The Federal Deposit Insurance Corporation (FDIC) has finalized its ‘safe harbor’ rule intended to address the treatment of assets during the potential insolvency of an FDIC-backed institution. The rule was developed to ensure assets transferred by these financial institutions into a securitization pool are protected from the insolvency proceedings of that institution.
The existing safe harbor rule, which was scheduled to expire on Sept. 30, had been extended earlier this year. However, included in the final rule was a five percent risk-retention mandate for all ABS, including CMBS, that would be applied to insured depository institutions (IDIs) that serve as originators in securitizations. The retention could either be five percent of each credit tranche or five percent of the underlying financial assets.
“Efforts to better align interests and strengthen our markets are important, but reforms should be coordinated by all regulators and considered by asset class to accommodate inherently different markets,” said Lisa Pendergast, president, CRE Finance Council. “We are concerned that today’s action creates confusion, uncertainty and implementation issues by providing a temporary and ‘one-size-fits-all’ approach that would impede a commercial real estate recovery at this critical time.”
The FDIC rule approved today also included an ‘auto-conform’ provision that would reconcile it with any jointly prescribed rules created in accordance with the new Dodd-Frank law. As such, the FDIC rule would be limited to just IDIs and would be in effect until completion of rulemaking under Dodd-Frank, which requires a joint rulemaking on risk retention within 270 days of enactment, followed by a one-year implementation for residential mortgage-backed securities and two years for all other asset classes.
“We are seeing some important signs of private lending and investing in the CMBS market, and market participants remain committed to improving safeguards that could be universally adopted,” Pendergast said. “Such an uncoordinated approach is problematic and effectively creates a two-tiered system between FDIC insured institutions and all other lenders.”
On July 1, CRE Finance Council filed a comment letter urging the FDIC to carefully consider the negative effect any piecemeal reforms could have on providing certainty and confidence for market participants, particularly investors, to ensure that regulatory actions would support rather than hinder a commercial real estate recovery. In that letter, CRE Finance Council urged the FDIC and other financial regulators to work within the new and coordinated framework directed in the Dodd-Frank Act, which requires regulators to promulgate rules ‘jointly’ and ‘by asset class’ to ensure that securitization reforms are coordinated and customized.
For similar reasons, the final rule was opposed by Acting Comptroller of the Currency (OCC) John Walsh. The OCC, along with the Federal Reserve, SEC and FDIC, are responsible for promulgating rules related to the commercial mortgage-backed securities (CMBS) market.
The CRE Finance Council's membership remains united in its view that the alignment of the interests of lenders, issuers and investors in the securitization process is essential. The Council has long been an advocate within the industry for enhanced transparency and sound practices, and the association will continue to work with market participants and policymakers to build on the unparalleled level of disclosure and other safeguards that exist in the CMBS market.
For more information, visit www.crefc.org.