[Federal Register: May 17, 2010 (Volume 75, Number 94)]
[Proposed Rules]
[Page 27471-27487]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my10-23]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AD53
Treatment by the Federal Deposit Insurance Corporation as
Conservator or Receiver of Financial Assets Transferred by an Insured
Depository Institution in Connection With a Securitization or
Participation After September 30, 2010
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking with request for comments.
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SUMMARY: The Federal Deposit Insurance Corporation (``FDIC'') proposes
to adopt amendments to the rule regarding the treatment by the FDIC, as
receiver or conservator of an insured depository institution, of
financial assets transferred by the institution in connection with a
securitization or a participation after September 30, 2010 (the
``Proposed Rule''). The Proposed Rule would continue the safe harbor
for transferred financial assets in connection with securitizations in
which the financial assets were transferred under the existing
regulations. The Proposed Rule would clarify the conditions for a safe
harbor for securitizations or participations issued after September 30,
2010. The Proposed Rule also sets forth safe harbor protections for
securitizations that do not comply with the new accounting standards
for off balance sheet treatment by providing for expedited access to
the financial assets that are securitized if they meet the conditions
defined in the Proposed Rule. The conditions contained in the Proposed
Rule would serve to protect the Deposit Insurance Fund (``DIF'') and
the FDIC's interests as deposit insurer and receiver by aligning the
conditions for the safe harbor with better and more sustainable
securitization practices by insured depository institutions (``IDIs'').
The FDIC seeks comment on the regulations, the scope of the safe
harbors provided, and the terms and scope of the conditions included in
the Proposed Rule.
DATES: Comments on this Notice of Proposed Rulemaking must be received
by July 1, 2010.
ADDRESSES: You may submit comments on the Proposed Rule, by any of the
following methods:
Agency Web Site: http://www.FDIC.gov/regulations/laws/
federal/notices.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: Comments@FDIC.gov. Include RIN 3064-AD53 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Instructions: All comments received will be posted generally
without change to http://www.fdic.gov/regulations/laws/federal/
propose.html, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Office of the
Chairman, 202-898-8950; George Alexander, Division of Resolutions and
Receiverships, (202) 898-3718; Robert Storch, Division of Supervision
and Consumer Protection, (202) 898-8906; or R. Penfield Starke, Legal
Division, (703) 562-2422, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
In 2000, the FDIC clarified the scope of its statutory authority as
conservator or receiver to disaffirm or repudiate contracts of an
insured depository institution with respect to transfers of financial
assets by an IDI in connection with a securitization or participation
when it adopted a regulation codified at 12 CFR 360.6 (the
``Securitization Rule''). This rule provided that the FDIC as
conservator or receiver would not use its statutory authority to
disaffirm or repudiate contracts to reclaim, recover, or recharacterize
as property of the institution or the receivership any financial assets
transferred by an IDI in connection with a securitization or in the
form of a participation, provided that such transfer meets all
conditions for sale accounting treatment under generally accepted
accounting principles (``GAAP''). The rule was a clarification, rather
than a limitation, of the repudiation power. Such power authorizes the
conservator or receiver to breach a contract or lease entered into
[[Page 27472]]
by an IDI and be legally excused from further performance, but it is
not an avoiding power enabling the conservator or receiver to recover
assets that were previously sold and no longer reflected on the books
and records on an IDI.
The Securitization Rule provided a ``safe harbor'' by confirming
``legal isolation'' if all other standards for off balance sheet
accounting treatment, along with some additional conditions focusing on
the enforceability of the transaction, were met by the transfer in
connection with a securitization or a participation. Satisfaction of
``legal isolation'' was vital to securitization transactions because of
the risk that the pool of financial assets transferred into the
securitization trust could be recovered in bankruptcy or in a bank
receivership. Generally, to satisfy the legal isolation condition, the
transferred financial assets must have been presumptively placed beyond
the reach of the transferor, its creditors, a bankruptcy trustee, or in
the case of an IDI, the FDIC as conservator or receiver. The
Securitization Rule, thus, addressed only purported sales which met the
conditions for off balance sheet accounting treatment under GAAP.
Since its adoption, the Securitization Rule has been relied on by
securitization participants, including rating agencies, as assurance
that investors could look to securitized financial assets for payment
without concern that the financial assets would be interfered with by
the FDIC as conservator or receiver. Recently, the implementation of
new accounting rules has created uncertainty for securitization
participants.
Modifications to GAAP Accounting Standards
On June 12, 2009, the Financial Accounting Standards Board
(``FASB'') finalized modifications to GAAP through Statement of
Financial Accounting Standards No. 166, Accounting for Transfers of
Financial Assets, an Amendment of FASB Statement No. 140 (``FAS 166'')
and Statement of Financial Accounting Standards No. 167, Amendments to
FASB Interpretation No. 46(R) (``FAS 167'') (the ``2009 GAAP
Modifications''). The 2009 GAAP Modifications are effective for annual
financial statement reporting periods that begin after November 15,
2009. The 2009 GAAP Modifications made changes that affect whether a
special purpose entity (``SPE'') must be consolidated for financial
reporting purposes, thereby subjecting many SPEs to GAAP consolidation
requirements. These accounting changes may require an IDI to
consolidate an issuing entity to which financial assets have been
transferred for securitization on to its balance sheet for financial
reporting purposes primarily because an affiliate of the IDI retains
control over the financial assets.\1\ Given the 2009 GAAP
Modifications, legal and accounting treatment of a transaction may no
longer be aligned. As a result, the safe harbor provision of the
Securitization Rule may not apply to a transfer in connection with a
securitization that does not qualify for off balance sheet treatment.
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\1\ Of particular note, Paragraph 26A of FAS 166 introduces a
new concept that was not in FAS 140, as follows: ``* * * the
transferor must first consider whether the transferee would be
consolidated by the transferor. Therefore, if all other provisions
of this Statement are met with respect to a particular transfer, and
the transferee would be consolidated by the transferor, then the
transferred financial assets would not be treated as having been
sold in the financial statements being presented.''
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FAS 166 also affects the treatment of participations issued by an
IDI, in that it defines participating interests as pari-passu pro-rata
interests in financial assets, and subjects the sale of a participation
interest to the same conditions as the sale of financial assets.
Statement FAS 166 provides that transfers of participation interests
that do not qualify for sale treatment will be viewed as secured
borrowings. While the GAAP modifications have some effect on
participations, most participations are likely to continue to meet the
conditions for sale accounting treatment under GAAP.
FDI Act Changes
In 2005, Congress enacted 11(e)(13)(C) \2\ of the Federal Deposit
Insurance Act (the ``FDI Act'')\3\. In relevant part, this paragraph
provides that generally no person may exercise any right or power to
terminate, accelerate, or declare a default under a contract to which
the IDI is a party, or obtain possession of or exercise control over
any property of the IDI, or affect any contractual rights of the IDI,
without the consent of the conservator or receiver, as appropriate,
during the 45-day period beginning on the date of the appointment of
the conservator or the 90-day period beginning on the date of the
appointment of the receiver. If a securitization is treated as a
secured borrowing, section 11(e)(13)(C) could prevent the investors
from recovering monies due to them for up to 90 days. Consequently,
securitized assets that remain property of the IDI (but subject to a
security interest) would be subject to the stay, raising concerns that
any attempt by securitization noteholders to exercise remedies with
respect to the IDI's assets would be delayed. During the stay, interest
and principal on the securitized debt could remain unpaid. The FDIC has
been advised that this 90-day delay would cause substantial downgrades
in the ratings provided on existing securitizations and could prevent
planned securitizations for multiple asset classes, such as credit
cards, automobile loans, and other credits, from being brought to
market.
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\2\ 12 U.S.C. 1821(e)(13)(C).
\3\ 12 U.S.C. 1811 et. seq.
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Analysis
The FDIC believes that several of the issues of concern for
securitization participants regarding the impact of the 2009 GAAP
Modifications on the eligibility of transfers of financial assets for
safe harbor protection can be addressed by clarifying the position of
the conservator or receiver under established law. Under Section
11(e)(12) of the FDI Act,\4\ the conservator or receiver cannot use its
statutory power to repudiate or disaffirm contracts to avoid a legally
enforceable and perfected security interest in transferred financial
assets. This provision applies whether or not the securitization meets
the conditions for sale accounting. The Proposed Rule would clarify
that prior to any monetary default or repudiation, the FDIC as
conservator or receiver would consent to the making of required
payments of principal and interest and other amounts due on the
securitized obligations during the statutory stay period. In addition,
if the FDIC decides to repudiate the securitization transaction, the
payment of repudiation damages in an amount equal to the par value of
the outstanding obligations on the date of receivership will discharge
the lien on the securitization assets. This clarification in paragraphs
(d)(4) and (e) of the Proposed Rule addresses certain questions that
have been raised about the scope of the stay codified in Section
11(e)(13)(C).
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\4\ 12 U.S.C. 1821(e)(12).
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An FDIC receiver generally makes a determination of what
constitutes property of an IDI based on the books and records of the
failed IDI. If a securitization is reflected on the books and records
of an IDI for accounting purposes, the FDIC would evaluate all facts
and circumstances existing at the time of receivership to determine
whether a transaction is a sale under applicable state law or a secured
loan. Given the 2009 GAAP Modifications, there may be circumstances in
which a sale transaction will continue to be reflected on the books and
records of the IDI because the IDI or one of its affiliates
[[Page 27473]]
continues to exercise control over the assets either directly or
indirectly. The Proposed Rule would provide comfort that conforming
securitizations which do not qualify for off balance sheet treatment
would have access to the assets in a timely manner irrespective of
whether a transaction is viewed as a legal sale.
If a transfer of financial assets by an IDI to an issuing entity in
connection with a securitization is not characterized as a sale, the
securitized assets would be viewed as subject to a perfected security
interest. This is significant because the FDIC as conservator or
receiver is prohibited by statute from avoiding a legally enforceable
or perfected security interest, except where such an interest is taken
in contemplation of insolvency or with the intent to hinder, delay, or
defraud the institution or the creditors of such institution.\5\
Consequently, the ability of the FDIC as conservator or receiver to
reach financial assets transferred by an IDI to an issuing entity in
connection with a securitization, if such transfer is characterized as
a transfer for security, is limited by the combination of the status of
the entity as a secured party with a perfected security interest in the
transferred assets and the statutory provision that prohibits the
conservator or receiver from avoiding a legally enforceable or
perfected security interest.
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\5\ 12 U.S.C. 1821(e)(12).
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Thus, for securitizations that are consolidated on the books of an
IDI, the Proposed Rule would provide a meaningful safe harbor
irrespective of the legal characterization of the transfer. There are
two situations in which consent to expedited access to transferred
assets would be given--(i) monetary default under a securitization by
the FDIC as conservator or receiver or (ii) repudiation of the
securitization agreements by the FDIC. The Proposed Rule provides that
in the event the FDIC is in monetary default under the securitization
documents and the default continues for a period of ten (10) business
days after written notice to the FDIC, the FDIC will be deemed to
consent pursuant to Section (11)(e)(13)(C) to the exercise of
contractual rights under the documents on account of such monetary
default, and such consent shall constitute satisfaction in full of
obligations of the IDI and the FDIC as conservator or receiver to the
holders of the securitization obligations.
The Proposed Rule also provides that in the event the FDIC
repudiates the securitization asset transfer agreement, the FDIC shall
have the right to discharge the lien on the financial assets included
in the securitization by paying damages in an amount equal to the par
value of the obligations in the securitization on the date of the
appointment of the FDIC as conservator or receiver, less any principal
payments made to the date of repudiation. If such damages are not paid
within ten (10) business days of repudiation, the FDIC will be deemed
to consent pursuant to Section (11)(e)(13)(C) to the exercise of
contractual rights under the securitization agreements.
The Proposed Rule would also confirm that, if the transfer of the
assets is viewed as a sale for accounting purposes (and thus the assets
are not reflected on the books of an IDI), the FDIC as receiver would
not reclaim, recover, or recharacterize as property of the institution
or the receivership assets of a securitization through repudiation or
otherwise, but only if the transactions comply with the requirements
set forth in paragraphs (b) and (c) of the Proposed Rule. The treatment
of off balance sheet transfers of the Proposed Rule is consistent with
the prior safe harbor under the Securitization Rule.
Pursuant to 12 U.S.C. 1821(e)(13)(C), no person may exercise any
right or power to terminate, accelerate, or declare a default under a
contract to which the IDI is a party, or to obtain possession of or
exercise control over any property of the IDI, or affect any
contractual rights of the IDI, without the consent of the conservator
or receiver, as appropriate, during the 45-day period beginning on the
date of the appointment of the conservator or the 90-day period
beginning on the date of the appointment of the receiver. In order to
address concerns that the statutory stay could delay repayment of
investors in a securitization or delay a secured party from exercising
its rights with respect to securitized financial assets, the Proposed
Rule provides for the consent by the conservator or receiver, subject
to certain conditions, to the continued making of required payments
under the securitization documents and continued servicing of the
assets, as well as the ability to exercise self-help remedies after a
payment default by the FDIC or the repudiation of a securitization
asset transfer agreement during the stay period of 12 U.S.C.
1821(e)(13)(C).
The FDIC recognizes that, as a practical matter, the scope of the
comfort that would be provided by the Proposed Rule is more limited
than that provided in the Securitization Rule. However, the FDIC
believes that the proposed requirements are necessary to support
sustainable securitization. The safe harbor is not exclusive, and it
does not address any transactions that fall outside the scope of the
safe harbor or that fail to comply with one or more safe harbor
conditions. The FDIC believes that its safe harbor should promote
responsible financial asset underwriting and increase transparency in
the market.
Previous Rulemakings
On November 12, 2009, the FDIC issued an Interim Final Rule
amending 12 CFR 360.6, Treatment by the Federal Deposit Insurance
Corporation as Conservator or Receiver of Financial Assets Transferred
by an Insured Depository Institution in Connection With a
Securitization or Participation, to provide for safe harbor treatment
for participations and securitizations until March 31, 2010, which was
further amended on March 11, 2010, by a Final Rule extending the safe
harbor until September 30, 2010 (as so amended, the ``Transition
Rule''). Under the Transition Rule, all existing securitizations as
well as those for which transfers were made or, for revolving trusts,
for which obligations were issued prior to September 30, 2010, were
permanently ``grandfathered'' so long as they complied with the pre-
existing Sec. 360.6.
At its December 15, 2009 meeting, the Board adopted an Advance
Notice of Proposed Rulemaking (``ANPR'') that sought public comment on
the scope of amendments to Section 360.6, as well as the requirements
for the application of the safe harbor. The ANPR and the public
comments received are discussed below in Sections III and IV.
The 2009 GAAP Modifications affect the way securitizations are
viewed by the rating agencies and whether they can achieve ratings that
are based solely on the credit quality of the financial assets,
independent from the rating of the IDI. Rating agencies are concerned
with several issues, including the ability of a securitization
transaction to pay timely principal and interest in the event the FDIC
is appointed receiver or conservator of the IDI. Rating agencies are
also concerned with the ability of the FDIC to repudiate the
securitization obligations and pay damages that may be less than the
full principal amount of such obligations and interest accrued thereon.
Moody's, Standard & Poor's, and Fitch have expressed the view that
because of the 2009 GAAP Modifications and the extent of the FDIC's
rights and powers as conservator or receiver, bank securitization
transactions would have to be linked to the rating of the IDI and are
unlikely to receive ``AAA'' ratings if the bank is rated below ``A''.
This view is based in
[[Page 27474]]
part on the ratings agencies' assessment of the delay involved in
receipt of amounts due with respect to securitization obligations and
the amount of repudiation damages payable under the FDI Act.
Securitization practitioners have asked the FDIC to provide assurances
regarding the position of the conservator or receiver as to the
treatment of both existing and future securitization transactions to
enable securitizations to be structured in a manner that enables them
to achieve de-linked ratings.
Purpose of the Proposed Rule
The FDIC, as deposit insurer and receiver for failed IDIs, has a
unique responsibility and interest in ensuring that residential
mortgage loans and other financial assets originated by IDIs are
originated for long-term sustainability. The supervisory interest in
origination of quality loans and other financial assets is shared with
other bank and thrift supervisors. Nevertheless, the FDIC's
responsibilities to protect insured depositors and resolve failed
insured banks and thrifts and its responsibility to the DIF require
that when the FDIC provides a safe harbor consenting to special relief
from the application of its receivership powers, it must do so in a
manner that fulfills these responsibilities.
The 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 and receiver in addition to its
role as a supervisor. 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. While many of the troubled mortgages were
originated by non-bank lenders, insured banks and thrifts also made
many troubled loans as underwriting standards declined under the
competitive pressures created by the returns achieved by lenders and
service providers through the ``originate to distribute'' model.
Defects in the incentives provided by securitization through
immediate gains on sale for transfers into securitization vehicles and
fee income directly led to material adverse consequences for insured
banks and thrifts. Among these consequences were increased repurchase
demands under representations and warranties contained in
securitization agreements, losses on purchased mortgage and asset-
backed securities, severe declines in financial asset values and in
mortgage- and asset-backed security values due to spreading market
uncertainty about the value of structured finance investments, and
impairments in overall financial prospects due to the accelerated
decline in housing values and overall economic activity. These
consequences, and the overall economic conditions, directly led to the
failures of many IDIs and to significant losses to the DIF. In this
context, it would be imprudent for the FDIC to provide consent or other
clarification of its application of its receivership powers without
imposing requirements designed to realign the incentives in the
securitization process to avoid these devastating effects.
The FDIC's adoption of 12 CFR 360.6 in 2000 provided clarification
of ``legal isolation'' and facilitated legal and accounting analyses
that supported securitization. In view of the accounting changes and
the effects they have upon the application of the Securitization Rule,
it is crucial that the FDIC provide clarification of the application of
its receivership powers in a way that reduces the risks to the DIF by
better aligning the incentives in securitization to support sustainable
lending and structured finance transactions.
The Proposed Rule is fully consistent with the position of the FDIC
in the Final Covered Bond Policy Statement of July 15, 2008. In that
Policy Statement, the FDIC Board of Directors acted to clarify how the
FDIC would treat covered bonds in the case of a conservatorship or
receivership with the express goal of thereby facilitating the
development of the U.S. covered bond market. As noted in that Policy
Statement, it served to ``define the circumstances and the specific
covered bond transactions for which the FDIC will grant consent to
expedited access to pledged covered bond collateral.'' The Policy
Statement further specifically referenced the FDIC's goal of promoting
development of the covered bond market, while protecting the DIF and
prudently applying its powers as conservator or receiver.\6\
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\6\ FDIC Covered Bond Policy Statement, 73 FR 43754 et seq.
(July 28, 2008)
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The Proposed Rule is also consistent with the amendments to
Regulation AB proposed by the Securities and Exchange Commission
(``SEC'') on April 7, 2010 (as so proposed to be amended, ``New
Regulation AB''). The proposed amendments represent a significant
overhaul of Regulation AB and related rules governing the offering
process, disclosure requirements and ongoing reporting requirements for
securitizations. New Regulation AB would establish extensive new
requirements for both SEC registered publicly offered securitization
and many private placements, including disclosure of standardized
financial asset level information, enhanced investor cash flow modeling
tools and on-going information reporting requirements. In addition New
Regulation AB requires certain certifications to the quality of the
financial asset pool, retention by the sponsor or an affiliate of a
portion of the securitization securities and third party reports on
compliance with the sponsor's obligation to repurchase assets for
breach of representations and warranties as a precondition to an
issuer's ability to use a shelf registration. The disclosure and
retention requirements of New Regulation AB are consistent with and
support the approach of the Proposed Rule.
To ensure that IDIs are sponsoring securitizations in a responsible
and sustainable manner, the Proposed Rule would impose certain
conditions on all securitizations and additional conditions on
securitizations that include residential mortgages (``RMBS''),
including those that qualify as true sales, as a prerequisite for the
FDIC to grant consent to the exercise of the rights and powers listed
in 12 U.S.C. 1821(e)(13)(C) with respect to such financial assets. To
qualify for the safe harbor provision of the Proposed Rule, the
conditions must be satisfied for any securitization (i) for which
transfers of financial assets were made on or after September 30, 2010
or (ii) for revolving trusts, for which obligations were issued on or
after September 30, 2010.
The FDIC believes that the transitional period until September 30,
2010, that is currently provided for in the Transitional Rule is
sufficient to allow sponsors and other participants in securitizations
to restructure transactions to comply with the new accounting
requirements, and to properly structure transactions which meet the
conditions of the Proposed Rules, when final. However, the FDIC is
requesting public comment on the adequacy of the transitional period
under the Transitional Rule for potential changes to securitizations to
comply with the Proposed Rule.
II. The ANPR
On January 7, 2010, the FDIC published its Advance Notice of
Proposed Rulemaking Regarding Treatment by the FDIC as Conservator or
Receiver of Financial Assets Transferred by an IDI in Connection with a
Securitization or Participation After March 31, 2010 in the Federal
Register. 75 FR 935 (Jan. 7, 2010). The ANPR
[[Page 27475]]
solicited public comment for 45 days relating to proposed amendments to
the Securitization Rule regarding the treatment by the FDIC, as
receiver or conservator of an IDI, of financial assets transferred by
an IDI in connection with a securitization or participation
transaction.
The ANPR set forth specific questions as to which comments were
sought and, in addition, in order to provide a basis for consideration
of the questions, the ANPR included a draft of sample regulatory text
(the ``Sample Text''). The questions posed by the ANPR were grouped
under the following general categories:
A. Capital Structure and Financial Assets. These questions included
whether there should be limitations on the capital structures of
securitizations that are eligible for safe harbor treatment, including
whether the number of tranches should be limited and whether external
credit support should be prohibited or limited.
B. Disclosure. These questions included whether disclosures for
private placements should be required to include the types of
information and level of specificity applicable to public
securitizations and inquiries as to the degree of disclosure and
periodic reports that should be required, as well as whether broker,
rating agency and other fees should be disclosed.
C. Documentation and Record Keeping. These questions included
whether securitization documentation should be required to include
certain provisions relating to actions by servicers, such as requiring
servicers to act for the benefit of all investors and commence loss
mitigation within a specified time period, and whether there should be
limits on the ability of servicers to make advances.
D. Compensation. These questions included whether a portion of RMBS
fees should be deferred and paid out over a number of years based on
the performance of the financial assets and whether compensation to
servicers should be required to take into account services provided and
include incentives for servicing and loss mitigation actions that
maximize the value of financial assets.
E. Origination and Risk Retention. These questions included whether
sponsors should be required to retain an economic interest in the
credit risk of the financial assets, and whether a requirement that
mortgage loans included in RMBS be originated more than twelve (12)
months before being transferred for a securitization would be an
effective way to align incentives to promote sound lending or,
alternatively, whether a one (1) year hold back of proceeds due to the
sponsor to fund repurchase requirements after a review of
representations and warranties would better fulfill the goal of such
alignment.
In addition, the ANPR included questions relating to the adequacy
of the scope of the safe harbor provisions, the effect of the change in
accounting rules on participation transactions and certain other
general questions.
III. Summary of Comments
The FDIC received 36 comment letters on the questions posed by the
ANPR and on provisions of the Sample Text, and held one teleconference
with interested parties at which details of the ANPR were discussed.
The letters included comments from trade associations, banks, law
firms, rating agencies, consumer advocates and investors, among others.
Institutional investors and consumer advocates supported many of
the proposed changes as responsive to the issues demonstrated in the
current crisis by the prior model of securitization. Certain
institutional investors commented specifically on the need for greater
disclosures of loan level data and emphasized the value of disclosures
and strong representations and warranties as important in allowing
investors to understand and limit the ongoing risks in a
securitization. Consumer advocate and investor comments also included
support for risk retention and greater clarity in servicing
responsibilities.
A number of banks, law firms and industry trade organizations
opposed the new conditions set forth in paragraph (b) of the Proposed
Rule for a variety of reasons. Their comments in opposition to the
conditions included disagreement that such requirements would serve to
promote more long-term sustainability for loans and other financial
assets originated by IDIs, and objections that the conditions would
impose additional costs on IDIs and competitively disadvantage IDIs in
relation to non-regulated securitization sponsors. Several commenters
stated that the FDIC should not unilaterally adopt new conditions, and
some urged the FDIC to act only on an interagency basis or following
final Congressional action.
These comments reflect a misunderstanding of the purpose of the
conditions. The conditions are 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 the opaque
securitization structures and the poorly underwritten loans that led to
the onset of the financial crisis. In addition, these comments fail to
recognize 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 disclosure of that
performance. Moreover, many of the conditions are supported by New
Regulation AB and are reflected in proposed financial services
legislation.
Several commenters also objected to inclusion of certain
conditions, especially ongoing requirements or subjective criteria,
because they would make it more difficult for persons analyzing a
securitization to conclude at the outset of the securitization whether
the conditions to the safe harbor have been satisfied. Some commenters
asserted that, as a result, it would be difficult for the rating
agencies to de-link the rating of a securitization from the rating of
the sponsor. While the FDIC is not persuaded that rating agencies,
which normally evaluate qualitative information, would not evaluate
compliance with certain subjective criteria, the Proposed Rule has been
drafted to tie disclosure and various other requirements to the
contractual terms of the securitization. This should enable both rating
agencies and investors to assess whether a transaction meets the
conditions in the Proposed Rule.
Comment letters also requested that the FDIC confirm that the safe
harbor is not exclusive and, thus, that the failure of a securitization
transaction to satisfy one or more safe harbor conditions would not
make the financial assets transferred to a special purpose issuing
entity subject to reclamation by a receiver. Commenters also requested
that the FDIC confirm its agreement with the legal principle that the
power to repudiate a contract is not a power to avoid asset transfers.
As indicated above, the FDIC does not view the safe harbor as
exclusive, but cannot provide comfort as to transactions that are not
eligible for the safe harbor. The FDIC also recognizes that the power
to repudiate a contract is not a power to recover assets that were
previously sold and are no longer reflected on the books and records of
an IDI.
Several commenters stated that the new accounting treatment of
assets transferred as part of a securitization should not be
determinative of the
[[Page 27476]]
FDIC's treatment of such assets in an insolvency of a bank sponsor and
that the Proposed Rule should focus instead on a legal analysis in
determining whether a transfer of assets should be treated as a sale.
Several commenters also objected to the proposal in the ANPR to treat
as secured borrowings transfers that did not satisfy the requirements
for sale accounting treatment. This position is not consistent with
precedent. The Securitization Rule as adopted in 2000, as well as the
FDIC's longstanding evaluation of assets potentially subject to
receivership powers, has addressed only the treatment of those assets
by looking to their treatment under applicable accounting rules. This
was explicitly stated in the Securitization Rule. In formulating the
revised safe harbor, it is appropriate for the FDIC to consider whether
assets are treated under GAAP as part of the IDI's balance sheet when
making the determination of how to treat assets in a conservatorship or
receivership.
The objections to a safe harbor based on a secured borrowing
analysis are misplaced. Such safe harbor provides a high degree of
certainty for securitization transfers that do not meet the
requirements for off balance sheet treatment under the 2009 GAAP
Modifications. Prior to the Securitization Rule, securitization
transactions were typically viewed as either secured transactions or
sales, and the analysis would rely on a perfected security interest in
the financial assets that are subject to securitization. As a result,
under the Proposed Rule, if the securitization does not meet the
standards for off balance sheet treatment, irrespective of whether the
transfer qualifies as a sale, the transaction would qualify for
treatment as a secured transaction if it meets the requirements imposed
on such transactions under the Proposed Rule. In this way, investors in
securitization transactions that do not qualify for off balance sheet
treatment may still receive benefits of expedited access to the
securitized loans if they meet the conditions specified in the Proposed
Rule.
Comments relating to specific questions posed by the ANPR are
discussed below in the description of the Proposed Rule.
IV. The Proposed Rule
The Proposed Rule would replace the Securitization Rule as amended
by the Transition Rule. Paragraph (a) of the Proposed Rule sets forth
definitions of terms used in the Proposed Rule. It retains many of the
definitions previously used in the Securitization Rule but modifies or
adds definitions to the extent necessary to accurately reflect current
industry practice in securitizations.
Paragraph (b) of the Proposed Rule imposes conditions to the
availability of the safe harbor for transfers of financial assets to an
issuing entity in connection with a securitization. These conditions
make a clear distinction between the conditions imposed on RMBS from
those imposed on securitizations for other asset classes. In the
context of a conservatorship or receivership, the conditions applicable
to all securitizations would improve overall transparency and clarity
through disclosure and documentation requirements along with ensuring
effective incentives for prudent lending by requiring that the payment
of principal and interest be based primarily on the performance of the
financial assets and by requiring retention of a share of the credit
risk in the securitized loans.
The conditions applicable to RMBS are more detailed and explicit
and require additional capital structure changes, disclosures, and
documentation, the establishment of a reserve and deferral of
compensation. These standards are intended to address the factors that
caused significant losses in current RMBS securitization structures as
demonstrated in the recent crisis. Confidence can be restored in RMBS
markets only through greater transparency and other structures that
support sustainable mortgage origination practices and require
increased disclosures. These standards respond to investor demands for
greater transparency and alignment of the interests of parties to the
securitization. In addition, they are generally consistent with
industry efforts while taking into account proposed legislative and
regulatory initiatives.
Capital Structure and Financial Assets
For all securitizations, the benefits of the Proposed Rule should
be available only to securitizations that are readily understood by the
market, increase liquidity of the financial assets and reduce consumer
costs. Any re-securitizations (securitizations supported by other
securitization obligations) would need to include adequate disclosure
of the obligations, including the structure and the assets supporting
each of the underlying securitization obligations and not just the
obligations that are transferred in the re-securitization. This
requirement would apply to all re-securitizations, including static re-
securitizations as well as managed collateralized debt obligations.
Securitizations that are unfunded or synthetic transactions would not
be eligible for expedited consent under the Proposed Rule. To support
sound lending, all securitizations would be required to have payments
of principal and interest on the obligations primarily dependent on the
performance of the financial assets supporting the securitization.
Payments of principal or interest to investors could not be contingent
on market or credit events that are independent of the assets
supporting the securitization, except for interest rate or currency
mismatches between the financial assets and the obligations to
investors.
For RMBS only, the capital structure of the securitization would be
limited to six tranches or less to discourage complex and opaque
structures. The most senior tranche could include time-based sequential
pay or planned amortization sub-tranches, which are not viewed as
separate tranches for the purpose of the six tranche requirement. This
condition would not prevent an issuer from creating the economic
equivalent of multiple tranches by re-securitizing one or more
tranches, so long as they meet the conditions set forth in the rule,
including adequate disclosure in connection with the re-securitization.
In addition, RMBS could not include leveraged tranches that introduce
market risks (such as leveraged super senior tranches). Although the
financial assets transferred into an RMBS would be permitted to benefit
from asset level credit support, such as guarantees (including
guarantees provided by governmental agencies, private companies, or
government-sponsored enterprises), co-signers, or insurance, the RMBS
could not benefit from external credit support. The temporary payment
of principal and interest, however, could be supported by liquidity
facilities. These conditions are designed to limit both the complexity
and the leverage of an RMBS and therefore the systemic risks introduced
by them in the market.
Comments in response to the ANPR expressed concern that a
limitation on the number of tranches of an RMBS would stifle innovation
and would negatively affect the ability of securitizations to meet
investor objectives and maximize offering proceeds. In addition,
commenters argued that there should be no restriction on external third
party pool level credit support, while one commenter stated that
guarantees in RMBS transactions should be permitted at the loan level
only if issued by
[[Page 27477]]
regulated third parties with proven capacity to ensure prudent loan
origination and satisfy their obligations. Commenters also requested
that the Proposed Rule not include the provision that a securitization
may not be an unfunded securitization or synthetic transaction.
In formulating the Proposed Rule, the FDIC was mindful of the need
to permit innovation and accommodate financing needs, and thus
attempted to strike a balance between permitting multi-tranche
structures for RMBS transactions, on the one hand, and promoting
readily understandable securitization structures and limiting
overleveraging of residential mortgage assets, on the other hand.
The FDIC is of the view that permitting pool level, external credit
support in an RMBS can lead to overleveraging of assets, as investors
might focus on the credit quality of the credit support provider as
opposed to the sufficiency of the financial asset pool to service the
securitization obligations.
Finally, although the Proposed Rule would exclude unfunded and
synthetic securitizations from the safe harbor, the FDIC does not view
the inclusion of existing credit lines that are not fully drawn in a
securitization as causing such securitization to be an ``unfunded
securitization.'' In addition, to the extent an unfunded or synthetic
transaction qualifies for treatment as a qualified financial contract
under section (11)(e) of the FDI Act, it would not need the benefits of
the safe harbor provided in the Proposed Rule in an FDIC
receivership.\7\
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\7\ 12 U.S.C. 1821(e)(10).
---------------------------------------------------------------------------
Disclosure
For all securitizations, disclosure serves as an effective tool for
increasing the demand for high quality financial assets and thereby
establishing incentives for robust financial asset underwriting and
origination practices. By increasing transparency in securitizations,
the Proposed Rule would enable investors (which may include banks) to
decide whether to invest in a securitization based on full information
with respect to the quality of the asset pool and thereby provide
additional liquidity only for sustainable origination practices.
The data must enable investors to analyze the credit quality for
the specific asset classes that are being securitized. The FDIC would
expect disclosure for all issuances to include the types of information
required under current Regulation AB (17 CFR 229.1100 through 229.1123)
or any successor disclosure requirements with the level of specificity
that would apply to public issuances, even if the obligations are
issued in a private placement or are not otherwise required to be
registered.
Securitizations that would qualify under this rule must include
disclosure of the structure of the securitization and the credit and
payment performance of the obligations, including the relevant capital
or tranche structure and any liquidity facilities and credit
enhancements. The disclosure would be required to include the priority
of payments and any specific subordination features, as well as any
waterfall triggers or priority of payment reversal features. The
disclosure at issuance would also be required to include the
representations and warranties made with respect to the financial
assets and the remedies for breach of such representations and
warranties, including any relevant timeline for cure or repurchase of
financial assets, and policies governing delinquencies, servicer
advances, loss mitigation and write offs of financial assets. The
periodic reports provided to investors would be required to include the
credit performance of the obligations and financial assets, including
periodic and cumulative financial asset performance data, modification
data, substitution and removal of financial assets, servicer advances,
losses that were allocated to each tranche and remaining balance of
financial assets supporting each tranche as well as the percentage
coverage for each tranche in relation to the securitization as a whole.
The FDIC anticipates that, where appropriate for the type of financial
assets included the pool, monthly reports would also include asset
level information that may be relevant to investors (e.g. changes in
occupancy, loan delinquencies, defaults, etc.).
Disclosure to investors would also be required to include the
nature and amount of compensation paid to any mortgage or other broker,
each servicer, rating agency or third-party advisor, and the originator
or sponsor, and the extent to which any risk of loss on the underlying
financial assets is retained by any of them for such securitization.
Disclosure of changes to this information while obligations are
outstanding would also be required. This disclosure should enable
investors to assess potential conflicts of interests and how the
compensation structure affects the quality of the assets securitized or
the securitization as a whole.
For RMBS, loan level data as to the financial assets securing the
mortgage loans, such as loan type, loan structure, maturity, interest
rate and location of property, would also be required to be disclosed
by the sponsor. Sponsors of securitizations of residential mortgages
would be required to affirm compliance with applicable statutory and
regulatory standards for origination of mortgage loans, including that
the mortgages in the securitization pool are underwritten at the fully
indexed rate relying on documented income \8\ and comply with existing
supervisory guidance governing the underwriting of residential
mortgages, including the Interagency Guidance on Non-Traditional
Mortgage Products, October 5, 2006, and the Interagency Statement on
Subprime Mortgage Lending, July 10, 2007, and such additional guidance
applicable at the time of loan origination.
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\8\ Institutions should verify and document the borrower's
income (both source and amount), assets and liabilities. For the
majority of borrowers, institutions should be able to readily
document income using recent W-2 statements, pay stubs, and/or tax
returns. Stated income and reduced documentation loans should be
accepted only if there are mitigating factors that clearly minimize
the need for direct verification of repayment capacity. Reliance on
such factors also should be documented. Mitigating factors might
include situations where a borrower has substantial liquid reserves
or assets that demonstrate repayment capacity and can be verified
and documented by the lender. A higher interest rate is not
considered an acceptable mitigating factor.
---------------------------------------------------------------------------
The Proposed Rule would require sponsors to disclose a third party
due diligence report on compliance with such standards and the
representations and warranties made with respect to the financial
assets. Finally, the Proposed Rule would require that the
securitization documents require the disclosure by servicers of any
ownership interest of the servicer or any affiliate of the servicer in
other whole loans secured by the same real property that secures a loan
included in the financial asset pool. This provision does not require
disclosure of interests held by servicers or their affiliates in the
securitization securities. This provision is intended to give investors
information to evaluate potential servicer conflicts of interest that
might impede the servicer's actions to maximize value for the benefit
of investors.
Responses to questions in the ANPR concerning disclosure included
requests that disclosure requirements be set forth in terms that are
susceptible to verification of compliance at the time when the
securitization securities are issued. Under the Proposed Rule, most of
the disclosure provisions would require that the securitization
documents require proper disclosure rather than making the disclosure
itself a condition to eligibility for the safe
[[Page 27478]]
harbor. Under these provisions, if required disclosure is not made,
there would be a default under the securitization documents, but a
transaction that otherwise qualified for the safe harbor would not be
ineligible for the safe harbor on the basis of inadequate disclosure.
Several letters requested that the FDIC refrain from adopting its
own disclosure requirements and that private placements not be required
to include the same degree of disclosure as is required for public
securitizations. Concern was also expressed that loan level disclosure
was inappropriate for certain asset classes, such as credit card
receivables. Commenters also urged that the safe harbor should not
require more information on re-securitizations than is required by the
securities laws. Comments also opposed a requirement that sponsors
affirm compliance with all statutory and regulatory standards for
mortgage loan origination. Finally, the comments included a request
that rating agency fees not be disclosed because of a concern that such
disclosure would jeopardize the objectivity of the ratings process by
making such information available to the rating agency analysts that
rate securitizations.
The Proposed Rule recognizes that loan level disclosure may not be
appropriate for each type of asset class securitization.
The FDIC believes that regardless of whether the securitization
transaction is in the form of a private rather than public securities
issuance, full disclosure to investors in such transaction is
necessary. With respect to re-securitizations, the FDIC does not
believe that there is a logical basis for requiring less disclosure
than is required for original securitizations. For both securitizations
and re-securitizations, the Proposed Rule would permit the omission of
information that is not available to the sponsor or issuer after
reasonable investigation so long as there is disclosure as to the types
of information omitted and the reason for such omission. In particular,
the FDIC is concerned that robust disclosure be provided in CDO
transactions and that ongoing monthly reports are provided to investors
in a securitization, whether or not there is an ongoing obligation for
filing with respect to such securitization under the Securities
Exchange Act of 1934.
Finally, the FDIC feels that disclosure of rating agency fees is
very important to investors and that rating agencies can take
appropriate internal measures to ensure that such disclosure does not
impact the rating process.
Documentation and Recordkeeping
For all securitizations, the operative agreements are required to
set forth all necessary rights and responsibilities of the parties,
including but not limited to representations and warranties, ongoing
disclosure requirements and any measures to avoid conflicts of
interest. The contractual rights and responsibilities of each party to
the transaction must provide each party with sufficient authority and
discretion for such party to fulfill its respective duties under the
securitization contracts.
Additional requirements apply to RMBS to address a significant
issue that has been demonstrated in the mortgage crisis by improving
the authority of servicers to mitigate losses on mortgage loans
consistent with maximizing the net present value of the mortgages, as
defined by a standardized net present value analysis. Therefore, for
RMBS, contractual provisions in the servicing agreement must provide
servicers with the authority to modify loans to address reasonably
foreseeable defaults and to take such other action as necessary or
required to maximize the value and minimize losses on the securitized
financial assets. The servicers are required to apply industry best
practices related to asset management and servicing.
The RMBS documents may not give control of servicing discretion to
a particular class of investors. The documents must require that the
servicer act for the benefit of all investors rather for the benefit of
any particular class of investors. Consistent with the forgoing, the
servicer must commence action to mitigate losses no later than ninety
(90) days after an asset first becomes delinquent unless all
delinquencies on such asset have been cured. A servicer must maintain
sufficient records of its actions to permit appropriate review of its
actions.
The FDIC believes that a prolonged period of servicer advances in a
market downturn misaligns servicer incentives with those of the RMBS
investors. Servicing advances also serve to aggravate liquidity
concerns, exposing the market to greater systemic risk. Occasional
advances for late payments, however, are beneficial to ensure that
investors are paid in a timely manner. To that end, the servicing
agreement for RMBS should not require the primary servicer to advance
delinquent payments by borrowers for more than three (3) payment
periods unless financing or reimbursement facilities to fund or
reimburse the primary servicers are available. However, foreclosure
recoveries cannot serve as the `financing facility' for repayment of
advances.
Comments on questions as to these provisions posed by the ANPR
included statements that the safe harbor should not require the
servicer to act for the benefit of all investors, and that the servicer
should be permitted to act for a specified class of investors. In
addition, concern was expressed that requiring servicer loss mitigation
to maximize the net present value of the financial assets would unduly
restrict the servicers.
Several comments were received relating to whether servicers should
be required to commence action to mitigate losses in connection with
residential mortgage securitizations within 90 days after an asset
first becomes delinquent and whether servicer advances should be
limited to three payment periods. The comments included suggestions
that there should be no loss mitigation provisions in the safe harbor,
that no set period should be established, that 90 days was too short,
and that 90 days was too long. Responses relating to servicer advances
included statements that the safe harbor should not include limits on
servicer advances, and that a longer period for servicer advances
should be permitted. One commenter suggested that servicers be given
explicit authority to reduce principal and exercise forbearance as to
principal payments, and that loan modification be required to be
evaluated as a precondition to foreclosure.
While the FDIC agrees that servicers should be given flexibility on
how best to maximize the value of financial assets, it believes that it
is essential that there be certain governing principles in RMBS
transactions. Maximization of net present value is a widely accepted
standard for mortgage loan workouts, and the FDIC believes that use of
this standard will result in the highest value being obtained. The FDIC
also believes that the Proposed Rule would give the servicer authority
to reduce principal or exercise forbearance if such action would
maximize the value of an asset, and expects that servicers will
consider loan modification in evaluating how best to maximize value.
The FDIC understands that it may not be possible to determine with
absolute certainty the appropriate deadline for the commencement of
servicer loss mitigation or the appropriate number of payment periods
for which servicers can be required to make advances for which
financing or reimbursement facilities are not available. However, the
FDIC believes that a framework for sustainable securitizations must
include certain deadlines and limits that address
[[Page 27479]]
issues identified in the current financial crisis, and that the loss
mitigation deadline and servicer advance limits set forth in the
Proposed Rule are appropriate. In this connection, it is important to
note that action to mitigate losses may include contact with the
borrower or other steps designed to return the asset to regular
payments, but does not require initiation of foreclosure or other
formal enforcement proceedings.
Finally, the FDIC does not agree that sustainable securitizations
would be promoted if sponsors are permitted to structure
securitizations where the servicer does not act for all classes of
investors.
Compensation
The compensation requirements of the Proposed Rule would apply only
to RMBS. Due to the demonstrated issues in the compensation incentives
in RMBS, in this asset class the Proposed Rule seeks to realign
compensation to parties involved in the rating and servicing of
residential mortgage securitizations.
The securitization documents are required to provide that any fees
payable credit rating agencies or similar third-party evaluation
companies must be payable in part over the five (5) year period after
the initial issuance of the obligations based on the performance of
surveillance services and the performance of the financial assets, with
no more than sixty (60) percent of the total estimated compensation due
at closing. Thus payments to rating agencies must be based on the
actual performance of the financial assets, not their ratings.
A second area of concern is aligning incentives for proper
servicing of the mortgage loans. Therefore, compensation to servicers
must include incentives for servicing, including payment for loan
restructuring or other loss mitigation activities, which maximizes the
net present value of the financial assets in the RMBS.
Commenters were divided on whether compensation to parties involved
in a securitization should be deferred. Responses to the ANPR also
stated that compensation to rating agencies should not be linked to
performance of a securitization because such linkage would interfere
with the neutral ratings process, and a rating agency expressed the
concern that such linkage might give rating agencies an incentive to
rate a transaction at a level that is lower than the level that the
rating agency believes to be the appropriate level. Concern was also
expressed that linkage of compensation to performance of the
securitization could cause payment of full compensation to one category
of securitization participants to be dependent in some measure on the
performance of a different category of securitization participants.
Comments also included an objection that if deferred performance based
compensation was imposed on certain securitization participants, such
as underwriters, these participants would be subject to risks that they
had not expected to assume. Others commented that there should be
incentives for servicers to modify loans rather than to foreclose.
Concern was also expressed as to the complexity of reserving for
deferred compensation and developing cash flow models relating to
servicing incentives. Finally, concern was expressed that giving
servicers incentives might lead to additional assets being consolidated
on bank balance sheets.
Based on the comments provided, the Proposed Rule imposes the
deferred compensation requirement only on fees and other compensation
to rating agencies or similar third-party evaluation companies. The
FDIC notes that rating agencies have procedures in place to protect
analytic independence and ensure the integrity of their ratings.
Compensation deferral may have certain ramifications on internal rating
agency processes but should not affect the ratings or surveillance
process. Finally, the FDIC is mindful of the proposal to encourage loan
modification rather than foreclosure and has spearheaded efforts in
this area. The Proposed Rule would include loan restructuring
activities as one of the categories of loss mitigation activities for
which incentive compensation could be payable to servicers.
Origination and Retention Requirements
To provide further incentives for quality origination practices,
several conditions address origination and retention requirements for
all securitizations. For all securitizations, the sponsor must retain
an economic interest in a material portion, defined as not less than
five (5) percent, of the credit risk of the financial assets. The
retained interest may be either in the form of an interest of not less
than five (5) percent in each credit tranche or in a representative
sample of the securitized financial assets equal to not less than five
(5) percent of the principal amount of the financial assets at
transfer. By requiring that the sponsor retain an economic interest in
the asset pool without hedging the risk of such portion, the sponsor
would be less likely to originate low quality financial assets.
The Proposed Rule would require that RMBS securitization documents
require that a reserve fund be established in an amount equal to at
least five (5) percent of the cash proceeds due to the sponsor and that
this reserve be held for twelve (12) months to cover any repurchases
required for breaches of representations and warranties.
In addition, residential mortgage loans in an RMBS must comply with
all statutory, regulatory and originator underwriting standards in
effect at the time of origination. Residential mortgages must be
underwritten at the fully indexed rate and rely on documented income
and comply with all existing supervisory guidance governing the
underwriting of residential mortgages, including the Interagency
Guidance on Non-Traditional Mortgage Products, October 5, 2006, and the
Interagency Statement on Subprime Mortgage Lending, July 10, 2007, and
such additional regulations or guidance applicable at the time of loan
origination.
Many commenters objected to the imposition of a 5 percent risk
retention requirement, while other commenters suggested that a higher
risk retention requirement might be acceptable. Objections included
reference to the costs associated with this requirement, the fact that
the requirement eliminates the ability of the originating bank to
transfer all of the credit risk, and assertions that the requirement
would constrict mortgage credit and would discourage banks from
securitizing low risk assets and high quality jumbo prime loans.
Commenters also objected that the retention requirements could cause
securitizations that might otherwise qualify for sale accounting
treatment under the 2009 GAAP Modifications to not qualify for that
treatment. Many comment letters stated that the goals sought to be
achieved by risk retention could be better achieved by the
establishment of minimum financial asset underwriting standards. Other
suggestions included establishing a reserve to support the repurchase
obligations of a sponsor.
Commenters also suggested that the amount of risk to be retained
should vary based on the asset type. Certain commenters suggested that
certain types of assets, such as prudently underwritten loans or prime
credit mortgage loans, be exempted from the retention requirement.
Concern was also expressed that attaching an anti-hedging
requirement to the retained portion would interfere with proper credit
risk management
[[Page 27480]]
practices. Comments also included the concern that requiring that all
assets have been originated in compliance with all applicable
underwriting standards could make the safe harbor unachievable.
Finally, many comments were received that opposed a 12 month
seasoning requirement for RMBS loans that was included in the options
set forth in the ANPR.
The FDIC believes that the sponsor must be required to retain an
economic interest in the credit risk relating to each credit tranche or
in a representative sample of financial assets in order to help ensure
quality origination practices. A risk retention requirement that did
not cover all types of exposure would not be sufficient to create an
incentive for quality underwriting at all levels of the securitization.
The recent economic crisis made clear that, if quality underwriting is
to be assured, it will require true risk retention by sponsors, and
that the existence of representations and warranties or regulatory
standards for underwriting will not alone be sufficient. The FDIC
believes that the 5 percent across the board requirement for all types
of assets is appropriate, and notes that it is consistent with the
requirements set forth in New Regulation AB.
Based on the comments objecting to the seasoning requirement, the
Proposed Rule includes the reserve requirement in lieu of a seasoning
requirement.
With respect to the concern expressed that the safe harbor may be
unachievable if all assets included in an RMBS must comply with all
applicable underwriting standards, the FDIC understands that during the
origination process it is difficult to assure compliance with all
origination and regulatory standards. While the Proposed Rule would
require that the financial assets be originated in compliance with all
regulatory standards, the FDIC does not view technical non-compliance
with some standards, or occasional limited non-compliance with
origination standards, as affecting the availability of the safe
harbor.
Finally, while the Proposed Rule provides that the retained
interest cannot be hedged during the term of the securitization, the
FDIC does not regard this prohibition as precluding hedging the
interest rate or currency risks associated with the retained portion of
the securitization tranches. Rather, the FDIC views this prohibition as
being directed at the credit risk of the transaction, to ensure that
the originator properly underwrites the financial assets.
Additional Conditions
Paragraph (c) of the Proposed Rule includes general conditions for
all securitizations and the transfer of financial assets. These
conditions also include requirements that are consistent with good
banking practices and are necessary to make the transactions comply
with established banking law.\9\
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\9\ See, 12 U.S.C. 1823(e).
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The transaction should be an arms-length, bona fide securitization
transaction and the obligations cannot be sold to an affiliate or
insider. The securitization agreements must be in writing, approved by
the board of directors of the bank or its loan committee (as reflected
in the minutes of a meeting of the board of directors or committee),
and have been, continuously, from the time of execution, in the
official record of the bank. The securitization also must have been
entered into in the ordinary course of business, not in contemplation
of insolvency and with no intent to hinder, delay or defraud the bank
or its creditors.
The Proposed Rule would apply only to transfers made for adequate
consideration. The transfer and/or security interest would need to be
properly perfected under the UCC or applicable state law. The FDIC
anticipates that it would be difficult to determine whether a transfer
complying with the Proposed Rule is a sale or a security interest, and
therefore expects that a security interest would be properly perfected
under the UCC, either directly or as a backup.
The sponsor would be required to separately identify in its
financial asset data bases the financial assets transferred into a
securitization and maintain an electronic or paper copy of the closing
documents in a readily accessible form. The sponsor would also be
required to maintain a current list of all of its outstanding
securitizations and issuing entities, and the most recent Form 10-K or
other periodic financial report for each securitization and issuing
entity. If acting as servicer, custodian or paying agent, the sponsor
would not be permitted to commingle amounts received with respect to
the financial assets with its own assets except for the time necessary
to clear payments received, and in event for more than two days. The
sponsor would be required to make these records available to the FDIC
promptly upon request. This requirement would facilitate the timely
fulfillment of the receiver's responsibilities upon appointment and
will expedite the receiver's analysis of securitization assets. This
would also facilitate the receiver's analysis of the bank's assets and
determination of which assets have been securitized and are therefore
potentially eligible for expedited access by investors.
In addition, the Proposed Rule would require that the transfer of
financial assets and the duties of the sponsor as transferor be
evidenced by an agreement separate from the agreement governing the
sponsor's duties, if any, as servicer, custodian, paying agent, credit
support provider or in any capacity other than transferor.
The Safe Harbor
Paragraph (d)(1) of the Proposed Rule would continue the safe
harbor provision that was provided by the Securitization Rule with
respect to participations so long as the participation satisfies the
conditions for sale accounting treatment set forth by generally
accepted accounting principles.
Paragraph (d)(2) of the Proposed Rule provides that for any
participation or securitization (i) for which transfers of financial
assets made or (ii) for revolving trusts, for which obligations were
issued, on or before September 30, 2010, the FDIC as conservator or
receiver will not, in the exercise of its statutory authority to
disaffirm or repudiate contracts, reclaim, recover, or recharacterize
as property of the institution or the receivership any such transferred
financial assets notwithstanding that such transfer does not satisfy
all conditions for sale accounting treatment under generally accepted
accounting principles as effective subsequent to November 15, 2009, so
long as such transfer satisfied the conditions for sale accounting
treatment as set forth in generally accepted accounting principles in
effect prior to November 15, 2009. This provision is intended to
continue the safe harbor provided by the Transition Rule.
Paragraph (d)(3) addresses transfers of financial assets made in
connection with a securitization for which transfers of financial
assets were made after September 30, 2010 or revolving trusts for which
obligations were issued after September 30, 2010, that satisfy the
conditions for sale accounting treatment under GAAP in effect for
reporting periods after November 15, 2009. For such securitizations,
the FDIC as conservator or receiver will not, in the exercise of its
statutory authority to disaffirm or repudiate contracts, reclaim,
recover, or recharacterize as property of the institution or the
[[Page 27481]]
receivership any such transferred financial assets, provided that such
securitization complies with the conditions set forth in paragraphs (b)
and (c) of the Proposed Rule.
Paragraph (d)(4) of the Proposed Rule addresses transfers of
financial assets in connection with a securitization for which
transfers of financial assets were made after September 30, 2010 or
revolving trusts for which obligations were issued after September 30,
2010, that satisfy the conditions set forth in paragraphs (b) and (c),
but where the transfer does not satisfy the conditions for sale
accounting treatment under GAAP in effect for reporting periods after
November 15, 2009. Clause (A) provides that if there is a monetary
default which remains uncured for ten (10) business days after actual
delivery of a written request to the FDIC to exercise contractual
rights because of such default, the FDIC consents to the exercise of
such contractual rights, including any rights to obtain possession of
the financial assets or the exercise of self-help remedies as a secured
creditor or liquidating properly pledged financial assets by the
investors, provided that no involvement of the receiver or conservator
is required. This clause also provides that the consent to the exercise
of such contractual rights shall serve as full satisfaction for all
amounts due.
Clause (B) provides that if the FDIC as conservator or receiver to
an IDI provides a written notice of repudiation of the securitization
agreement pursuant to which assets were transferred and the FDIC does
not pay the damages due by reason of such repudiation within ten (10)
business days following the effective date of the notice, the FDIC
consents to the exercise of any contractual rights, including any
rights to obtain possession of the financial assets or the exercise of
self-help remedies as a secured creditor or liquidating properly
pledged financial assets by the investors, provided that no involvement
of the receiver or conservator is required. Clause (B) also provides
that the damages due for these purposes shall be an amount equal to the
par value of the obligations outstanding on the date of receivership
less any payments of principal received by the investors to the date of
repudiation, and that upon receipt of such payment the investors' liens
on the financial assets shall be released.
Comments as to the scope of the safe harbor, including a comment
from one of the rating agencies, expressed concern with the risk of
repudiation by the FDIC, in particular, the risk that the FDIC would
repudiate an issuer's securitization obligations and liquidate the
financial assets at a time when the market value of such assets was
less than the amount of the outstanding obligations owed to investors,
thus exposing investors to market value risks relating to the
securitization asset pool.
The Proposed Rule addresses this concern. It clarifies that
repudiation damages would be equal to the par value of the obligations
as of the date of receivership less payments of principal received by
the investors to the date of repudiation. The Proposed Rule also
provides that the FDIC consents to the exercise of remedies by
investors, including self-help remedies as secured creditors, in the
event that the FDIC repudiates a securitization transfer agreement and
does not pay damages in such amount within ten business days following
the effective date of notice of repudiation. Thus, if the FDIC
repudiates and the investors are not paid the par value of the
securitization obligations, they will be permitted to obtain the asset
pool. Accordingly, exercise by the FDIC of its repudiation rights will
not expose investors to market value risks relating to the asset pool.
The comments also included a request that the safe harbor not
condition the FDIC's consent to the exercise of secured creditor
remedies on there being no involvement of the receiver or conservator.
The FDIC does not believe that the condition that no involvement of the
receiver of conservator be required in connection with the exercise of
secured creditor remedies should be of concern to investors, because
the provision should not be understood to encompass ordinary course
consents or transfers of financial asset related documentation needed
to facilitate customary remedies as to the collateral.
Comments also included concern that non-proportionate participation
arrangements, such as LIFO participations, entered into after September
30, 2010, that do not satisfy the criteria for ``participating
interests'' under the 2009 GAAP Modifications would no longer qualify
for sale treatment because the safe harbor is available only to
participations which satisfy sale accounting treatment. Because the
vast majority of participations are expected to satisfy the sale
accounting requirement, the Proposed Rule includes only participations
that satisfy the sale accounting requirements. However, the FDIC
recognizes that this formulation may exclude certain types of
participations from eligibility for the safe harbor and is requesting
more detailed comments on how it could address these type of
participations in a manner that does not expand the safe harbor
inappropriately.
Consent to Certain Payments and Servicing
Paragraph (e) provides that, during the stay period imposed by 12
U.S.C. 1821(e)(13)(C) and during the period specified in subparagraph
(d)(4)(A) prior to any payment of damages or consent under 12 U.S.C.
1821(e)(13)(C) to the exercise of any contractual rights, the FDIC as
conservator or receiver of the sponsor consents to the making of
required payments to the investors in accordance with the
securitization documents, except for provisions that take effect upon
the appointment of the receiver or conservator, and to any servicing
activity required in furtherance of the securitization, (subject to the
FDIC's rights to repudiate such agreements) with respect to the
underlying financial assets in connection with securitizations that
meet the conditions set forth in paragraphs (b) and (c) of the Proposed
Rule.
Responses to the ANPR included a request that the safe harbor state
specifically that the FDIC will make payments prior to repudiation,
rather than merely consenting to payments to the investors in
accordance with the securitization documents. The FDIC does not believe
that addition of this provision is necessary. Unless the FDIC
repudiates an agreement, as successor to the obligations of an IDI it
would continue to perform the IDI's obligations under the
securitization documents. Therefore the servicer, on behalf of the
FDIC, in its capacity as receiver or conservator, would apply the
payments received on financial assets to securitization obligations as
required under the securitization documents.
Finally, the comments included a request that provisions addressing
the making of payments during the stay period not be limited to
originally scheduled payments of principal and interest. In response to
these comments, the Proposed Rule was drafted to permit the making of
required payments in accordance with the securitization documents,
excluding any such payments arising on account of insolvency or the
appointment of a receiver or conservator. Under the Federal Deposit
Insurance Act, such ipso facto clauses are unenforceable.\10\
---------------------------------------------------------------------------
\10\ 12 U.S.C. 1821(e)(13)(A)).
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Miscellaneous
Paragraph (f) requires that any party requesting the FDIC's consent
pursuant
[[Page 27482]]
to paragraph (d)(4), provide notice to the FDIC together with a
statement of the basis upon the request is made, together with copies
of all documentation supporting the request. This would include a copy
of the applicable agreements (such as the transfer agreement and the
security agreement) and of any applicable notices under the agreements.
Paragraph (g) of the Proposed Rule provides that the conservator or
receiver will not seek to avoid an otherwise legally enforceable
agreement that is executed by an insured depository institution in
connection with a securitization solely because the agreement does not
meet the ``contemporaneous'' requirement of 12 U.S.C. 1821(d)(9),
1821(n)(4)(I), or 1823(e).
Paragraph (h) of the Proposed Rule would provide that the consents
set forth in the Proposed Rule would not act to waive or relinquish any
rights granted to the FDIC in any capacity, pursuant to any other
applicable law or any agreement or contract except the securitization
transfer agreement or any relevant security agreements, and nothing
contained in the section would alter the claims priority of the
securitized obligations.
Paragraph (i) provides that the Proposed Rule does not authorize,
and shall not be construed as authorizing the waiver of the
prohibitions in 12 U.S.C. 1825(b)(2) against levy, attachment,
garnishment, foreclosure, or sale of property of the FDIC, nor does it
authorize nor shall it be construed as authorizing the attachment of
any involuntary lien upon the property of the FDIC. The Proposed Rule
should not be construed as waiving, limiting or otherwise affecting the
rights or powers of the FDIC to take any action or to exercise any
power not specifically mentioned, including but not limited to any
rights, powers or remedies of the FDIC regarding transfers taken in
contemplation of the institution's insolvency or with the intent to
hinder, delay or defraud the institution or the creditors of such
institution, or that is a fraudulent transfer under applicable law.
The right to consent under 12 U.S.C. 1821(e)(13)(C) may not be
assigned or transferred to any purchaser of property from the FDIC,
other than to a conservator or bridge bank. The Proposed Rule could be
repealed by the FDIC upon 30 days notice provided in the Federal
Register, but any repeal would not apply to any issuance that complied
with the Proposed Rule before such repeal.
V. Solicitation of Comments
The FDIC is soliciting comments on all aspects of the Proposed
Rule. The FDIC specifically requests comments responding to the
following:
1. Does the Proposed Rule treatment of participations provide a
sufficient safe harbor to address most needs of participants? Are there
changes to the Proposed Rule that would expand protection different
types of participations issued by IDIs?
2. Is there a way to differentiate among participations that are
treated as secured loans by the 2009 GAAP Modifications? Should the
safe harbor consent apply to such participations? Is there a concern
that such changes may deplete the assets of an IDI because they would
apply to all participations?
3. Is the transition period to September 30, 2010, sufficient to
implement the changes required by the conditions identified by
Paragraph (b) and (c)? In light of New Regulation AB, how does this
transition period impact existing shelf registrations?
4. Does the capital structure for RMBS identified by paragraph
(b)(1)(ii)(A) provide for a structure that will allow for effective
securitization of well-underwritten mortgage loan assets? Does it
create any specific issues for specific mortgage assets?
5. Do the disclosure obligations for all securitizations identified
by paragraph (b)(2) meet the needs of investors? Are the disclosure
obligations for RMBS identified by paragraph (b)(2) sufficient? Are
there additional disclosure requirements that should be imposed to
create needed transparency? How can more standardization in disclosures
and in the format of presentation of disclosures be best achieved?
6. Do the documentation requirements in paragraph (b)(3) adequately
describe that rights and responsibilities of the parties to the
securitization that are required? Are there other or different rights
and responsibilities that should be required?
7. Do the documentation requirements applicable only to RMBS in
paragraph (b)(3) adequately describe the authorities necessary for
servicers? Should similar requirements be applied to other asset
classes?
8. Are the servicer advance provisions applicable only to RMBS in
paragraphs (b)(3)(ii)(A) effective to provide effective incentives for
servicers to maximize the net present value of the serviced assets? Do
these provisions create any difficulties in application? Are similar
provisions appropriate for other asset classes?
9. Is the limitation on servicer interest applicable only to RMBS
in paragraph (b)(3)(ii)(C) effective to minimize servicer conflicts of
interest? Does this provision create any difficulties in application?
Are similar provisions appropriate for other asset classes?
10. Are the compensation requirements applicable only to RMBS in
paragraph (b)(4) effective to align incentives of all parties to the
securitization for the long-term performance of the financial assets?
Are these requirements specific enough for effective application? Are
there alternatives that would be more effective? Should similar
provisions be applied to other asset classes?
11. Are the origination or retention requirements of paragraph
(b)(5) appropriate to support sustainable securitization practices? If
not, what adjustments should be made?
12. Is the requirement that a reserve fund be established to
provide for repurchases for breaches of representations and warranties
an effective way to align incentives to promote sound lending? What are
the costs and benefits of this approach? What alternatives might
provide a more effective approach?
13. Is retention by the sponsor of a 5 percent ``vertical strip''
of the securitization adequate to protect investors? Should any hedging
strategies or transfers be allowed?
14. Do you have any other comments on the conditions imposed by
paragraphs (b) and (c)?
15. Is the scope of the safe harbor provisions in paragraph (d)
adequate? If not, what changes would you suggest?
16. Do the provisions of paragraph (d)(4) adequately address
concerns about the receiver's monetary default under the securitization
document or repudiation of the transaction?
17. Could transactions be structured on a de-linked basis given the
clarification provided in paragraph (d)(4)?
18. Do the provisions of paragraph (e) provide adequate
clarification of the receiver's agreement to pay monies due under the
securitization until monetary default or repudiation?
VI. Regulatory Procedure
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires an
agency to provide an Initial Regulatory Flexibility Analysis with a
proposed rule, unless the agency certifies that the rule would not have
a significant economic impact on a substantial number of small
entities. 5 U.S.C. 603-605. The FDIC hereby certifies that this
proposed rule would not have a significant economic
[[Page 27483]]
impact on a substantial number of small entities, as that term applies
to insured depository institutions.
B. Paperwork Reduction Act
This proposed rule contains new information collection requirements
subject to the Paperwork Reduction Act (PRA). The FDIC will submit a
request for review and approval of a collection of information to the
Office of Management and Budget (OMB) regulation, 5 CFR 1320.13.
The proposed burden estimates for the applications are as follows:
1. 10K annual report
Non Reg AB Compliant:
Estimated Number of Respondents: 473.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 1 time per year.
Average time per response: 36 hours.
Estimated Annual Burden: 17,028 hours.
Reg AB Compliant:
Estimated Number of Respondents: 203.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 1 time per year.
Average time per response: 6 hours.
Estimated Annual Burden: 1,218 hours.
2. 8K--Disclosure Form
Non Reg AB Compliant:
Estimated Number of Respondents: 473.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 2 times per year.
Estimated Number of Annual Responses: 946.
Average time per response: 6 hours.
Estimated Annual Burden: 5,676 hours.
Reg AB Compliant:
Estimated Number of Respondents: 203.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 2 times per year.
Estimated Number of Annual Responses: 406.
Average time per response: 1 hour.
Estimated Annual Burden: 406 hours.
3. 10D Reports
Non Reg AB Compliant:
Estimated Number of Respondents: 473.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 5 times per year.
Estimated Number of Annual Responses: 2,365.
Average time per response: 36 hours.
Estimated Annual Burden: 85,140 hours.
Reg AB Compliant:
Estimated Number of Respondents: 203.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 5 times per year.
Estimated Number of Annual Responses: 1,015.
Average time per response: 36 hours.
Estimated Annual Burden: 36,540 hours.
The FDIC invites the general public to comment on: (1) Whether this
collection of information is necessary for the proper performance of
the FDIC's functions, including whether the information has practical
utility; (2) the accuracy of the estimates of the burden of the
information collection, including the validity of the methodologies and
assumptions used; (3) ways to enhance the quality, utility, and clarity
of the information to be collected; and (4) ways to minimize the burden
of the information collection on respondents, including through the use
of automated collection techniques or other forms of information
technology; and (5) estimates of capital or start up costs, and costs
of operation, maintenance and purchase of services to provide the
information. In the interim, interested parties are invited to submit
written comments by any of the following methods. All comments should
refer to the name and number of the collection:
http://www.FDIC.gov/regulations/laws/federal/propose.html.
E-mail: comments@fdic.gov. Include the name and number of
the collection in the subject line of the message.
Mail: Gary A. Kuiper (202-898-3877), Counsel, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429.
Hand Delivery: Comments may be hand-delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street), on business days between 7 a.m. and 5 p.m.
A copy of the comments may also be submitted to the OMB Desk
Officer for the FDIC, Office of Information and Regulatory Affairs,
Office of Management and Budget, New Executive Office Building, Room
3208, Washington, DC 20503.
List of Subjects in 12 CFR 360.6
Banks, Banking, Bank deposit insurance, Holding companies, National
banks, Participations, Reporting and recordkeeping requirements,
Savings associations, Securitizations.
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation proposes to amend 12 CFR part 360 as
follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
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.
2. Revise Sec. 360.6 to read as follows:
Sec. 360.6 Treatment of financial assets transferred in connection
with a securitization or participation.
(a) Definitions. (1) Financial asset means cash or a contract or
instrument that conveys to one entity a contractual right to receive
cash or another financial instrument from another entity.
(2) Investor means a person or entity that owns an obligation
issued by an issuing entity.
(3) Issuing entity means an entity created at the direction of a
sponsor that owns a financial asset or financial assets or has a
perfected security interest in a financial asset or financial assets
and issues obligations supported by such asset or assets. Issuing
entities may include, but are not limited to, corporations,
partnerships, trusts, and limited liability companies and are commonly
referred to as special purpose vehicles or special purpose entities. To
the extent a securitization is structured as a two-step transfer, the
term issuing entity would include both the issuer of the obligations
and any intermediate entities that may be a transferee.
(4) Monetary default means a default in the payment of principal or
interest when due following the expiration of any cure period.
(5) Obligation means a debt or equity (or mixed) beneficial
interest or security that is primarily serviced by the cash flows of
one or more financial assets or financial asset pools, either fixed or
revolving, that by their terms convert into cash within a finite time
period, or upon the disposition of the underlying financial assets, any
rights or other assets designed to assure the servicing or timely
distributions of proceeds to the security holders issued by an issuing
entity. The term does not include any instrument that evidences
ownership of
[[Page 27484]]
the issuing entity, such as LLC interests, common equity, or similar
instruments.
(6) Participation means the transfer or assignment of an undivided
interest in all or part of a financial asset, that has all of the
characteristics of a ``participating interest,'' from a seller, known
as the ``lead,'' to a buyer, known as the ``participant,'' without
recourse to the lead, pursuant to an agreement between the lead and the
participant. ``Without recourse'' means that the participation is not
subject to any agreement that requires the lead to repurchase the
participant's interest or to otherwise compensate the participant upon
the borrower's default on the underlying obligation.
(7) Securitization means the issuance by an issuing entity of
obligations for which the investors are relying on the cash flow or
market value characteristics and the credit quality of transferred
financial assets (together with any external credit support permitted
by this section) to repay the obligations.
(8) Servicer means any entity responsible for the management or
collection of some or all of the financial assets on behalf of the
issuing entity or making allocations or distributions to holders of the
obligations, including reporting on the overall cash flow and credit
characteristics of the financial assets supporting the securitization
to enable the issuing entity to make payments to investors on the
obligations.
(9) Sponsor means a person or entity that organizes and initiates a
securitization by transferring financial assets, either directly or
indirectly, including through an affiliate, to an issuing entity,
whether or not such person owns an interest in the issuing entity or
owns any of the obligations issued by the issuing entity.
(10) Transfer means:
(i) The conveyance of a financial asset or financial assets to an
issuing entity; or
(ii) The creation of a security interest in such asset or assets
for the benefit of the issuing entity.
(b) Coverage. This section shall apply to securitizations that meet
the following criteria:
(1) Capital structure and financial assets. The documents creating
the securitization must clearly define the payment structure and
capital structure of the transaction.
(i) The following requirement applies to all securitizations:
(A) The securitization shall not consist of re-securitizations of
obligations or collateralized debt obligations unless the disclosures
required in paragraph (b)(2) of this section are available to investors
for the underlying assets supporting the securitization at initiation
and while obligations are outstanding; and
(B) The payment of principal and interest on the securitization
obligation must be primarily based on the performance of financial
assets that are transferred to the issuing entity and, except for
interest rate or currency mismatches between the financial assets and
the obligations, shall not be contingent on market or credit events
that are independent of such financial assets. The securitization may
not be an unfunded securitization or a synthetic transaction.
(ii) The following requirements apply only to securitizations in
which the financial assets include any residential mortgage loans:
(A) The capital structure of the securitization shall be limited to
no more than six credit tranches and cannot include ``sub-tranches,''
grantor trusts or other structures. Notwithstanding the foregoing, the
most senior credit tranche may include time-based sequential pay or
planned amortization sub-tranches; and
(B) The credit quality of the obligations cannot be enhanced at the
issuing entity or pool level through external credit support or
guarantees. However, the temporary payment of principal and/or interest
may be supported by liquidity facilities, including facilities designed
to permit the temporary payment of interest following appointment of
the FDIC as conservator or receiver. Individual financial assets
transferred into a securitization may be guaranteed, insured or
otherwise benefit from credit support at the loan level through
mortgage and similar insurance or guarantees, including by private
companies, agencies or other governmental entities, or government-
sponsored enterprises, and/or through co-signers or other guarantees.
(2) Disclosures. The documents shall require that the sponsor,
issuing entity, and/or servicer, as appropriate, shall make available
to investors, information describing the financial assets, obligations,
capital structure, compensation of relevant parties, and relevant
historical performance data as follows:
(i) The following requirements apply to all securitizations:
(A) The documents shall require that, prior to issuance of
obligations and monthly 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 Securities and Exchange Commission Regulation AB,
17 CFR 229.1100 through 229.1123, or any successor disclosure
requirements for public issuances, even if the obligations are issued
in a private placement or are not otherwise required to be registered.
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;
(B) The documents shall require that, prior to issuance of
obligations, the structure of the securitization and the credit and
payment performance of the obligations shall be disclosed, including
the capital or tranche structure, the priority of payments and specific
subordination features; representations and warranties made with
respect to the financial assets, the remedies for and the time
permitted for cure of any breach of representations and warranties,
including the repurchase of financial assets, if applicable; liquidity
facilities and any credit enhancements permitted by this rule, any
waterfall triggers or priority of payment reversal features; and
policies governing delinquencies, servicer advances, loss mitigation,
and write-offs of financial assets;
(C) The documents shall require that while obligations are
outstanding, the issuing entity shall provide to investors information
with respect to the credit performance of the obligations and the
financial assets, including periodic and cumulative financial asset
performance data, delinquency and modification data for the financial
assets, substitutions and removal of financial assets, servicer
advances, as well as losses that were allocated to such tranche and
remaining balance of financial assets supporting such tranche, if
applicable; and the percentage of each tranche in relation to the
securitization as a whole; and
(D) In connection with the issuance of obligations, the nature and
amount of compensation paid to the originator, sponsor, rating agency
or third-party advisor, any mortgage or other broker, and the
servicer(s), and the extent to which any risk of loss on the underlying
assets is retained by any of them for such securitization shall be
disclosed.
[[Page 27485]]
The securitization documents shall require the issuer to provide to
investors while obligations are outstanding any changes to such
information and the amount and nature of payments of any deferred
compensation or similar arrangements to any of the parties.
(ii) The following requirements apply only to securitizations in
which the financial assets include any residential mortgage loans:
(A) Prior to issuance of obligations, sponsors shall disclose loan
level information about the financial assets including, but not limited
to, loan type, loan structure (for example, fixed or adjustable,
resets, interest rate caps, balloon payments, etc.), maturity, interest
rate and/or Annual Percentage Rate, and location of property; and
(B) Prior to issuance of obligations, sponsors shall affirm
compliance with all 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 comply with existing supervisory guidance governing the
underwriting of residential mortgages, including the Interagency
Guidance on Non-Traditional Mortgage Products, October 5, 2006, and the
Interagency Statement on Subprime Mortgage Lending, July 10, 2007, and
such additional guidance applicable at the time of loan origination.
Sponsors shall disclose a third party due diligence report on
compliance with such standards and the representations and warranties
made with respect to the financial assets; and
(C) The documents shall require that prior to issuance of
obligations and while obligations are outstanding, servicers shall
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. The ownership of
an obligation, as defined in this regulation, shall not constitute an
ownership interest requiring disclosure.
(3) Documentation and recordkeeping. The documents creating the
securitization must clearly define the respective contractual rights
and responsibilities of all parties and include the requirements
described below and use as appropriate any available standardized
documentation for each different asset class.
(i) The following requirements apply to all securitizations:
(A) The documents shall set forth all necessary rights and
responsibilities of the parties, including but not limited to
representations and warranties and ongoing disclosure requirements, and
any measures to avoid conflicts of interest. The contractual rights and
responsibilities of each party to the transaction, including but not
limited to the originator, sponsor, issuing entity, servicer, and
investors, must provide sufficient authority for the parties to fulfill
their respective duties and exercise their rights under the contracts
and clearly distinguish between any multiple roles performed by any
party.
(ii) The following requirements apply only to securitizations in
which the financial assets include any residential mortgage loans:
(A) Servicing and other agreements must provide servicers with full
authority, subject to contractual oversight by any master servicer or
oversight advisor, if any, to mitigate losses on financial assets
consistent with maximizing the net present value of the financial
asset. Servicers shall have the authority to modify assets to address
reasonably foreseeable default, and to take such other action necessary
to maximize the value and minimize losses on the securitized financial
assets applying industry best practices for asset management and
servicing. The documents shall require the servicer to act for the
benefit of all investors, and not for the benefit of any particular
class of investors. The servicer must commence action to mitigate
losses no later than ninety (90) days after an asset first becomes
delinquent unless all delinquencies on such asset have been cured. A
servicer must maintain sufficient records of its actions to permit
appropriate review; and
(B) The servicing agreement shall not require a primary servicer to
advance delinquent payments of principal and interest for more than
three payment periods, unless financing or reimbursement facilities are
available, which may include, but are not limited to, the obligations
of the master servicer or issuing entity to fund or reimburse the
primary servicer, or alternative reimbursement facilities. Such
``financing or reimbursement facilities'' under this paragraph shall
not depend on foreclosure proceeds.
(4) Compensation. The following requirements apply only to
securitizations in which the financial assets include any residential
mortgage loans. Compensation to parties involved in the securitization
of such financial assets must be structured to provide incentives for
sustainable credit and the long-term performance of the financial
assets and securitization as follows:
(i) The documents shall require that any fees or other compensation
for services payable to credit rating agencies or similar third-party
evaluation companies shall be payable, in part, over the five (5) year
period after the first issuance of the obligations based on the
performance of surveillance services and the performance of the
financial assets, with no more than sixty (60) percent of the total
estimated compensation due at closing; and
(ii) Compensation to servicers shall provide incentives for
servicing, including payment for loan restructuring or other loss
mitigation activities, which maximizes the net present value of the
financial assets. Such incentives may include payments for specific
services, and actual expenses, to maximize the net present value or a
structure of incentive fees to maximize the net present value, or any
combination of the foregoing that provides such incentives.
(5) Origination and Retention Requirements. (i) The following
requirements apply to all securitizations:
(A) The sponsor must retain an economic interest in a material
portion, defined as not less than five (5) percent, of the credit risk
of the financial assets. This retained interest may be either in the
form of an interest of not less than five (5) percent in each of the
credit tranches sold or transferred to the investors or in a
representative sample of the securitized financial assets equal to not
less than five (5) percent of the principal amount of the financial
assets at transfer. This retained interest may not be transferred or
hedged during the term of the securitization.
(ii) The following requirements apply only to securitizations in
which the financial assets include any residential mortgage loans:
(A) The documents shall require the establishment of a reserve fund
equal to at least five (5) percent of the cash proceeds of the
securitization payable to the sponsor to cover the repurchase of any
financial assets required for breach of representations and warranties.
The balance of such fund, if any, shall be released to the sponsor one
year after the date of issuance.
(B) The assets shall have been originated in compliance with all
statutory, regulatory, and originator underwriting standards in effect
at the time of origination. Residential mortgages included in the
securitization shall be underwritten at the fully indexed rate, based
upon the borrowers' ability to repay the mortgage according to its
terms, and rely on documented income and comply with all existing
supervisory guidance governing the underwriting of residential
mortgages, including the Interagency Guidance on
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Non-Traditional Mortgage Products, October 5, 2006, and the Interagency
Statement on Subprime Mortgage Lending, July 10, 2007, and such
additional regulations or guidance applicable to insured depository
institutions at the time of loan origination. Residential mortgages
originated prior to the issuance of such guidance shall meet all
supervisory guidance governing the underwriting of residential
mortgages then in effect at the time of loan origination.
(c) Other requirements. (1) The transaction should be an arms
length, bona fide securitization transaction, and the obligations shall
not be sold to an affiliate or insider;
(2) The securitization agreements are in writing, approved by the
board of directors of the bank or its loan committee (as reflected in
the minutes of a meeting of the board of directors or committee), and
have been, continuously, from the time of execution in the official
record of the bank;
(3) The securitization was entered into in the ordinary course of
business, not in contemplation of insolvency and with no intent to
hinder, delay or defraud the bank or its creditors;
(4) The transfer was made for adequate consideration;
(5) The transfer and/or security interest was properly perfected
under the UCC or applicable state law;
(6) The transfer and duties of the sponsor as transferor must be
evidenced in a separate agreement from its duties, if any, as servicer,
custodian, paying agent, credit support provider or in any capacity
other than the transferor; and
(7) The sponsor shall separately identify in its financial asset
data bases the financial assets transferred into any securitization and
maintain an electronic or paper copy of the closing documents for each
securitization in a readily accessible form, a current list of all of
its outstanding securitizations and issuing entities, and the most
recent Form 10-K, if applicable, or other periodic financial report for
each securitization and issuing entity. To the extent the sponsor
serves as servicer, custodian or paying agent provider for the
securitization, the sponsor shall not comingle amounts received with
respect to the financial assets with its own assets except for the time
necessary to clear any payments received and in no event greater than a
two day period. The sponsor shall make these records readily available
for review by the FDIC promptly upon written request.
(d) Safe harbor. (1) Participations. With respect to transfers of
financial assets made in connection with participations, the FDIC as
conservator or receiver shall not, in the exercise of its statutory
authority to disaffirm or repudiate contracts, reclaim, recover, or
recharacterize as property of the institution or the receivership any
such transferred financial assets provided that such transfer satisfies
the conditions for sale accounting treatment set forth by generally
accepted accounting principles, except for the ``legal isolation''
condition that is addressed by this paragraph.
(2) Transition period safe harbor. With respect to any
participation or securitization for which transfers of financial assets
were made or, for revolving trusts, for which obligations were issued,
on or before September 30, 2010, the FDIC as conservator or receiver
shall not, in the exercise of its statutory authority to disaffirm or
repudiate contracts, reclaim, recover, or recharacterize as property of
the institution or the receivership any such transferred financial
assets notwithstanding that such transfer does not satisfy all
conditions for sale accounting treatment under generally accepted
accounting principles as effective for reporting periods after November
15, 2009, provided that such transfer satisfied the conditions for sale
accounting treatment set forth by generally accepted accounting
principles in effect for reporting periods before November 15, 2009,
except for the ``legal isolation'' condition that is addressed by this
paragraph (d)(2) and the transaction otherwise satisfied the provisions
of this section (Rule 360.6) in effect prior to [EFFECTIVE DATE OF
FINAL RULE].
(3) For securitizations meeting sale accounting requirements. With
respect to any securitization for which transfers of financial assets
were made, or for revolving trusts for which obligations were issued,
after September 30, 2010, and which complies with the requirements
applicable to that securitization as set forth in paragraphs (b) and
(c) of this section, the FDIC as conservator or receiver shall not, in
the exercise of its statutory authority to disaffirm or repudiate
contracts, reclaim, recover, or recharacterize as property of the
institution or the receivership such transferred financial assets,
provided that such transfer satisfies the conditions for sale
accounting treatment set forth by generally accepted accounting
principles in effect for reporting periods after November 15, 2009,
except for the ``legal isolation'' condition that is addressed by this
paragraph (d)(3).
(4) For securitization not meeting sale accounting requirements.
With respect to any securitization for which transfers of financial
assets made, or for revolving trusts for which obligations were issued,
after September 30, 2010, and which complies with the requirements
applicable to that securitization as set forth in paragraphs (b) and
(c) of this section, but where the transfer does not satisfy the
conditions for sale accounting treatment set forth by generally
accepted accounting principles in effect for reporting periods after
November 15, 2009:
(i) Monetary default. If at any time after appointment, the FDIC as
conservator or receiver is in a monetary default under a
securitization, as defined above, and remains in monetary default for
ten (10) business days after actual delivery of a written request to
the FDIC pursuant to paragraph (f) of this section hereof to exercise
contractual rights because of such monetary default, the FDIC hereby
consents pursuant to 12 U.S.C. 1821(e)(13)(C) to the exercise of any
contractual rights, including obtaining possession of the financial
assets, exercising self-help remedies as a secured creditor under the
transfer agreements, or liquidating properly pledged financial assets
by commercially reasonable and expeditious methods taking into account
existing market conditions, provided no involvement of the receiver or
conservator is required. The consent to the exercise of such
contractual rights shall serve as full satisfaction of the obligations
of the insured depository institution in conservatorship or
receivership and the FDIC as conservator or receiver for all amounts
due.
(ii) Repudiation. If the FDIC as conservator or receiver of an
insured depository institution provides a written notice of repudiation
of the securitization agreement pursuant to which the financial assets
were transferred, and the FDIC does not pay damages, defined below,
within ten (10) business days following the effective date of the
notice, the FDIC hereby consents pursuant to 12 U.S.C. 1821(e)(13)(C)
to the exercise of any contractual rights, including obtaining
possession of the financial assets, exercising self-help remedies as a
secured creditor under the transfer agreements, or liquidating properly
pledged financial assets by commercially reasonable and expeditious
methods taking into account existing market conditions, provided no
involvement of the receiver or conservator is required. For purposes of
this paragraph, the damages due shall be in an amount equal to the par
value
[[Page 27487]]
of the obligations outstanding on the date of receivership less any
payments of principal received by the investors to the date of
repudiation. Upon receipt of such payment, the investor's lien on the
financial assets shall be released.
(e) Consent to certain actions. During the stay period imposed by
12 U.S.C. 1821(e)(13)(C), and during the periods specified in paragraph
(d)(4)(i) of this section prior to any payment of damages or consent
pursuant to 12 U.S.C. 1821(e)(13)(C) to the exercise of any contractual
rights, the FDIC as conservator or receiver of the sponsor consents to
the making of required payments to the investors in accordance with the
securitization documents, except for provisions that take effect upon
the appointment of the receiver or conservator, and to any servicing
activity required in furtherance of the securitization (subject to the
FDIC's rights to repudiate such agreements) with respect to the
financial assets included in securitizations that meet the requirements
applicable to that securitization as set forth in paragraphs (b) and
(c) of this section.
(f) Notice for consent. Any party requesting the FDIC's consent as
conservator or receiver under 12 U.S.C. 1821(e)(13)(C) pursuant to
paragraph (d)(4)(i) of this section shall provide notice to the Deputy
Director, Division of Resolutions and Receiverships, Federal Deposit
Insurance Corporation, 550 17th Street, NW., F-7076, Washington DC
20429-0002, and a statement of the basis upon which such request is
made, and copies of all documentation supporting such request,
including without limitation a copy of the applicable agreements and of
any applicable notices under the contract.
(g) Contemporaneous requirement. The FDIC will not seek to avoid an
otherwise legally enforceable agreement that is executed by an insured
depository institution in connection with a securitization or in the
form of a participation solely because the agreement does not meet the
``contemporaneous'' requirement of 12 U.S.C. 1821(d)(9), 1821(n)(4)(I),
or 1823(e).
(h) Limitations. The consents set forth in this section do not act
to waive or relinquish any rights granted to the FDIC in any capacity,
pursuant to any other applicable law or any agreement or contract
except the securitization transfer agreement or any relevant security
agreements. Nothing contained in this section alters the claims
priority of the securitized obligations.
(i) No waiver. This section does not authorize, and shall not be
construed as authorizing the waiver of the prohibitions in 12 U.S.C.
1825(b)(2) against levy, attachment, garnishment, foreclosure, or sale
of property of the FDIC, nor does it authorize nor shall it be
construed as authorizing the attachment of any involuntary lien upon
the property of the FDIC. Nor shall this section be construed as
waiving, limiting or otherwise affecting the rights or powers of the
FDIC to take any action or to exercise any power not specifically
mentioned, including but not limited to any rights, powers or remedies
of the FDIC regarding transfers taken in contemplation of the
institution's insolvency or with the intent to hinder, delay or defraud
the institution or the creditors of such institution, or that is a
fraudulent transfer under applicable law.
(j) No assignment. The right to consent under 12 U.S.C.
1821(e)(13)(C) may not be assigned or transferred to any purchaser of
property from the FDIC, other than to a conservator or bridge bank.
(k) Repeal. This section may be repealed by the FDIC upon 30 days
notice provided in the Federal Register, but any repeal shall not apply
to any issuance made in accordance with this section before such
repeal.
By order of the Board of Directors.
Dated at Washington, DC, this 11th day of May, 2010.
Robert E. Feldman,
Executive Secretary, Federal Deposit Insurance Corporation.
[FR Doc. 2010-11680 Filed 5-14-10; 8:45 am]
BILLING CODE 6714-01-P