MBA Letter Lauds FDIC Proposed ‘Safe Harbor’ Rulemaking

The Mortgage Bankers Association, in an Oct. 21 letter to the Federal Deposit Insurance Corp., expressed strong support for a proposed rulemaking that would remove barriers for issuance of private residential mortgage-backed securities without jeopardizing safety and soundness of RMBS sponsors or investors.

The FDIC Notice of Proposed Rulemaking would revise the agency’s Securitization Safe Harbor Rule (https://www.federalregister.gov/documents/2019/08/22/2019-15536/securitization-safe-harbor-rule.) The proposal aims to align the FDIC Rule’s disclosure requirements with current Securities and Exchange Commission standards.

The Rule, as amended in 2010, requires insured depository institutions sponsoring certain securitizations to comply with the loan-level disclosure requirements of the SEC’s Regulation AB in order to protect financial assets transferred as a result of a securitization agreement. The Rule applies both to registered (public) and non-registered (private) offerings. This requirement was consistent with the amendments to Regulation AB then being proposed by the SEC which would have required privately offered securitizations eligible for resale under Rule 144A of the Securities Act of 1933, as amend, as well as securitizations sold privately pursuant to Rule 506 of Regulation D, to be subject to the same disclosure requirements as public offerings. 

However, when the SEC amended Regulation AB in 2014, those amendments did not require Rule 144A Issuances or Reg D Issuances to have the same disclosure requirements as public offerings. The Rule was not amended in a similar fashion by the FDIC, creating disparities between the FDIC and SEC disclosure requirements for private offerings.

The NPR, if adopted, would remove the disclosure requirement in the Rule that private offerings sponsored by IDIs include disclosures satisfying Regulation AB, thereby aligning disclosure requirements between the FDIC and the SEC.

In the letter to SEC Chair Jelena McWilliams, MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills said such a proposed alignment would establish greater consistency for securitization disclosures across varying types of sponsors, which in turn would facilitate a more level playing field throughout the market. He noted over the past decade, the private RMBS market has been largely dormant, leaving a void in the housing finance system that has been filled primarily by government-backed sources of capital.

“While private capital continues to support home financing through sources such as portfolio lending, mortgage insurance and credit risk transfer programs, the lack of a vibrant private RMBS market has limited the options available to reduce taxpayer exposure to mortgage credit risk,” Mills said. “A more robust private RMBS market would increase the diversity of housing finance capital sources, making the system more resilient and promoting greater liquidity, while also lowering costs and improving choices for borrowers.”

MBA said it echoes sentiments expressed in the NPR regarding the need for a safe, sustainable private RMBS market. “Any increase in private RMBS issuance should occur with appropriate regulatory oversight to ensure that borrowers, investors and other market participants are not subject to undue risk,” the letter said. “Securitization structures should be transparent and foster aligned incentives across the various parties to the transaction. Detailed and accurate disclosures are an important component of this framework and IDIs should be full participants in the reemergence of this market.” 

MBA noted the current securitization disclosure requirements of Regulation AB for RMBS, however, have been an “insurmountable barrier” to issuance in public RMBS transactions, since the effectiveness of those requirements and has significantly and unnecessarily limited the number of private RMBS transactions sponsored by IDIs. MBA said it is not aware of any public RMBS offerings in the U.S. since the effectiveness of the SEC’s 2014 amendments to Regulation AB governing RMBS transactions.

“The reason for this complete absence of public RMBS issuance is readily apparent,” MBa said. “Many of the 270 asset-level data elements required to be disclosed under Regulation AB for RMBS are poorly defined (eg., back-end DTI ratio) or unavailable (eg., appraisals, AVM and credit scores obtained by any transaction party or its affiliates). In many cases, data elements do not follow the standards set forth by the Mortgage Industry Standands Maintenance Organization. In the case of the data element for the property location, investors demand more detail than can be provided on the SEC’s EDGAR website and there is no means to provide that more specific detail in a public RMBS offering without incurring securities law liability. Given these barriers to issuance it is clear why RMBS are only being offered in the U.S. in private offerings.”

MBA said it believes RMBS transactions should be governed by disclosure standards that produce detailed, consistent and accurate information for investors, while also ensuring this information is easily determined and readily available to be provided by issuers.

“Disclosure standards that meet these objectives would remain in place even if the Regulation AB requirements were removed for private securitizations sponsored by IDIs,” MBA said. “Outside of the requirement for compliance with Regulation AB, the Rule contains other disclosure requirements that will be unchanged if the revisions in the NPR take effect. These disclosure requirements include numerous data elements addressing the structure of the securitization, the loan-level characteristics of the underlying assets, the performance of the underlying assets, representations and warranties, policies governing delinquencies, and compensation paid to various parties, among others. This information, which generally has been required by investors in non-IDI sponsored RMBS transactions since the financial crisis, will allow for thorough investor diligence while facilitating compliance by IDI sponsors.”

MBA said it supports the NPR as it strikes an appropriate balance regarding the required disclosures and would eliminate a barrier for IDIs that wish to enter the private RMBS market. Aligning the Rule with the SEC’s implementation of Regulation AB has many potential benefits, such as encouraging increased participation in the private RMBS market, promoting harmonized regulatory requirements across federal agencies, and increasing liquidity in the secondary mortgage market, which ultimately leads to lower costs for homeowners across the country.

“The proposal, together with more favorable regulatory capital treatment for RMBS sponsored by IDIs, could promote a substantial increase in private RMBS transaction participation by IDIs and the associated desired effects,” MBA said.