FDIC Clarifies Securitization Safe Harbor Risk Retention Compliance | Practical Law

FDIC Clarifies Securitization Safe Harbor Risk Retention Compliance | Practical Law

A final rule became effective that clarifies how the FDIC's securitization safe harbor rule, which requires risk retention for asset-backed securities (ABS), interacts with final ABS risk retention rules under Section 941 of the Dodd-Frank Act.

FDIC Clarifies Securitization Safe Harbor Risk Retention Compliance

Practical Law Legal Update w-001-3885 (Approx. 3 pages)

FDIC Clarifies Securitization Safe Harbor Risk Retention Compliance

by Practical Law Finance
Published on 27 Jan 2016 • USA (National/Federal)
A final rule became effective that clarifies how the FDIC's securitization safe harbor rule, which requires risk retention for asset-backed securities (ABS), interacts with final ABS risk retention rules under Section 941 of the Dodd-Frank Act.
On January 25, 2016, a final rule issued by the FDIC became effective that clarifies how the FDIC's securitization safe harbor rule, which requires risk retention for asset-backed securities (ABS), interacts with final ABS risk retention rules promulgated under Section 941 of the Dodd-Frank Act (see Practice Note, ABS Risk Retention under Dodd-Frank).
Paragraph (b)(5)(i) of the FDIC’s securitization safe harbor rule (12 CFR 360.6(b)(5)(i)) requires that banks retain a part of the credit risk of a securitization transaction for which they act as sponsors (referred to as the Credit Risk Retention Condition) in order to avail themselves of the FDIC's securitization safe harbor.
For banks that comply with the FDIC securitization safe harbor rules, the FDIC promises not to interfere with securitized assets and securitization cash flows, including payments to investors under ABS, if the institution on whose balance sheet securitized assets are held comes under FDIC receivership.
The Credit Risk Retention Condition has two sections:
  • 12 CFR 360.0(b)(5)(i)(A), which is the FDIC's own risk retention requirement that is effective until the Dodd-Frank risk retention rules are fully phased-in.
  • 12 CFR 360.0(b)(5)(i)(B), which references the Dodd-Frank risk retention rules, codified under Section 15G of the Securities Exchange Act (15 U.S.C. § 78a), incorporating these rules into the FDIC's securitization safe harbor.
The final FDIC rule clarifies that:
  • To be complaint with the Credit Risk Retention Condition, the documentation of a securitization must require the requisite retention of the economic interest. The final FDIC rule clarifies that, if the documentation of a securitization correctly reflects the Credit Risk Retention Condition, actual non-compliance with the provision required to be in the documentation will not, by itself, disqualify the transaction from the securitization safe harbor. This clarification ensures that sponsors that fail to retain the required economic interest under the documentation will not disqualify the entire transaction from the securitization safe harbor.
  • To obtain the benefit of the FDIC securitization safe harbor:
    • Residential mortgage-backed securities (RMBS) issued on or after December 24, 2015 must be compliant with the Dodd-Frank risk retention rules; and
    • All other ABS must be compliant with the Dodd-Frank risk retention rules beginning December 24, 2016.
    • Issuances of ABS that closed prior to these effective dates must comply with the risk retention provisions of paragraph (b)(5)(i)(A) of the FDIC securitization safe harbor rules.
The FDIC believed that this clarification was necessary given the confusion caused by Federal Register-publication compliance/effective date conventions.
For more information on the FDIC’s securitization safe harbor rules, see Practice Note, Summary of the Dodd-Frank Act: Securitization: The FDIC's Bank Securitization Safe Harbor Rules.