On January 21, 2015, the FDIC proposed a rule that would clarify the requirements of its Securitization Safe Harbor Rule regarding retention of an economic interest in the credit risk of securitized financial assets upon and following the effective date of the credit risk retention regulations adopted under Section 15G of the Securities Exchange Act (Section 15G Regulations).
Adopted in 2010, the FDIC’s Securitization Safe Harbor Rule sets forth criteria under which the FDIC, in its capacity as receiver or conservator of an insured depository institution and in the exercise of its authority to repudiate contracts, will not recover or reclaim financial assets transferred in connection with a securitization transaction. Among those criteria is a credit risk retention requirement. The Securitization Safe Harbor Rule requires that, prior to the effective date of the Section 15G Regulations, the documents governing the securitization transaction must require that the sponsor retain an economic interest either (a) in the form of 5 percent of each of the credit tranches sold or transferred to the investors or (b) in a representative sample of the securitized financial assets equal to not less than 5 percent of the principal amount of the financial assets at transfer. However, upon the effective date of the Section 15G Regulations, the Section 15G Regulations will exclusively govern the credit risk retention requirement under the Securitization Safe Harbor Rule.
The final Section 15G Regulations were adopted in October 2014 and were published in the Federal Register on December 24, 2014. The Federal Register identifies the effective date of the Section 15G Regulations as February 23, 2015 and specifies the compliance dates as follows:
- Compliance with respect to asset-backed securities (ABS) collateralized by residential mortgages is required beginning December 24, 2015; and
- Compliance with respect to all other classes of ABS is required beginning December 24, 2016.
There has been confusion among market participants on several aspects pertaining to the relationship between the FDIC’s Securitization Safe Harbor Rule and the new Section 15G Regulations. In response to this confusion, the FDIC proposes to revise the Securitization Safe Harbor Rule to make the following points clear:
“(i) In order to qualify for the benefits of the Securitization Safe Harbor Rule, the documents governing the issuance of asset-backed securities in a securitization transaction must require retention of an economic interest in the credit risk of the financial assets relating to the securitization transaction in compliance with the Section 15G Regulations if such issuance occurs upon or following the date on which compliance with Section 15G is required for such type of securitization transaction;
(ii) The Securitization Safe Harbor Rule does not require inquiry as to whether the sponsor or other applicable party in fact complies with risk retention requirements of the documentation; and
(iii) The Securitization Safe Harbor Rule requirements as to the Section 15G Regulations do not require changes to the securitization documents governing asset-backed security issuances that are closed prior to the date on which compliance with Section 15G is required for such type of issuances."
Comments on the proposed rule will be due 60 days following their date of publication in the Federal Register.
For a copy of the proposed rule, click here.