The Final Rule
The final rule amends Sec. 360.6(b)(2)(i)(A) of the Securitization
Safe Harbor Rule by removing the requirement that the documents
governing securitization transactions
[[Page 12729]]
require disclosure of information as to the securitized financial
assets on a financial asset or pool level and on a security level that,
at a minimum, complies with Regulation AB in circumstances where under
the terms of Regulation AB itself, Regulation AB is not applicable to
the transaction. As amended, such disclosure is required under Sec.
360.6(b)(2)(i)(A) only in the case of an issuance of obligations that
is subject to Regulation AB.\17\
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\17\ The amendment to this provision also includes certain
technical revisions required by the Federal Register, including a
revised form of citation to Regulation AB, and deletion of the
specification that the requirement for Regulation AB compliance
refers to Regulation AB as in effect at the relevant time and that
the requirement applies to successor public issuance requirements to
Regulation AB.
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V. Expected Effects
A. Effects of the Final Rule
The final rule could increase the willingness of IDIs to sponsor
the issuance of ABS that are exempt from registration with the SEC.
Feedback from market participants suggests that the final rule may be
most likely to affect incentives to issue private RMBS, since the
disclosure requirements of Regulation AB are most extensive for
residential mortgages.
If these market perceptions are correct, the final rule could
result in an increase in the dollar volume of privately issued RMBS,
presumably increasing the total flow of credit available to finance
residential mortgages in the United States. For context, total issuance
of RMBS secured by 1-4 family residential mortgages was approximately
$1.3 trillion in 2018.\18\ About $1.2 trillion of this total were
agency issuances, issued through the government sponsored housing
enterprises, or GSEs: The Federal National Mortgage Association (Fannie
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the
Government National Mortgage Association (Ginnie Mae). About $100
billion of RMBS were non-agency issuances, which includes both
securities registered with the SEC (public issuances), if any, and
private issuances. This level of private-label activity is low compared
to pre-financial crisis levels.\19\ The FDIC does not currently have a
basis for quantifying the amount of any increase in RMBS issuance by
IDIs that might result from the final rule, because additional factors
affect the demand and supply for private-label RMBS. For example, the
current level of private-label RMBS issuance volume may suggest that
demand for non-agency RMBS is still weak in the aftermath of the
financial crisis. In addition, the scope of participation of non-IDI
sponsors of RBMS could affect the volume of RMBS sponsorship activities
for IDIs, particularly if non-IDI institutions not currently involved
in sponsoring private-label RMBS begin to do so.
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\18\ Inside Mortgage Finance, 2019 Mortgage Market Statistical
Annual.
\19\ See id. Annual non-agency single family RMBS issuance
reached a high of about $1.2 trillion in 2005.
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The FDIC cannot definitively identify the set of FDIC-insured banks
that have sponsored private-label RMBS. Moreover, for any bank that has
sponsored private RMBS, some may have chosen to make the Regulation AB
disclosures necessary for the safe harbor, and some may have chosen not
to make such disclosures, but instead may have chosen to disclose to
investors the risks associated with the exercise of the FDIC's
receivership authorities. Information about such disclosure choices
made by private RMBS issuers also is not readily available to the FDIC.
Based on the information available to it, the FDIC believes that
the number of IDIs directly affected by the final rule is extremely
small. The FDIC identified fewer than ten IDI sponsors of private
placements of securitizations of asset classes subject to Regulation AB
in 2017 and 2018.
Increased issuance sponsored by insured banks of private RMBS, to
the extent it is not offset by corresponding reductions in the amount
of mortgages they hold in portfolio, would result in an increase in the
supply of credit available to fund residential mortgages. An increase
in the supply of mortgage credit would be expected to benefit borrowers
by increasing mortgage availability and decreasing mortgage costs.
While problematic or predatory mortgage practices can harm borrowers, a
significant body of new regulations exists to prevent such practices,
as described in II. Background. Given this, it is more likely that any
increase in mortgage credit resulting from the final rule would be
beneficial to borrowers.
Some associated increase in measured U.S. economic output would be
expected to accompany an increased volume of mortgage credit. This is
in part because the imputed value of the credit services that banks
provide is a component of measured GDP. The purchase of a new home also
may be accompanied by the purchase of other household goods and
services that contribute to an increase in overall economic activity.
Institutions affected by the final rule will incur reduced
compliance costs as a result of not having to make the otherwise
required disclosures. Based on the methodology used in its most recent
Information Collection Resubmission request for part 360.6 of the FDIC
regulations, the FDIC estimates that the reduction in compliance costs
associated with the final rule for the IDIs identified as having been
involved in private ABS issuances in 2017 and 2018 would have been
about $4.9 million annually.
To the extent private-label ABS is being issued now in conformance
with the disclosure requirements that are be removed under the final
rule, a potential cost of the final rule is that the information
available to investors about the credit quality of the assets
underlying these ABS could be reduced. As a general matter, a reduction
in information available to investors can result in a less efficient
allocation of credit and increased risk of potential losses to
investors, including banks. A related potential cost is that if
privately placed securitization products were to become more widespread
and risky as a result of the final rule, the vulnerability of the
mortgage market to a period of financial stress could increase. In this
respect, a significant part of the problems experienced with RMBS
during the crisis were attributable to the proliferation of subprime
and so-called alternative mortgages as underlying assets for those
RMBS. As previously discussed, the FDIC believes that a number of post-
crisis regulatory changes make it unlikely that substantial growth of
similar types of RMBS would occur again.
B. Alternatives Considered
The FDIC considered alternatives to the final rule, and has
concluded that the amendment set forth in the final rule represents the
most appropriate option for achieving the policy goal of removing an
unnecessary barrier to sponsorship of securitizations by IDIs. One
alternative considered was to try to isolate particular disclosure
fields in Regulation AB that posed obstacles to compliance and to
remove those fields. However, the FDIC determined that it was not the
proper agency to edit and rewrite a securities law disclosure
regulation. Such an exercise was also determined to be unnecessary
based on the FDIC's analysis that other provisions of the
Securitization Safe Harbor Rule, together with regulatory initiatives
adopted since the Rule was adopted in 2010, made the continued
application of paragraph (b)(2)(i)(A) to privately placed
securitization transactions unnecessary for so long as Regulation AB is
not otherwise applicable to such transactions. In this connection, the
FDIC notes that in the section titled ``V.
[[Page 12730]]
Request for Comment'', the NPR requested comments as to whether the
results intended to be achieved by the proposed rule should be achieved
as set forth in the proposed rule or by way of different modifications
to the Securitization Safe Harbor Rule, but received no comments in
response to this inquiry.
VI. Administrative Law Matters
A. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et
seq.) (PRA) the FDIC may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid Office of Management and Budget (OMB) control number.
As discussed above, the final rule revises certain provisions of
the Securitization Safe Harbor Rule, which relates to the treatment of
financial assets transferred in connection with a securitization or
participation transaction, in order to eliminate a requirement that the
securitization documents require compliance with Regulation AB of the
Securities and Exchange Commission in circumstances where Regulation AB
by its terms would not apply to the issuance of obligations backed by
such financial assets.
The FDIC has determined that the final rule would revise an
existing collection of information (3064-0177). The information
collection requirements contained in this proposed rulemaking will be
submitted by the FDIC to OMB for review and approval under section
3507(d) of the PRA (44 U.S.C. 3507(d)) and Sec. 1320.11 of the OMB's
implementing regulations (5 CFR 1320.11).
The FDIC revises this information collection as follows:
Title of Information Collection: Conservator or Receiver of
Financial Assets Transferred by an Insured Depository Institution in
Connection with a Securitization or Participation After September 30,
2010.
OMB Control Number: 3064-0177.
Affected Public: Insured Depository Institutions.
Burden Estimate:
----------------------------------------------------------------------------------------------------------------
Estimated
Information collection (IC) Estimated Number of time per Estimated
description Type of burden number of responses per response annual burden
respondents respondent (hrs) (hrs)
----------------------------------------------------------------------------------------------------------------
Sec. 360.6(b)(2)(i)(D)...... Disclosure...... 14 6 3 252
Sec. 360.6(b)(2)(ii)(B)..... Disclosure...... 3 2 1 6
Sec. 360.6(b)(2)(ii)(C)..... Disclosure...... 3 2 1 6
Sec. 360.6(c)(7)............ Recordkeeping... 14 6 1 84
---------------------------------------------------------------
Total Estimated Annual ................ .............. .............. .............. 348
Burden (Hrs).
----------------------------------------------------------------------------------------------------------------
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rule, an agency prepare and make available for
public comment a final regulatory flexibility analysis describing the
impact of the rulemaking on small entities.\20\ A regulatory
flexibility analysis is not required, however, if the agency certifies
that the rule will not have a significant economic impact on a
substantial number of small entities. The Small Business Administration
(SBA) has defined ``small entities'' to include banking organizations
with total assets less than or equal to $600 million.\21\ Generally,
the FDIC considers a significant effect to be a quantified effect in
excess of five percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-insured institutions. For the reasons
described below and under section 605(b) of the RFA, the FDIC certifies
that this rule will not have a significant economic effect on a
substantial number of small entities.
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\20\ 5 U.S.C. 601 et seq.
\21\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201.
In its determination, the ``SBA counts the receipts, employees, or
other measure of size of the concern whose size is at issue and all
of its domestic and foreign affiliates.'' See 13 CFR 121.103.
Following these regulations, the FDIC uses a covered entity's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the covered entity is ``small'' for
the purposes of RFA.
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The FDIC insures 5,256 depository institutions, of which 3,891 are
considered small entities for the purposes of RFA.\22\ The final rule
will only affect institutions currently engaged in arranging, issuing
or acting as servicer for privately-placed securitizations of asset-
backed securities, or likely to do so as a result of the final rule.
The FDIC knows of no small, FDIC-insured institution that is currently
acting in this capacity. The FDIC believes that acting as arranger,
issuer or servicer for privately placed ABS requires a level of
resources and capital markets expertise that would preclude a
substantial number of small, FDIC-insured institutions from becoming
involved in these activities.
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\22\ FDIC Call Report, September 30, 2019.
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Accordingly, the FDIC concludes that the final rule will not have a
significant impact on a substantial number of small entities. For the
reasons described above and pursuant to 5 U.S.C. 605(b), the FDIC
certifies that the final rule will not have a significant economic
impact on a substantial number of small entities.
C. The Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major rule.''
\23\ If a rule is deemed a ``major rule'' by the OMB, the Congressional
Review Act generally provides that the rule may not take effect until
at least 60 days following its publication.\24\
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\23\ 5 U.S.C. 801 et seq.
\24\ 5 U.S.C. 801(a)(3).
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The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in--(A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
[[Page 12731]]
export markets.\25\ The OMB has determined that this final rule is a
major rule for purposes of the Congressional Review Act. As required by
the Congressional Review Act, the FDIC will submit the final rule and
other appropriate reports to Congress and the Government Accountability
Office for review.
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\25\ 5 U.S.C. 804(2).
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D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \26\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC has sought to present the
final rule in a simple and straightforward manner.
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\26\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999).
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D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA), in determining the effective date
and administrative compliance requirements for new regulations that
impose additional reporting, disclosure, or other requirements on IDIs,
each federal banking agency must consider, consistent with principles
of safety and soundness and the public interest, any administrative
burdens that such regulations would place on IDIs, including small
depository institutions, and customers of IDIs, as well as the benefits
of such regulations.\27\ In addition, section 302(b) of RCDRIA requires
new regulations and amendments to regulations that impose additional
reporting, disclosures, or other new requirements on IDIs generally to
take effect on the first day of a calendar quarter that begins on or
after the date on which the regulations are published in final
form.\28\
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\27\ 12 U.S.C. 4802(a).
\28\ 12 U.S.C. 4802(b).
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The FDIC has determined that the final rule will not impose
additional reporting, disclosure, or other requirements; therefore, the
requirements of RCDRIA do not apply.
E. Treasury and General Government Appropriations Act, 1999--Assessment
of Federal Regulations and Policies on Families
The FDIC has determined that the final rule will not affect family
well-being within the meaning of Sec. 654 of the Treasury and General
Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L.105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 360
Savings associations.
Authority and Issuance
For the reasons set forth in the preamble, the Federal Deposit
Insurance Corporation amends 12 CFR part 360 as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
0
1. The authority citation for part 360 continues to read as follows:
Authority: 12 U.S.C. 1821(d)(1),1821(d)(10)(C), 1821(d)(11),
1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2); Sec. 401(h),
Pub. L. 101-73, 103 Stat. 357.
0
2. In Sec. 360.6, revise paragraph (b)(2)(i)(A) to read as follows:
Sec. 360.6 Treatment of financial assets transferred in connection
with a securitization or participation.
(b) * * *
(2) * * *
(i) * * *
(A) In the case of an issuance of obligations that is subject to 17
CFR part 229, subpart 229.1100 (Regulation AB of the Securities and
Exchange Commission (Regulation AB)), the documents shall require that,
on or prior to issuance of obligations and at the time of delivery of
any periodic distribution report and, in any event, at least once per
calendar quarter, while obligations are outstanding, information about
the obligations and the securitized financial assets shall be disclosed
to all potential investors at the financial asset or pool level, as
appropriate for the financial assets, and security-level to enable
evaluation and analysis of the credit risk and performance of the
obligations and financial assets. The documents shall require that such
information and its disclosure, at a minimum, shall comply with the
requirements of Regulation AB. Information that is unknown or not
available to the sponsor or the issuer after reasonable investigation
may be omitted if the issuer includes a statement in the offering
documents disclosing that the specific information is otherwise
unavailable;
* * * * *
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on January 30, 2020.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2020-02936 Filed 3-3-20; 8:45 am]
BILLING CODE 6714-01-P
