FDIC Seeks to Toughen Rules on Banks’ Securitizations (Update3)
By Jody Shenn and Theo Francis
bloomberg.com
Dec. 15 (Bloomberg) -- The Federal Deposit Insurance Corp. is proposing new rules on banks’ sales of securities backed by loans and leases, including limits on the pay of companies involved, after past practices helped create the worst financial crisis since the Great Depression.
The U.S. agency’s board voted to seek comment on possible conditions for bank securitizations at a meeting today in Washington. Banks would have to follow the guidance to win a so- called safe harbor that prevents the FDIC from seizing the assets bundled into their securitizations when it winds down failed institutions, making the bonds attractive to investors.
Policy makers are seeking to transform the almost $4 trillion U.S. market for securitizations not created by government-supported entities. Risky lending enabled by asset- backed bonds and investor losses on debt including subprime- mortgage securities led to a collapse in the world’s economies.
“We’re trying to strike a middle ground here” between those who want to eliminate securitization completely and those who want little to change, FDIC Chairman Sheila Bair said at the meeting. “I look forward to eventually finalizing strong, common-sense standards.”
The U.S. House last week passed a financial-overhaul bill that includes a requirement that loan originators and companies that package debt into securities retain 5 percent of the credit risk, among additional changes including ones related to disclosures. The Senate is considering similar modifications.
Compensation Block
The FDIC’s board agreed to issue a so-called advance notice of proposed rulemaking, in which the agency will ask for comment on 35 questions and offer a version of what the securitization conditions might look like, according to an e-mailed copy of the planned notice.
It plans that approach rather than other options that could move more quickly toward final regulations because of interference from other regulators, said Joshua Rosner, an analyst in New York at investment research firm Graham Fisher & Co., said.
“The agency’s push to create smart, rational market- and investor-friendly standards seems to be running into opposition from other regulators who have repeatedly demonstrated their inability to separate what’s good for banks and issuers with what’s good for markets,” Rosner said in a telephone interview.
In its “sample” rule, the FDIC suggests, among other things, blocking for home-loan bonds any more than 80 percent of the compensation for lenders, securitization sponsors, credit raters and bond underwriters from being paid upfront, with the rest due over five years and based on asset performance.
Risk Retention
It also proposes requiring sponsors to retain 5 percent of credit risk of all securitizations, as well as barring from securities any home loans less than a year old, or that don’t rely on documented borrower income.
Comptroller of the Currency John Dugan raised objections at the meeting to several ideas that he said might be part of rule changes. Those included: a ban on external support for issuances; the creation of the same disclosure requirements for private placements as public offerings; six-class limits for some securitizations; and the requirements for risk retention and the seasoning of mortgages ahead of securitizations.
Dugan and Office of Thrift Supervision Acting Director John Bowman, two of the five members of the FDIC’s board, said the agency may hurt banks competitiveness if it doesn’t act in tandem with other regulators such as the Securities & Exchange Commission and Federal Reserve, and may be best served waiting for lawmakers to finish deliberations.
Industry Reforms
“It would be far preferable to have rules that would apply across the board, as envisioned by the legislative proposals, than adopt a rule that applies only to insured depository institutions,” Dugan said.
The House legislation, approved 223-202, was weakened from a proposal to require as much as 10 percent risk retention, and allowed regulators to exempt commercial-mortgage bonds whose riskiest slices are bought by third parties doing due diligence.
The industry also is seeking to reform itself in some ways, with the American Securitization Forum today releasing guidelines for so-called representations and warranties on loans put into residential mortgage-backed securities. Such contract clauses can require lenders or issuers to repurchase debt that fails to match promises on its quality.
The New York-based trade group argued that the guidelines would help address the objectives of proposals that would require issuers or originators to retain slices of securitizations. The FDIC’s ideas include objectionable ones, the ASF said in a statement.
Credit Needs
“A number of the proposals presented today may inadvertently slow the restart of the securitization markets at a time when American consumers and small- and medium-sized business most need the credit availability that these critical markets provide,” Tom Deutsch, deputy executive director of the securitization group, said in an e-mailed statement.
New accounting rules sparked concern among bond buyers and rating firms that the FDIC would be able to tap the pools of debt underlying credit-card securities to protect its deposit insurance fund after banks fail. That halted sales of such bonds in October and early November after issuance totaled $10.7 billion in September, according to data compiled by Bloomberg.
The rules from the Financial Accounting Standards Board took effect for fiscal years starting after Nov. 15, and require issuers to include assets and liabilities of securitized debt on their balance sheets in many circumstances. The FDIC last month agreed to grant safe harbors for bonds sold through March, unfreezing the market for credit-card securities, with Bair saying she wanted to seize on the opportunity to improve practices before granting a further extension.
Taking Comment
Bair said today that the sample conditions that the FDIC is considering are consistent with lawmakers’ proposals, though the agency will consider suggested changes from regulators, consumer groups, lenders and others, with a particular focus on the thoughts of “the buy-side community” of debt investors.
The comment period will last for 45 days after the publication of the rulemaking notice in the Federal Register, which is expected in about two weeks, Greg Hernandez, an FDIC spokesman, said in an e-mail.
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net; Theo Francis in Washington at tfrancis14@bloomberg.net.
Last Updated: December 15, 2009 15:23 EST |
