In July, the Federal Deposit Insurance Corporation (the “FDIC”) proposed a change (discussed here and here) to certain provisions of its securitization safe harbor rule (the “Rule”) to eliminate the requirement that the securitization documents for non-grandfathered bank-sponsored securitizations not otherwise subject to Regulation AB (i.e. non-public transactions) require compliance with the disclosure and periodic reporting requirements of Regulation AB. If adopted in its proposed form, this would significantly ease the compliance burden associated with non-public bank-sponsored ABS issuances, potentially resulting in a greater volume of such transactions.
The proposed change was published in the Federal Register on August 22, 2019, with a comment period that ended on October 21, 2019. Comments received by the FDIC included comments from several financial services industry groups, including the American Bankers Association (“ABA”), the Structured Finance Association (“SFA”), the Mortgage Bankers Association (“MBA”) and SIFMA, as well as advocacy groups like the Americans for Financial Reform Education Fund (“AFREF”) and Better Markets.
Comments from industry groups were generally supportive of the proposed change. ABA noted that the change represented an “appropriate balance of protection of the Deposit Insurance Fund and facilitation of insured institutions’ prudent participation in the private securitization markets” and was “a reasonable step to improve the flow of credit in the residential mortgage market and other financial sectors appropriate for securitization funding.”
SFA, MBA and SIFMA were also supportive of the rule change. SFA’s comment letter noted that the change would eliminate the inconsistent regulation of sponsors of non-public ABS transactions (bank sponsors generally being subject to Regulation AB’s disclosure requirements; non-bank sponsors generally being exempt). MBA and SIFMA noted the proposed rule change would afford relief with respect to bank-sponsored offerings of residential mortgage-backed securities, for which Regulation AB’s disclosure (particularly loan-level disclosure) requirements have “significantly and unnecessarily limited the number of private RMBS transactions sponsored by” FDIC-insured banks.
However, SFA’s letter noted the divergent concerns of its membership regarding the more general question of whether Regulation AB’s disclosure requirements should apply to ABS issuances (whether bank-sponsored or otherwise) made in reliance on Rule 144A. SFA’s investor members generally support such an extension of the disclosure requirements under Regulation AB, while SFA’s issuer members do not.
While expressing support for the FDIC’s proposed change to the Rule, industry groups noted other ongoing regulatory concerns, including capital requirements and other regulatory impediments to bank participation in the securitization markets. SIFMA’s comment letter identified in particular the Rule’s loan-level data disclosure requirements (which are generally parallel to but not wholly consistent with the requirements of Regulation AB) and the Rule’s reserve fund requirement as areas for future consideration.
Comment letters were not uniformly supportive of the proposed change to the Rule. AFREF argued that bank-sponsored issuances of RMBS should not be exempted from the loan-level reporting requirements of Regulation AB merely by virtue of being non-public, noting that “the great majority of the mortgage securitizations” thought to have triggered the 2008-09 financial crisis were private offerings. Similarly, Better Markets, recalling the role of ABS and MBS markets in the financial crisis, argued that the proposed change “will increase systemic risk and decrease investor protection” and that the FDIC had not adequately justified the change or meaningfully evaluated the related risks identified in the Notice of Proposed Rulemaking, such as “reduced information flow to investors, less efficient allocation of credit, potential losses to investors, including banks and increased vulnerability of the mortgage market to periods of financial stress.”
The FDIC is expected to consider the comment letters received and could issue a final rule during the first quarter of 2020.