FDIC Safe Harbor Proposal May Impact Securitization Ratings: S&P

A proposed rule from the Federal Deposit Insurance Corp. (FDIC) could have implications on the potential outcome of the insolvency of a bank with has securitized assets, according to Standard & Poor’s research. The proposed FDIC rule arrived in response to Financial Accounting Standards Board (FASB) limitations on the treatment of assets being transferred for securitization as sales for accounting purposes. The FDIC issued a “securitization rule” to treat transfers by banks of financial assets for securitization purposes as true sales. The rule essentially provides safe harbor for assets being transferred for securitization, so the FDIC cannot seize the assets in the event of the originating entity’s insolvency. The FDIC also adopted an interim final rule that established a transitional period during which eligible securitizations were grandfathered into the safe harbor. The FDIC in May proposed to replace the amended securitization rule with a new rule, which imposes a number of new conditions on safe harbor eligibility. The proposed changes are already not going over well in the market. Prior to the S&P announcement the safe harbor amendments were challenged as potentially damaging investor confidence and also drew fire from industry experts. “We believe the proposed rule, if adopted, could affect our analysis of bank-originated securitizations,” S&P said. For example, securitizations issued before Sept. 30, 2010 are grandfathered into the existing safe harbor, but uncertainty remains as to how the provision would apply to securities that existing master trusts issue after the cutoff date in transactions that aren’t eligible for the new safe harbor, according to S&P. “If originators use existing master trusts for post-Sept. 30 issuances that do not comply with the proposed rule, it is unclear how the collateral would be shared between securities issued before and after that date in the event of an insolvency of the bank originator,” S&P said. The rating agency said it would examine whether any steps are taken to protect the existing security holders’ rights in the master trust collateral, and whether these steps are adequate to isolate such collateral from the insolvency of the originator, when analyzing these transactions. Additionally, while the proposed rule restates the existing safe harbor for asset transfers treated as sales under generally accepted accounting principals (GAAP), S&P noted that the effect of Financial Accounting Standards (FAS) 166 and 167 means most of the transfers will likely no longer be treated as sales under GAAP. “For transfers that are treated as sales for accounting purposes and meet the new conditions imposed by the proposed rule, the rule would operate as the securitization rule currently does; that is, it would confirm the legal isolation of the securitized assets from the institution’s assets, and support, in our view, a rating on these transactions solely based on the creditworthiness of the assets,” S&P said. However, asset transfers that are sales for GAAP purposes but that don’t meet the proposed rule’s requirements would not be eligible to benefit from the safe harbor after Sept. 30. Some bank originators might decide not to pursue safe harbor if their asset transfers achieve sale treatment for GAAP purposes — and logically, so they think, beyond the reach of the FDIC acting as receiver or conservator. “We would generally review these true sale opinions and consider them in our analysis of these transactions to assess whether we believe the assets have been legally isolated from the originator, supporting a rating on these transactions solely based on the assets’ creditworthiness, in accordance with our criteria,” S&P said. Write to Diana Golobay.

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