Since its adoption in 2010, the Federal Deposit Insurance Corporation’s (the “FDIC”) securitization safe harbor rule, 12 C.F.R. § 360.6 (the “Rule”), which relates to the treatment of financial assets transferred in connection with a securitization or participation transaction, has required that securitization documents require compliance with Regulation AB of the Securities and Exchange Commission (“SEC”), 17 C.F.R. §§ 229.1100 et. seq. (“Regulation AB”) even in circumstances where Regulation AB by its terms would not apply to the issuance of obligations backed by such financial assets. On January 30, 2020, the FDIC finalized and adopted changes (the “Adopted Change”) to certain provisions of the Rule to eliminate such requirement where Regulation AB would not otherwise apply to the related securitization transaction.
This change will be effective 30 or 60 days following publication in the Federal Register (as determined by the Office of Management and Budget) and will modify section 360.6(b)(2)(i)(A) of the Rule to read as follows:
In the case of an issuance of obligations that is subject to [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 maybe omitted if the issuer includes a statement in the offering documents disclosing that the specific information is otherwise unavailable.
The Adopted Change is the same as the language originally proposed by the FDIC in its notice of proposed rulemaking issued earlier this year. 84 Fed. Reg. 43732 (Aug. 22, 2019).
For bank-sponsored 144A securitizations relying on the Rule, the Adopted Change eliminates the Regulation AB disclosure requirement. As a result, loan-level data that Regulation AB requires to be provided to investors for securitizations of certain asset classes (e.g. auto loans and mortgages) will no longer need to be disclosed in these private securitizations. In adopting this change, the FDIC noted the disincentive provided by the previous requirement to bank-sponsored securitizations seeking to be compliant with the Rule and the policy objective of removing this barrier to securitization transactions, in particular as related to RMBS transactions. The FDIC does not believe that the removal of this barrier will result in any adverse effect on the safety and soundness of insured depository institutions.
The Adopted Change is great news for future bank sponsors of securitizations and could result in an increase in the amount of bank-sponsored ABS and RMBS because, unlike under the Rule in effect prior to the Adopted Change, the documents governing a private placement or an issuance not otherwise required to be registered are no longer required to mandate compliance with Regulation AB. Bank sponsors of existing private securitizations will need to review the amendment standards in their existing transaction documents (entered into prior to the Adopted Change) to determine whether an amendment is possible to remove the requirement to provide Regulation AB style reporting as now permitted by the Adopted Change.
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