Securitization Safe Harbor Rule, 12724-12731 [2020-02936]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 85, Number 43 (Wednesday, March 4, 2020)]
[Rules and Regulations]
[Pages 12724-12731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02936]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 360

RIN 3064-AF09


Securitization Safe Harbor Rule

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The FDIC is amending its securitization safe harbor rule, 
which relates to the treatment of financial assets transferred in 
connection with a securitization transaction, in order to eliminate a 
requirement that the securitization documents require compliance with 
Regulation AB of the Securities and Exchange Commission in 
circumstances where Regulation AB by its terms would not apply to the 
issuance of obligations backed by such financial assets.

DATES: Effective May 4, 2020.

FOR FURTHER INFORMATION CONTACT: Phillip E. Sloan, Counsel, Legal 
Division, (703) 562-6137, [email protected]; George H. Williamson, 
Manager, Division of Resolutions and Receiverships, (571) 858-8199, 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

    The policy objective of this final rule (final rule) is to remove 
an unnecessary barrier to securitization transactions, in particular 
the securitization of residential mortgages, without adverse effects on 
the safety and soundness of insured depository institutions (IDIs).
    The FDIC is revising the Securitization Safe Harbor Rule by 
removing a disclosure requirement that was established by the 
Securitization Safe Harbor Rule when it was amended and restated in 
2010.\1\ As used in this final rule, ``Securitization Safe Harbor 
Rule'' refers to the FDIC's securitization safe harbor rule titled 
``Treatment of financial assets transferred in connection with a 
securitization or participation'' and codified at 12 CFR 360.6.
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    \1\ The prior version of the Securitization Safe Harbor Rule, 
which the Securitization Safe Harbor Rule amended and restated, was 
adopted in 2000.
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    The Securitization Safe Harbor Rule addresses circumstances that 
may arise if the FDIC is appointed receiver or conservator for an IDI 
that has sponsored one or more securitization transactions.\2\ If a 
securitization satisfies one of the sets of conditions established by 
the Securitization Safe Harbor Rule, the Rule provides that, depending 
on which set of conditions is satisfied, either (i) in the exercise of 
its authority to repudiate or disclaim contracts, the FDIC shall not 
reclaim, recover or recharacterize as property of the institution or 
receivership the financial assets transferred as part of the 
securitization transaction, or (ii) if the FDIC repudiates the 
securitization agreement pursuant to which financial assets were 
transferred and does not pay damages within a specified period, or if 
the FDIC is in monetary default under a securitization for a specified 
period due to its failure to pay or apply collections received by it 
under the securitization documents, certain remedies will be available 
to investors on an expedited basis.
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    \2\ The Securitization Safe Harbor Rule also addresses transfers 
of assets in connection with participation transactions. Since the 
revision included in the Rule does not address participations, this 
release does not include further reference to participations.
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    The FDIC is removing the requirement of the Securitization Safe 
Harbor Rule that the documents governing a securitization transaction 
require compliance with Regulation AB of the Securities and Exchange 
Commission, 17 CFR part 229, subpart 229.1100 (Regulation AB) in 
circumstances where, under the terms of Regulation AB itself, 
Regulation AB is not applicable to the transaction. As discussed below, 
Regulation AB imposes significant asset-level disclosure requirements 
in connection with registered securitization issuances. While the SEC 
has not applied the Regulation AB disclosure requirements to private 
placement transactions, the Securitization Safe Harbor Rule has 
required (except for certain grandfathered transactions) that these 
disclosures be required as a condition for eligibility for the 
Securitization Safe Harbor Rule's benefits. The net effect appears to 
have been a disincentive for IDIs to sponsor securitizations of 
residential mortgages that are compliant with the Rule.
    The FDIC's rationale for establishing the disclosure requirements 
in 2010 was to reduce the likelihood of structurally opaque and 
potentially risky mortgage securitizations or other securitizations 
that could pose risks to IDIs. In the ensuing years, a number of other 
regulatory changes have been implemented that have also contributed to 
the same objective. As a result, 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 the

[[Page 12725]]

policy objective of preventing a buildup of opaque and potentially 
risky securitizations such as occurred during the pre-crisis years, 
particularly where the imposition of such a requirement may serve to 
restrict overall liquidity.

II. Background

    The Securitization Safe Harbor Rule sets forth criteria under 
which, in its capacity as receiver or conservator of an IDI, the FDIC 
will not, in the exercise of its authority to repudiate contracts, 
recover or reclaim financial assets transferred in connection with 
securitization transactions. Asset transfers that, under the 
Securitization Safe Harbor Rule, are not subject to recovery or 
reclamation through the exercise of the FDIC's repudiation authority 
include those that pertain to certain grandfathered transactions, such 
as, for example, asset transfers made on or prior to December 31, 2010, 
that satisfied the conditions (except for the legal isolation condition 
addressed by the Securitization Safe Harbor Rule as then in effect) for 
sale accounting treatment under generally accepted accounting 
principles (GAAP) in effect for reporting periods prior to November 15, 
2009, and that satisfied certain other requirements. In addition, the 
Securitization Safe Harbor Rule provides that asset transfers that are 
not grandfathered, but that satisfy the conditions (except for the 
legal isolation condition addressed by the Securitization Safe Harbor 
Rule) for sale accounting treatment under GAAP in effect for reporting 
periods after November 15, 2009, and that pertain to a securitization 
transaction that satisfies all other conditions of the Securitization 
Safe Harbor Rule (such asset transfers, together with grandfathered 
asset transfers, are referred to collectively as Safe Harbor Transfers) 
will not be subject to FDIC recovery or reclamation actions through the 
exercise of the FDIC's repudiation authority. For any securitization 
transaction in respect of which transfers of financial assets do not 
qualify as Safe Harbor Transfers but which transaction satisfies all of 
its other requirements, the Securitization Safe Harbor Rule provides 
that, in the event the FDIC as receiver or conservator remains in 
monetary default for a specified period under a securitization due to 
its failure to pay or apply collections, or repudiates the 
securitization asset transfer agreement and does not pay damages within 
a specified period, certain remedies can be exercised by investors on 
an expedited basis.
    In adopting the amended and restated Securitization Safe Harbor 
Rule in 2010, the FDIC stated that the conditions of the Rule were 
designed to ``provide greater clarity and transparency to allow a 
better ongoing evaluation of the quality of lending by banks and reduce 
the risks to the DIF from opaque securitization structures and the 
poorly underwritten loans that led to onset of the financial crisis.'' 
\3\ As part of its effort to achieve this goal, the FDIC included 
paragraph (b)(2) in the Securitization Safe Harbor Rule, which imposes 
extensive disclosure requirements relating to securitizations. These 
requirements include paragraph (b)(2)(i)(A) which, prior to the 
effectiveness of this final rule, mandates that the documents governing 
a securitization require disclosure of information as to the 
securitized financial assets on a financial asset or pool level and on 
a security level that, at a minimum, complies with the requirements of 
Regulation AB, whether or not the transaction is a registered issuance 
otherwise subject to Regulation AB.
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    \3\ 75 FR 60287, 60291 (Sept. 30, 2010).
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    The SEC first adopted Regulation AB in 2004 as a new, principles-
based set of disclosure items specifically tailored to asset-backed 
securities. The regulation was intended to form the basis of disclosure 
for both Securities Act registration statements and Exchange Act 
reports relating to asset-backed securities. In April 2010, the SEC 
proposed significant revisions to Regulation AB and other rules 
regarding the offering process, disclosure and reporting for asset-
backed securities. Among such revisions were the adoption of specified 
asset-level disclosures for particular asset classes and the extension 
of the Regulation AB disclosure requirements to exempt offerings and 
exempt resale transactions for asset-backed securities (ABS). As 
adopted in 2014, Regulation AB retained the majority of the proposed 
asset-specific disclosure requirements but did not apply the disclosure 
requirements to exempt offerings. The disclosure requirements of 
Regulation AB vary, depending on the type of securitization issuance. 
The most extensive disclosure requirements relate to residential 
mortgage-backed securitizations (RMBS). These requirements became 
effective in November 2016.
    While the Securitization Safe Harbor Rule requirement for 
compliance with Regulation AB applies to all securitizations, the 
preamble to the amended and restated Securitization Safe Harbor Rule in 
2010 makes clear that the FDIC was focused mostly on RMBS. The preamble 
states that ``securitization as a viable liquidity tool in mortgage 
finance will not return without greater transparency and clarity 
because investors have experienced the difficulties provided by the 
existing model of securitization. However, greater transparency is not 
solely for investors, but will serve to more closely tie the 
origination of loans to their long-term performance by requiring 
disclosures of performance.'' \4\ In a different paragraph, the 
preamble states that ``[t]he evident defects in many subprime and other 
mortgages originated and sold into securitizations requires attention 
by the FDIC to fulfill its responsibilities as deposit insurer . . . 
The defects and misalignment of incentives in the securitization 
process for residential mortgages were a significant contributor to the 
erosion of underwriting standards throughout the mortgage finance 
system.'' \5\
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    \4\ Id. at 60291.
    \5\ Id. at 60289.
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    When the FDIC adopted the Securitization Safe Harbor Rule in 2010, 
none of the regulatory reforms listed below had been adopted. In the 
absence of the protection afforded by those and other regulations 
adopted since 2010, the FDIC believed it was appropriate to include a 
disclosure condition that would inhibit the proliferation of risky 
securitizations, and thus required that, as a condition to safe harbor 
protection, privately placed transactions comply with Regulation AB 
disclosure requirements whether or not the SEC applied that regulation 
to the transactions. Since the adoption of the Securitization Safe 
Harbor Rule, there have been numerous regulatory developments that have 
the effect of limiting or precluding poorly underwritten, risky 
securitizations, particularly securitizations of residential 
mortgages.\6\
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    \6\ These include, among others, (i) liquidity regulations 
adopted in 2014 by the FDIC, the Board of Governors of the Federal 
Reserve System (FRB) and the Office of Comptroller of the Currency 
(OCC) (12 CFR part 329, 12 CFR part 249, 12 CFR part 50); (ii) 
capital rules adopted by the FDIC, the FRB and the OCC that became 
effective in 2014 (12 CFR part 324, 12 CFR part 271, 12 CFR part 3); 
(iii) the ability to repay rule adopted by the Bureau of Consumer 
Financial Protection (CFPB) pursuant to section 129C of the Truth in 
Lending Act (TILA) (15 U.S.C. 1639c); (iv) the Integrated Mortgage 
Disclosures Rules adopted by the CFPB in 2013 pursuant to the Truth 
in Lending Act, the Real Estate Settlement Procedures Act (RESPA), 
and sections 1032(f), 1098, and 1100A of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act); (v) the loan 
originator compensation regulation adopted in 2013 by the CFPB 
pursuant to sections 129B and 129C of TILA (15 U.S.C. 1639B & 
1639C); (vi) the appraisal rule adopted by the FDIC and other 
regulators in 2013 pursuant to Section 129H of TILA (15 U.S.C. 
1639h); (vii) the requirements for residential mortgage loan 
servicers adopted by the CFPB in 2013 pursuant to title XIV of the 
Dodd-Frank Act, which amended Regulation X (implementing RESPA) and 
Regulation Z (implementing TILA); and (viii) the interim final rule 
establishing new requirements for appraisal independence adopted by 
the FRB in 2010 pursuant to section 129E of TILA (15 U.S.C. 1639e).
    Other provisions of the Securitization Safe Harbor Rule and 
regulatory developments also reduce the risks of risky mortgage 
securitizations and complex opaque structures. For example, 
securitization credit risk retention requirements, compliance with 
which is a condition set forth in a different section of the Rule, 
have been adopted and become effective. The Securitization Safe 
Harbor Rule also includes a specific disclosure requirement relating 
to re-securitizations.


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[[Page 12726]]

    The other disclosure requirements of paragraph (b)(2) of the 
Securitization Safe Harbor Rule are unaffected by the final rule and 
continue to strongly promote the Rule's goal of preventing opaque and 
poorly underwritten securitizations. Among these are Sec.  
360.6(b)(2)(ii)(A), which is applicable to RMBS and requires that prior 
to issuance of the RMBS obligations, the sponsor must disclose loan 
level information about the underlying mortgages including, but not 
limited to, loan type, loan structure, interest rate, maturity and 
location of property; Sec.  360.6(b)(2)(i)(B), which requires that the 
securitization documents mandate that on or prior to issuance of 
obligations there is disclosure of numerous matters, including the 
credit and payment performance of the obligations and the structure of 
the securitization, the capital or tranche structure of the 
securitization, priority of payments and subordination features, 
representations and warranties made with respect to the financial 
assets, the remedies and time permitted for breach of the 
representations and warranties, liquidity facilities and any credit 
enhancements permitted by the Securitization Safe Harbor Rule, any 
waterfall triggers or priority of payment reversal features, and 
policies governing delinquencies, servicer advances loss mitigation and 
write-offs of financial assets; Sec.  360.6(b)(2)(i)(D), which 
requires, in connection with the issuance of the securitization 
obligations, that the documents require disclosure of the nature and 
amount of compensation paid to originators, the sponsor, rating 
agencies, and certain other parties, and the extent to which any risk 
of loss on the underlying assets is retained by any of them; Sec.  
360.6(b)(ii)(B), which requires that prior to issuance of the 
securitization obligations in an RMBS transaction, the sponsors affirm 
compliance with applicable statutory and regulatory standards for 
origination of mortgage loans, including that the mortgages are 
underwritten at the fully indexed rate relying on documented income, 
and that sponsors disclose a third party due diligence report on 
compliance with the representations and warranties made with respect to 
the financial assets; Section 360.6(b)(ii)(C), which requires that the 
documents governing RMBS transactions require that prior to the 
issuance of obligations (and while the obligations are outstanding), 
servicers disclose any ownership interest by the servicer or an 
affiliate of the servicer in other whole loans secured by the same real 
property that secures a loan included in the financial asset pool; and 
Sec.  360.6(b)(i)(C), which requires ongoing provision of information 
relating to the credit performance of the financial assets. Other 
provisions of the Securitization Safe Harbor Rule limit the capital 
structure of RMBS to six credit tranches; prohibit most forms of 
external credit enhancement of obligations issued in an RMBS; in the 
case of RMBS, require that servicing and other agreements provide 
servicers with authority, subject to oversight, to mitigate losses on 
the financial assets and to modify assets and take other action to 
maximize the value and minimize losses on the securitized mortgage 
loans, and in general require that servicers take action to mitigate 
losses not later than 90 days after an asset first becomes delinquent; 
require that RMBS documents include incentives for servicing, including 
loan restructuring and loss mitigation activities that maximize the net 
present value of the financial assets; in the case of RMBS, require 
that the securitization documents mandate that fees and other 
compensation to rating agencies are payable over the five-year period 
after first issuance of the securitization obligations based on the 
performance of surveillance services, with no more than 60 percent of 
the total estimated compensation due at closing; and in the case of 
RMBS, require that the documents require the sponsor to establish a 
reserve fund, for one year, equal to five percent of cash proceeds of 
the securitization payable to the sponsor, to cover repurchases of 
financial assets required due to the breach of representations and 
warranties.
    As noted in the NPR (as defined below) and discussed in more detail 
under III. Discussion of Comments, FDIC staff has been told that 
potential IDI sponsors of RMBS have found that it is difficult to 
provide certain information required by Regulation AB, either because 
the information is not readily available to them or because there is 
uncertainty as to the information requested to be disclosed and, thus, 
uncertainty as to whether the disclosure would be deemed accurate. FDIC 
staff was also advised that due to the provision of Sec.  
360.6(b)(2)(i)(A) that requires that the securitization documents 
require compliance with Regulation AB in private transactions, private 
offerings of RMBS obligations that are compliant with the 
Securitization Safe Harbor Rule are similarly challenging for sponsors, 
and that the net effect has been to discourage IDIs from participating 
in the securitization of residential mortgages, apart from selling the 
mortgages to, or with a guarantee from, the government-sponsored 
housing enterprises.
    On August 22, 2019, the FDIC published in the Federal Register a 
notice of proposed rulemaking (NPR) in which it proposed to amend Sec.  
360.6(b)(2)(i)(A) by removing, in circumstances where under the terms 
of Regulation AB itself, Regulation AB is not applicable to the 
transaction, the requirement that the documents governing 
securitization transactions require disclosure of information as to the 
securitized financial assets on a financial asset or pool level and on 
a security level that, at a minimum, complies with Regulation AB. As 
amended, such disclosure is required under Sec.  360.6(b)(2)(i)(A) only 
for an issuance of obligations that, pursuant to Regulation AB itself, 
is subject to Regulation AB.
    The comment period under the NPR ended on October 21, 2019. The 
FDIC received ten comment letters in total: Five from trade 
organizations; one from an IDI; two from individuals; one from a 
financial reform advocacy group; and one from a financial market public 
interest group. These comment letters are available on the FDIC's 
website. The FDIC considered all of the comments it received when 
developing the final rule, which is unchanged from the rule proposed in 
the NPR.

III. Discussion of Comments

    A majority of the comment letters support the amendment to the 
Securitization Safe Harbor Rule. All of the trade group and IDI letters 
support removing the requirement to impose Regulation AB compliance on 
transactions where Regulation AB is not otherwise applicable. This 
requirement was characterized by the letters as ``an insurmountable 
obstacle'', a ``barrier'', ``a regulatory impediment'', a 
``disincentive'' to IDI sponsorship of RMBS, and a ``roadblock'' to 
increased

[[Page 12727]]

RMBS issuance by IDIs. In addition, three of the letters observed that 
aligning the Regulation AB disclosure requirement contained in the 
Securitization Safe Harbor Rule with the SEC rule as to the scope of 
transactions to which Regulation AB disclosure applies would level the 
playing field for sponsorship of securitizations between IDIs, which 
prior to the final rule are required by the Securitization Safe Harbor 
Rule to comply with Regulation AB in private transactions, and 
securitization sponsors not subject to the Securitization Safe Harbor 
Rule, which are not required to comply with Regulation AB in connection 
with private transactions.\7\ Indeed, the lack of alignment of the 
disclosure rules governing private IDI securitization sponsors and non-
IDI securitization sponsors was viewed as so significant that one trade 
organization indicated that although its investor members would prefer 
obtaining Regulation AB disclosure in private transactions, the 
investor members generally joined with its other members in supporting 
the amendment ``based on the principle that the regulations applicable 
to industry participants should be consistent.''
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    \7\ As noted below, National Credit Union Administration Rules 
also require compliance with Regulation AB in private transactions.
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    Several of the letters expressed the view that removal of this 
Regulation AB requirement would help promote an increase in credit 
available to the mortgage market. Some of the letters also maintained 
that this amendment to the Securitization Safe Harbor Rule would 
increase liquidity for mortgage and other asset classes and lower costs 
and improve choices for consumers.
    One commenter stated that the proposal was consistent with 
principles regarding the need for increased private securitization set 
forth in a Treasury Department September 2019 report on capital markets 
\8\ and in a separate Treasury Department paper on housing finance 
reform.\9\ This letter also stated that the proposal would provide 
benefits to the economy by weaning the mortgage market off of its 
significant dependency on government backed securitization programs and 
thus reduce the risk to taxpayers.
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    \8\ www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
    \9\ https://home.treasury.gov/system/files/136/Treasury-Housing-Finance-Reform-Plan.pdf.
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    The letters from the individuals, the financial reform advocacy 
group and the public interest group were critical of the rule change. 
One of the letters asserted that an expected result of the change, an 
increase in RMBS, was not an appropriate goal since, according to the 
letters, RMBS was a primary cause of the 2008 financial crisis.\10\ The 
letter stated the FDIC should include a finding that adequate 
safeguards protecting investors and the financial system remain in 
place, and demonstrate a dire shortage of residential mortgage credit 
sufficient to justify the need for the amendment. Another letter argued 
that while the NPR identified certain risks that could arise from the 
amendment to the Securitization Safe Harbor Rule, it did not adequately 
explain why these risks (reduced information flow to investors, a less 
efficient allocation of credit, increased risk of potential losses to 
investors, and, if private placements increased and became more risky, 
an increase in vulnerability of the mortgage market to a period of 
financial stress) were minimized by reference to post-financial crisis 
regulatory changes that were not specifically identified in the NPR. 
This letter also criticized the NPR for not explaining how such 
regulatory changes would prevent the amendment to the Securitization 
Safe Harbor Rule from leading to the conditions that led to the 
financial crisis.
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    \10\ One of the letters cited two chapters of an FDIC 
publication (FDIC, Crisis and Response: An FDIC History, 2008-2013, 
Chapters 1 and 4 (2017) (avail. at https://www.fdic.gov/bank/historical/crisis/)) as support for the view that excessive RMBS 
issuance was a leading cause of the 2008 financial crisis. In fact, 
while noting that increased RMBS issuance was one of several causes 
of the financial crisis, the applicable parts of the chapters 
focused on subprime and other high-risk alternative type mortgages, 
as well as relaxed lending standards, as significant contributors to 
the problems it discussed.
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    The FDIC did note that a possible effect of removing an unnecessary 
barrier to IDI sponsorship of RMBS was an increase in RMBS issuance, 
but it does not follow that the FDIC is attempting with the final rule 
to cure a deficiency of mortgage credit. The FDIC believes that the 
reasons articulated in support of the rule are sound, and do not 
require a further demonstration of a shortage of mortgage credit. In 
addition, as for the claim that the NPR did not address the risks 
identified in the NPR, such as a possible increase in the vulnerability 
of the mortgage market to a period of financial stress in the event 
that the amendment results in an increase in risky, privately placed 
securitizations, the NPR explained that ``[i]n this respect, a 
significant part of the problems experienced with RMBS during the 
crisis were attributable to the proliferation of subprime and so-called 
alternative mortgages as underlying assets for those RMBS. The FDIC 
believes that a number of post-crisis regulatory changes make it 
unlikely that substantial growth of similar types of RMBS would occur 
again.'' \11\ This analysis applies equally to the other potential 
risks cited in the preceding paragraph that were noted in the NPR.
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    \11\ 84 FR 43732, 43735.
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    One of these letters also asserted that the proposal did not 
address the danger that the amendment could increase activity in other 
potentially risky asset classes and did not adequately quantify the 
effects of the proposed rule. This letter also stated that the FDIC's 
suggestion that the amendment would increase the willingness of IDIs to 
sponsor securitizations was speculative, that any reduction of burden 
is irrelevant because it is not the FDIC's mission to reduce burden, 
and that the likely impact of the proposal included in the NPR must be 
evaluated in light of the other current deregulatory efforts.\12\
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    \12\ A letter also stated the amendment would result in an 
inconsistency with regulations of the National Credit Union 
Administration (NCUA), which adopted a securitization safe harbor in 
2017 which includes the Regulation AB requirement. The FDIC was 
pleased that the NCUA adopted a securitization safe harbor rule that 
was consistent with the Securitization Safe Harbor Rule, and notes, 
in response to this letter, that the NCUA is free to maintain that 
consistency, if it chooses to do so, by adopting an amendment 
similar to the final rule.
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    While the FDIC appreciates the concerns as to the effect of the 
final rule expressed in these letters, it does not believe that the 
concerns are justified. In adopting the final rule, the FDIC evaluated 
the numerous other significant disclosure requirements identified in 
II. Background and has concluded that the Securitization Safe Harbor 
Rule continues to require robust and adequate disclosure to investors. 
As noted in the NPR, a significant part of the problems experienced 
with RMBS during the financial crisis was attributable to the 
proliferation of subprime and alternative mortgages (sometimes referred 
to as ``nontraditional mortgages''). As further noted in the NPR, a 
major part of the problems with RMBS that surfaced during the financial 
crisis arose from poorly underwritten loans and a significant portion 
of these problems was attributable to relaxed lending standards and the 
making of mortgages to persons who were unable to repay the loans. As 
also noted in the FDIC study referenced in one of the letters,\13\ the 
originate to distribute model, under which sponsoring institutions 
retained limited or no exposure to the mortgages that they sold to 
securitization vehicles, was a major source of the proliferation of 
poorly underwritten mortgage loans and risky RMBS issuances. The

[[Page 12728]]

regulatory developments mentioned in II. Background, which (among other 
items) strongly motivate lenders to ascertain a borrower's ability to 
pay, require that sponsors retain a portion of the risk of mortgages 
that they securitize, imposed new appraisal requirements and mandated 
more easily understandable disclosures, address these problems and 
other objections from commenters cited above, and have made it very 
unlikely that substantial growth of similar types of RMBS securitized 
in risky transactions will re-occur.\14\
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    \13\ See footnote 10, supra.
    \14\ Several of these regulatory developments (the ability to 
pay regulation and the capital and liquidity regulations) are 
presumably well-recognized by investors, as they are discussed in 
two of the comment letters that were critical of the NPR.
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    The FDIC agrees with the comment that the NPR did not offer an 
analysis of whether the amendment to the Securitization Safe Harbor 
Rule could increase activity in other ``potentially risky asset 
classes.'' The discussion in the NPR, as well as the discussion in this 
final rule, has focused on RMBS because FDIC staff found no evidence 
that the Regulation AB compliance requirement of the Securitization 
Safe Harbor Rule had prevented would-be IDI sponsors from sponsoring 
securitizations of other asset classes that are subject to Regulation 
AB.
    The comment letters reinforced the FDIC's understanding that RMBS 
market participants have found it difficult or impossible to comply 
with several requirements of Regulation AB, with the result that the 
Securitization Safe Harbor Rule requirement for compliance with 
Regulation AB in private transactions has posed an obstacle to IDI 
sponsorship of RMBS. The Regulation AB disclosure requirements 
identified in the comment letters as difficult or impossible to comply 
with include the back-end debt-to-equity income ratio disclosure 
requirement, the requirements for disclosure of appraisals, automated 
valuation model results and credit scores obtained by any credit party 
or credit party affiliate, and the inconsistency of data elements with 
the standards set forth in the Mortgage Industry Standards Maintenance 
Organization. In addition, according to one of the trade association 
letters, some of the required Regulation AB disclosure fields cannot be 
included in publicly accessible securities filings without creating 
``unacceptable and reputational risks for RMBS sponsors and privacy 
risks to borrowers.''
    Comment letters that criticized the change to the Regulation AB 
provision of the Securitization Safe Harbor Rule suggested that the 
amendment to the Securitization Safe Harbor Rule was intended to 
enhance proliferation of RMBS. It is important to note that by removing 
a regulatory requirement that poses an obstacle to IDI access to a 
segment of the capital markets, and acknowledging that such removal can 
be expected to increase RMBS sponsorship (and possibly other asset 
class sponsorship) by IDIs, the FDIC should not be interpreted as 
enunciating a policy goal to increase such IDI participation. The 
amendment should be viewed as clearing or leveling the field from 
unnecessary regulatory interference, rather than as an action whose 
goal is the increase of such activity.\15\ If such an increase occurs, 
it will occur due to individual decisions of market participants, and 
all such issuances will be subject to the suite of post-2010 
regulations mentioned in II. Background. The FDIC believes that if such 
market decisions result in increased RMBS activity, the remaining 
disclosure requirements of the Securitization Safe Harbor Rule together 
with the other requirements of the Rule, when coupled with the other 
post-crisis regulatory developments, will promote sustainable, prudent 
securitization sponsorship by IDIs to at least the same extent as such 
goals were promoted by the Securitization Safe Harbor Rule Regulation 
AB requirement when it was adopted in 2010.
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    \15\ As noted above, one letter critical of the amendment 
referred to the analysis in the NPR that the amendment would reduce 
costs for IDIs and stated that reduction of compliance costs should 
not be considered an element of the FDIC's mission. The NPR cited, 
and this Supplementary Information cites, the reduction in costs as 
part of its analysis of expected effects. While a policy to remove 
unnecessary regulatory requirements is indeed reflected in the NPR 
(and in this Supplementary Information), it is not the case (and the 
NPR and this Supplementary Information do not suggest) that the 
FDIC's mission is to generally reduce compliance costs, without 
regard to the substance of the regulation necessitating such 
compliance costs.
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    As noted, one commenter asserted that the analysis that the 
amendment will increase private RMBS is speculative. The FDIC notes 
that the NPR did not predict an increase in RMBS. The NPR stated that 
if market participants' perceptions are correct that the rule could 
increase insured banks' willingness to participate in private RMBS 
activity, then the proposed rule ``could (emphasis added) result in an 
increase in the dollar volume of privately issued RMBS . . .'' \16\
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    \16\ 84 FR 43732, 43735.
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    One of the comment letters also asserted that the statement that 
some associated increase in U.S. economic input would be expected to 
accompany an increased volume of mortgage credit is a ``bold assertion 
apparently based on speculation for which the FDIC offers no support''. 
In fact, the NPR states that the possibility of increased economic 
activity is, in part, because ``the imputed value of credit services 
banks provides is a component of measured GDP. The purchase of a new 
home also may be accompanied by the purchase of other household goods 
and services that contribute to an increase in overall economic 
activity.'' 84 FR 43732, 43735. This comment letter also states that 
the FDIC must consider the impact of the proposal ``in light of the 
deregulatory environment that currently prevails.'' As noted in the NPR 
and as discussed in this Supplementary Information, an array of 
important regulatory safeguards now exist that should minimize the 
likelihood of a recurrence of a substantial volume of risky 
securitizations backed by poorly underwritten mortgages.
    The comment letters that criticized the amendment also asserted 
that if the FDIC adopts the amendment to the Securitization Safe Harbor 
Rule, the FDIC will be acting contrary to its mandate to protect the 
Deposit Insurance Fund (DIF) and that, in not applying Regulation AB to 
transactions to which Regulation AB does not otherwise apply, the FDIC 
lost sight of the fact that it has a different mandate than the SEC. 
The FDIC does not agree with these assertions. In adopting the final 
rule, the FDIC carefully considered the risks to IDIs and to the DIF, 
and also reviewed the array of disclosure requirements that will remain 
part of the Securitization Safe Harbor Rule as well as the regulatory 
safeguards described in II. Background. The FDIC also notes that the 
final rule will enable IDIs to diversify their sources of funding and 
enhance options for obtaining liquidity for mortgage loans. Comment 
letters support this analysis. According to one letter, the amendment 
would benefit ``IDIs, who would see additional risk management paths 
that would allow them to maintain lending through a variety of economic 
circumstances.'' Indeed, another letter evaluated the amendment to the 
Regulation AB provision as ``an appropriate balance of protection of 
the Deposit Insurance Fund and facilitation of insured institutions' 
prudent participation in the private securitization markets.''

IV. The Final Rule

    The final rule amends Sec.  360.6(b)(2)(i)(A) of the Securitization 
Safe Harbor Rule by removing the requirement that the documents 
governing securitization transactions

[[Page 12729]]

require disclosure of information as to the securitized financial 
assets on a financial asset or pool level and on a security level that, 
at a minimum, complies with Regulation AB in circumstances where under 
the terms of Regulation AB itself, Regulation AB is not applicable to 
the transaction. As amended, such disclosure is required under Sec.  
360.6(b)(2)(i)(A) only in the case of an issuance of obligations that 
is subject to Regulation AB.\17\
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    \17\ The amendment to this provision also includes certain 
technical revisions required by the Federal Register, including a 
revised form of citation to Regulation AB, and deletion of the 
specification that the requirement for Regulation AB compliance 
refers to Regulation AB as in effect at the relevant time and that 
the requirement applies to successor public issuance requirements to 
Regulation AB.
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V. Expected Effects

A. Effects of the Final Rule

    The final rule could increase the willingness of IDIs to sponsor 
the issuance of ABS that are exempt from registration with the SEC. 
Feedback from market participants suggests that the final rule may be 
most likely to affect incentives to issue private RMBS, since the 
disclosure requirements of Regulation AB are most extensive for 
residential mortgages.
    If these market perceptions are correct, the final rule could 
result in an increase in the dollar volume of privately issued RMBS, 
presumably increasing the total flow of credit available to finance 
residential mortgages in the United States. For context, total issuance 
of RMBS secured by 1-4 family residential mortgages was approximately 
$1.3 trillion in 2018.\18\ About $1.2 trillion of this total were 
agency issuances, issued through the government sponsored housing 
enterprises, or GSEs: The Federal National Mortgage Association (Fannie 
Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the 
Government National Mortgage Association (Ginnie Mae). About $100 
billion of RMBS were non-agency issuances, which includes both 
securities registered with the SEC (public issuances), if any, and 
private issuances. This level of private-label activity is low compared 
to pre-financial crisis levels.\19\ The FDIC does not currently have a 
basis for quantifying the amount of any increase in RMBS issuance by 
IDIs that might result from the final rule, because additional factors 
affect the demand and supply for private-label RMBS. For example, the 
current level of private-label RMBS issuance volume may suggest that 
demand for non-agency RMBS is still weak in the aftermath of the 
financial crisis. In addition, the scope of participation of non-IDI 
sponsors of RBMS could affect the volume of RMBS sponsorship activities 
for IDIs, particularly if non-IDI institutions not currently involved 
in sponsoring private-label RMBS begin to do so.
---------------------------------------------------------------------------

    \18\ Inside Mortgage Finance, 2019 Mortgage Market Statistical 
Annual.
    \19\ See id. Annual non-agency single family RMBS issuance 
reached a high of about $1.2 trillion in 2005.
---------------------------------------------------------------------------

    The FDIC cannot definitively identify the set of FDIC-insured banks 
that have sponsored private-label RMBS. Moreover, for any bank that has 
sponsored private RMBS, some may have chosen to make the Regulation AB 
disclosures necessary for the safe harbor, and some may have chosen not 
to make such disclosures, but instead may have chosen to disclose to 
investors the risks associated with the exercise of the FDIC's 
receivership authorities. Information about such disclosure choices 
made by private RMBS issuers also is not readily available to the FDIC.
    Based on the information available to it, the FDIC believes that 
the number of IDIs directly affected by the final rule is extremely 
small. The FDIC identified fewer than ten IDI sponsors of private 
placements of securitizations of asset classes subject to Regulation AB 
in 2017 and 2018.
    Increased issuance sponsored by insured banks of private RMBS, to 
the extent it is not offset by corresponding reductions in the amount 
of mortgages they hold in portfolio, would result in an increase in the 
supply of credit available to fund residential mortgages. An increase 
in the supply of mortgage credit would be expected to benefit borrowers 
by increasing mortgage availability and decreasing mortgage costs. 
While problematic or predatory mortgage practices can harm borrowers, a 
significant body of new regulations exists to prevent such practices, 
as described in II. Background. Given this, it is more likely that any 
increase in mortgage credit resulting from the final rule would be 
beneficial to borrowers.
    Some associated increase in measured U.S. economic output would be 
expected to accompany an increased volume of mortgage credit. This is 
in part because the imputed value of the credit services that banks 
provide is a component of measured GDP. The purchase of a new home also 
may be accompanied by the purchase of other household goods and 
services that contribute to an increase in overall economic activity.
    Institutions affected by the final rule will incur reduced 
compliance costs as a result of not having to make the otherwise 
required disclosures. Based on the methodology used in its most recent 
Information Collection Resubmission request for part 360.6 of the FDIC 
regulations, the FDIC estimates that the reduction in compliance costs 
associated with the final rule for the IDIs identified as having been 
involved in private ABS issuances in 2017 and 2018 would have been 
about $4.9 million annually.
    To the extent private-label ABS is being issued now in conformance 
with the disclosure requirements that are be removed under the final 
rule, a potential cost of the final rule is that the information 
available to investors about the credit quality of the assets 
underlying these ABS could be reduced. As a general matter, a reduction 
in information available to investors can result in a less efficient 
allocation of credit and increased risk of potential losses to 
investors, including banks. A related potential cost is that if 
privately placed securitization products were to become more widespread 
and risky as a result of the final rule, the vulnerability of the 
mortgage market to a period of financial stress could increase. In this 
respect, a significant part of the problems experienced with RMBS 
during the crisis were attributable to the proliferation of subprime 
and so-called alternative mortgages as underlying assets for those 
RMBS. As previously discussed, the FDIC believes that a number of post-
crisis regulatory changes make it unlikely that substantial growth of 
similar types of RMBS would occur again.

B. Alternatives Considered

    The FDIC considered alternatives to the final rule, and has 
concluded that the amendment set forth in the final rule represents the 
most appropriate option for achieving the policy goal of removing an 
unnecessary barrier to sponsorship of securitizations by IDIs. One 
alternative considered was to try to isolate particular disclosure 
fields in Regulation AB that posed obstacles to compliance and to 
remove those fields. However, the FDIC determined that it was not the 
proper agency to edit and rewrite a securities law disclosure 
regulation. Such an exercise was also determined to be unnecessary 
based on the FDIC's analysis that other provisions of the 
Securitization Safe Harbor Rule, together with regulatory initiatives 
adopted since the Rule was adopted in 2010, made the continued 
application of paragraph (b)(2)(i)(A) to privately placed 
securitization transactions unnecessary for so long as Regulation AB is 
not otherwise applicable to such transactions. In this connection, the 
FDIC notes that in the section titled ``V.

[[Page 12730]]

Request for Comment'', the NPR requested comments as to whether the 
results intended to be achieved by the proposed rule should be achieved 
as set forth in the proposed rule or by way of different modifications 
to the Securitization Safe Harbor Rule, but received no comments in 
response to this inquiry.

VI. Administrative Law Matters

A. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et 
seq.) (PRA) the FDIC may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid Office of Management and Budget (OMB) control number.
    As discussed above, the final rule revises certain provisions of 
the Securitization Safe Harbor Rule, which relates to the treatment of 
financial assets transferred in connection with a securitization or 
participation transaction, in order to eliminate a requirement that the 
securitization documents require compliance with Regulation AB of the 
Securities and Exchange Commission in circumstances where Regulation AB 
by its terms would not apply to the issuance of obligations backed by 
such financial assets.
    The FDIC has determined that the final rule would revise an 
existing collection of information (3064-0177). The information 
collection requirements contained in this proposed rulemaking will be 
submitted by the FDIC to OMB for review and approval under section 
3507(d) of the PRA (44 U.S.C. 3507(d)) and Sec.  1320.11 of the OMB's 
implementing regulations (5 CFR 1320.11).
    The FDIC revises this information collection as follows:
    Title of Information Collection: Conservator or Receiver of 
Financial Assets Transferred by an Insured Depository Institution in 
Connection with a Securitization or Participation After September 30, 
2010.
    OMB Control Number: 3064-0177.
    Affected Public: Insured Depository Institutions.
    Burden Estimate:

----------------------------------------------------------------------------------------------------------------
                                                                                     Estimated
  Information collection (IC)                        Estimated       Number of       time per        Estimated
          description            Type of burden      number of     responses per     response      annual burden
                                                    respondents     respondent         (hrs)           (hrs)
----------------------------------------------------------------------------------------------------------------
Sec.   360.6(b)(2)(i)(D)......  Disclosure......              14               6               3             252
Sec.   360.6(b)(2)(ii)(B).....  Disclosure......               3               2               1               6
Sec.   360.6(b)(2)(ii)(C).....  Disclosure......               3               2               1               6
Sec.   360.6(c)(7)............  Recordkeeping...              14               6               1              84
                                                 ---------------------------------------------------------------
    Total Estimated Annual      ................  ..............  ..............  ..............             348
     Burden (Hrs).
----------------------------------------------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rule, an agency prepare and make available for 
public comment a final regulatory flexibility analysis describing the 
impact of the rulemaking on small entities.\20\ A regulatory 
flexibility analysis is not required, however, if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. The Small Business Administration 
(SBA) has defined ``small entities'' to include banking organizations 
with total assets less than or equal to $600 million.\21\ Generally, 
the FDIC considers a significant effect to be a quantified effect in 
excess of five percent of total annual salaries and benefits per 
institution, or 2.5 percent of total non-interest expenses. The FDIC 
believes that effects in excess of these thresholds typically represent 
significant effects for FDIC-insured institutions. For the reasons 
described below and under section 605(b) of the RFA, the FDIC certifies 
that this rule will not have a significant economic effect on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \20\ 5 U.S.C. 601 et seq.
    \21\ The SBA defines a small banking organization as having $600 
million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201. 
In its determination, the ``SBA counts the receipts, employees, or 
other measure of size of the concern whose size is at issue and all 
of its domestic and foreign affiliates.'' See 13 CFR 121.103. 
Following these regulations, the FDIC uses a covered entity's 
affiliated and acquired assets, averaged over the preceding four 
quarters, to determine whether the covered entity is ``small'' for 
the purposes of RFA.
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    The FDIC insures 5,256 depository institutions, of which 3,891 are 
considered small entities for the purposes of RFA.\22\ The final rule 
will only affect institutions currently engaged in arranging, issuing 
or acting as servicer for privately-placed securitizations of asset-
backed securities, or likely to do so as a result of the final rule. 
The FDIC knows of no small, FDIC-insured institution that is currently 
acting in this capacity. The FDIC believes that acting as arranger, 
issuer or servicer for privately placed ABS requires a level of 
resources and capital markets expertise that would preclude a 
substantial number of small, FDIC-insured institutions from becoming 
involved in these activities.
---------------------------------------------------------------------------

    \22\ FDIC Call Report, September 30, 2019.
---------------------------------------------------------------------------

    Accordingly, the FDIC concludes that the final rule will not have a 
significant impact on a substantial number of small entities. For the 
reasons described above and pursuant to 5 U.S.C. 605(b), the FDIC 
certifies that the final rule will not have a significant economic 
impact on a substantial number of small entities.

C. The Congressional Review Act

    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major rule.'' 
\23\ If a rule is deemed a ``major rule'' by the OMB, the Congressional 
Review Act generally provides that the rule may not take effect until 
at least 60 days following its publication.\24\
---------------------------------------------------------------------------

    \23\ 5 U.S.C. 801 et seq.
    \24\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in--(A) 
an annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and

[[Page 12731]]

export markets.\25\ The OMB has determined that this final rule is a 
major rule for purposes of the Congressional Review Act. As required by 
the Congressional Review Act, the FDIC will submit the final rule and 
other appropriate reports to Congress and the Government Accountability 
Office for review.
---------------------------------------------------------------------------

    \25\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

D. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \26\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The FDIC has sought to present the 
final rule in a simple and straightforward manner.
---------------------------------------------------------------------------

    \26\ Public Law 106-102, sec. 722, 113 Stat. 1338, 1471 (1999).
---------------------------------------------------------------------------

D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA), in determining the effective date 
and administrative compliance requirements for new regulations that 
impose additional reporting, disclosure, or other requirements on IDIs, 
each federal banking agency must consider, consistent with principles 
of safety and soundness and the public interest, any administrative 
burdens that such regulations would place on IDIs, including small 
depository institutions, and customers of IDIs, as well as the benefits 
of such regulations.\27\ In addition, section 302(b) of RCDRIA requires 
new regulations and amendments to regulations that impose additional 
reporting, disclosures, or other new requirements on IDIs generally to 
take effect on the first day of a calendar quarter that begins on or 
after the date on which the regulations are published in final 
form.\28\
---------------------------------------------------------------------------

    \27\ 12 U.S.C. 4802(a).
    \28\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

    The FDIC has determined that the final rule will not impose 
additional reporting, disclosure, or other requirements; therefore, the 
requirements of RCDRIA do not apply.

E. Treasury and General Government Appropriations Act, 1999--Assessment 
of Federal Regulations and Policies on Families

    The FDIC has determined that the final rule will not affect family 
well-being within the meaning of Sec.  654 of the Treasury and General 
Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L.105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 360

    Savings associations.

Authority and Issuance

    For the reasons set forth in the preamble, the Federal Deposit 
Insurance Corporation amends 12 CFR part 360 as follows:

PART 360--RESOLUTION AND RECEIVERSHIP RULES

0
1. The authority citation for part 360 continues to read as follows:

    Authority: 12 U.S.C. 1821(d)(1),1821(d)(10)(C), 1821(d)(11), 
1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2); Sec. 401(h), 
Pub. L. 101-73, 103 Stat. 357.


0
2. In Sec.  360.6, revise paragraph (b)(2)(i)(A) to read as follows:


Sec.  360.6  Treatment of financial assets transferred in connection 
with a securitization or participation.

    (b) * * *
    (2) * * *
    (i) * * *
    (A) In the case of an issuance of obligations that is subject to 17 
CFR part 229, subpart 229.1100 (Regulation AB of the Securities and 
Exchange Commission (Regulation AB)), the documents shall require that, 
on or prior to issuance of obligations and at the time of delivery of 
any periodic distribution report and, in any event, at least once per 
calendar quarter, while obligations are outstanding, information about 
the obligations and the securitized financial assets shall be disclosed 
to all potential investors at the financial asset or pool level, as 
appropriate for the financial assets, and security-level to enable 
evaluation and analysis of the credit risk and performance of the 
obligations and financial assets. The documents shall require that such 
information and its disclosure, at a minimum, shall comply with the 
requirements of Regulation AB. Information that is unknown or not 
available to the sponsor or the issuer after reasonable investigation 
may be omitted if the issuer includes a statement in the offering 
documents disclosing that the specific information is otherwise 
unavailable;
* * * * *

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on January 30, 2020.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2020-02936 Filed 3-3-20; 8:45 am]
 BILLING CODE 6714-01-P