FDIC Issues Final Safe Harbor Rule

Preemption . . . party over?


The final rule amending 12 C.F.R. § 360.6 (the “Securitization Rule”) has made for a tough month for us and it is still not over. We felt very strongly at the beginning of year that the FDIC would do the inevitable. Accounting and legal professionals practicing securities law said they were going to do it—and now, some critics say, “They’ve really done it.”

Thwre now is a face behind MERS people. Only less than 30 days ago the Board of Directors of the Federal Deposit Insurance Corporation (“FDIC”) resolved by a four-to-one vote to issue a final rule amending 12 C.F.R. § 360.6 (the “Securitization Rule”) relating to The FDIC’s treatment, as conservator or receiver, of financial assets transferred by an insured depository institution(“IDI”) in connection with a securitization or participation.

The FDIC’s role as conservator or receiver, of financial assets transferred in connection with a securitization or participation.

Securitization Rule, adopted in 2000, was premised, that the FDIC capitalized on the opportunity to address at the same time perceived structural failures inherent in the “originate to sell” securitization model widely believed to have contributed to the recent financial meltdown.

Securitization is the fraud and not the Robo Hobo’s who contract government agents are. . It’s just like any other sale of assets by an originator, may become suspect if implemented when an originator is on the brink of bankruptcy. The potential for such suspect actions, however, is not unique to securitization transactions. The same issues would arise, for example, if on the eve of bankruptcy an originator sold, or borrowed money by encumbering, a factory or equipment and similarly sought to dissipate the sale or loan proceeds. Such questionable uses of proceeds are more appropriately addressed by preference and fraudulent conveyance laws

If your out for the count consider securitization that increases overall value by providing a new source of financing, the capital markets, whose rates are systematically lower than the rates at which many companies commonly borrow. So long as the added transaction costs are less than the interest saved by using securitization instead of secured financing, there is a net gain. Last year, changes in accounting rules for securitizations called into question the effectiveness of the Securitization Rule. Modifications to GAAP through FAS 166 and 167 have made it significantly more difficult to achieve sale accounting treatment for transfers of assets in securitizations.

Specifically, the change required that the underlying assets of some bank sponsored securitizations be consolidated on the balance sheets of the sponsoring banks. In addition to raising questions about the treatment of existing transactions that are required to be brought on selling institutions’ balance sheets, this development has also raised questions about whether, and under what circumstances, on-balance sheet securitizations should be covered by the legal isolation safe harbor, considering that many such transactions require legal isolation certainty in order to obtain external ratings or to satisfy investors’ due diligence concerns.3 And so, in an effort to address many of the above concerns, November, 2009, the FDIC issued a transitional interim rule protecting existing securitizations complying with the Securitization Rule until March 31, 2010 at which time a new rule would be put in place

The current interim rule grandfathers all  changes issued prior to March 31, 2010that otherwise comply with the old safe harbor rule, so long as those securitizations meet the requirements for sale treatment under GAAP prior to the effective date of the new Financial Accounting Statements 166 and 167 (January 1, 2010).

M.Soliman
expert.witness@live.com