Proposal would revise treatment of financial assets transferred in securitization transaction

Some provisions of the securitization safe harbor rule related to treatment of financial assets transferred in a securitization or participation transaction would be revised by the federal insurer of bank deposits under a proposal expected to be published Thursday.

The Federal Deposit Insurance Corp. (FDIC) is proposing the revisions to its securitization safe harbor rule, it stated in filings with the Federal Register, to remove a disclosure requirement that was established by the rule when it was amended and restated in 2010.

According to the agency, the change would “eliminate a requirement that the securitization documents require compliance with Regulation AB of the Securities and Exchange Commission in circumstances where Regulation AB by its terms would not apply to the issuance of obligations backed by such financial assets.”

More specifically, the agency is proposing to remove the requirement of the rule that the documents governing securitization transactions require compliance with Regulation AB of the Securities and Exchange Commission (SEC) which, the FDIC said, imposes significant asset-level disclosure requirements in circumstances where, under the terms of Regulation AB itself, Regulation AB is not applicable to the transaction.

“This would mean that, unlike under the Rule as currently in effect, the documents governing a private placement or an issuance not otherwise required to be registered would not be required to mandate compliance with Regulation AB (as currently in effect),” the FDIC wrote in its notice. “This proposal is made in response to feedback that it is difficult for institutions to comply with Regulation AB as applied to certain types of securitization transactions, in particular residential mortgage securitizations.”

The FDIC noted that although the SEC has not applied the Regulation AB disclosure requirements to private placement transactions, “the Rule has required (except for certain grandfathered transactions) that these disclosures be required as a condition for eligibility for the Rule’s benefits.”

The net effect, the FDIC said, appears to be a disincentive for IDIs (insured depository institutions) to sponsor securitizations of residential mortgages that are compliant with the Rule.”

The proposal will be out for comment for 60 days, starting on its publication in the Register.

Proposal: Securitization Safe Harbor Rule