FDIC Amends Securitization Safe Harbor Rule Disclosure Requirements

The FDIC recently adopted a final rule amending the Securitization Safe Harbor Rule (Rule) by removing disclosure requirements insured depository institutions (IDIs) were required to comply with to take advantage of safe harbors provided by the Rule for financial assets transferred in certain securitization transactions.  The final rule will take effect 30 or 60 days after its publication in the Federal Register. 

The Rule establishes the criteria under which the FDIC, in its capacity as receiver or conservator of an IDI, will not exercise its authority to repudiate contracts, recover, or reclaim financial assets transferred in connection with securitizations.  The disclosure requirements the final rule removes were added to the Rule in 2010 as new conditions IDIs were required to comply with to take advantage of safe harbors provided by the Rule for financial assets transferred in certain securitization transactions.  Pursuant to these requirements, documents governing a securitization had to require disclosure information as to the securitized financial assets on a financial asset or pool level and on a security level that, at a minimum, complied with the SEC’s Regulation AB, whether or not Regulation AB, by its terms, applied to the transaction. 

The FDIC’s intent in establishing the disclosure requirements was to reduce the likelihood of “structurally opaque and potentially risky securitizations” as had occurred prior to the financial crisis.  Since the adoption of the disclosure requirements, however, there have been “numerous regulatory developments that have the effect of limiting or precluding poorly underwritten, risky securitizations, particularly securitizations of residential mortgages.”  As a result, the FDIC determined that it is no longer clear that compliance with the public disclosure requirements of Regulation AB in a private placement or in an issuance not otherwise required to be registered is needed to achieve its policy objectives, particularly where such requirements may have the effect of restricting overall liquidity.  According to the FDIC, the amendments could increase the dollar volume of privately issued residential mortgage-backed securities, presumably increasing the total flow of credit to finance residential mortgages.