Financial Crisis News Center

House Legislation Requires FASB to Study Securitization Standards

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The House has passed legislation requiring the Federal Reserve Board, in consultation with the SEC, to conduct a study and report to Congress on the impact on individual classes of asset-backed securities of FASB’s new securitization accounting standards, FAS 166 and 167, and the Act’s new credit risk retention requirements.

The Wall Street Reform and Consumer Protection Act, HR 4173, says that the report must make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending. The study would be required to be completed in 90 days.

Securitization Safe Harbor ANPRM Approved

This story appeared in Bank Digest.

The Federal Deposit Insurance Corp. Board of Directors has approved an Advance Notice of Proposed Rulemaking (ANPR) Regarding Safe Harbor Protection for Treatment by the FDIC as Conservator or Receiver of Financial Assets Transferred by an Insured Depository Institution in Connection With a Securitization or Participation. Since 2000 and the adoption of 12 C.F.R. Part 360.6, the FDIC has provided important safe harbor protections to securitizations by confirming that in the event of a bank failure, the FDIC would not try to reclaim loans transferred into a securitization so long as an accounting sale had occurred. However, with the Financial Accounting Standards Board June 2009 changes in FAS 166 and 167, most securitizations will no longer meet the off-balance sheet standards for sale treatment when they take effect on Jan. 1, 2010. The ANPR requests comments on the standards that should be adopted to provide safe harbor treatment in connection with participations and securitizations issued after March 31, 2010.

CCH Briefing Paper Examines House Legislation

The CCH Editorial Staff of banking and securities law analysts has authored a detailed overview titled, "House Passes Wall Street Reform Act." From the introduction:

On December 11, 2009, the U.S. House of Representatives passed legislation to restructure the financial services regulatory system, the Wall Street Reform and Consumer Protection Act of 2009 (HR 4173), by a vote of 223-202. As discussed below, the sweeping array of reforms includes the Financial Stability Improvement Act, which would create a systemic risk regulator, strengthen regulation of depository institutions and bank holding companies, improve the asset-backed securitization process, and provide for an enhanced dissolution authority. The legislation also would create a Consumer Financial Protection Agency, reform the over-the-counter derivatives market, subject hedge funds to stricter scrutiny, impose new corporate governance mandates, adopt heightened requirements for credit rating agencies and expand regulatory enforcement powers. Among other measures, the legislation features expansive consumer mortgage protections and creates a Federal Insurance Office.

Download the briefing paper

House Legislation Requires FASB to Study Securitization, Orders New Regulator to Weigh Standards Affecting Systemic Risk

This story appeared in Jim Hamilton's World of Securities Regulation

Two amendments added during mark-up to the Financial Stability Improvement Act (HR 3996) could impact FASB standard-setting. The Garrett Amendment would require FASB to conduct a study of its new securitization accounting standards, while the Perlmutter-Lucas Amendment would require the new systemic risk regulator to make recommendations to the SEC on FASB standards affecting market-wide financial stability. The legislation is expected to pass the House Financial Services Committee in early December.

Transitional Safe Harbor Provided for All Participations and Securitizations

This story appeared in Bank Digest.

The Federal Deposit Insurance Corp. Board of Directors adopted an interim final rule amending 12 CFR 360.6 to provide a transitional safe harbor effective immediately for all participations and securitizations in compliance with that rule as originally adopted in 2000. In effect, the interim rule “grandfathers” all participations and securitizations for which financial assets were transferred or, for revolving securitization trusts, for which securities were issued prior to March 31, 2010, so long as those participations or securitizations complied with the preexisting provision under generally accepted accounting principles in effect prior to Nov. 15, 2009. The transitional safe harbor will apply irrespective of whether or not the participation or securitization satisfies all of the conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after Nov. 15, 2009. The FDIC is intending to publish in December 2009, a Notice of Proposed Rulemaking to amend its regulations further regarding the treatment of participations and securitizations issued after March 31, 2010.

PR-208-2009 at http://www.fdic.gov/news/news/press/2009/pr09208.html

Staff Memorandum at http://www.fdic.gov/news/board/2009nov12no5.pdf

Interim Rule at http://www.fdic.gov/news/board/2009nov12no6.pdf

New White Paper Offers Detailed Look at Dodd Bill

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, and Richard Roth, CCH Writer Analyst, have authored an extensive white paper entitled, “Senate Banking Committee Releases Draft Legislation: Restoring American Financial Stability Act of 2009.” From the Introduction:

The Senate Banking Committee has released draft legislation that, if enacted, would provide a sweeping overhaul of the regulation of U.S. financial services and markets. The Restoring American Financial Stability Act of 2009 would regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, expand consumer and investor protection, and prevent regulatory arbitrage. The draft provides for the regulation of hedge funds and over-the-counter derivatives and would establish a new resolution authority to unwind failing financial firms. The legislation also provides for major corporate-governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees. The draft further envisions a completely reformed securitization process playing an important role in the financial markets. A new independent regulator would be created with authority to make sure that consumer protection regulations are written and enforced.

Download the White Paper

FMOC Debates Scope of Fed Asset Program

John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporter and Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; Co-Author CCH Financial Privacy Law Guide.

As reported in the Oct. 15, 2009, New York Times, the recently-released minutes of the Sept. 22-23 meeting of the Federal Open Market Committee indicated a debate among FMOC members regarding the Federal Reserve Board’s program to purchase Treasury securities, agency debt and agency mortgage-backed securities (MBS).

According to the minutes, the FOMC members observed that the rate of new purchases could have an effect on asset prices, especially of MBS; and that a gradual reduction in the pace at which the Fed buys agency debt and agency MBS could help promote a smooth transition in markets as the announced asset purchases are completed. Some committee members suggested tapering quickly and completing the purchases by year-end, while a few preferred slowing the rate of purchases over a longer period in order to maintain flexibility regarding the pace and the cumulative amount purchased and thus potentially better calibrate the programs to evolving economic and financial market conditions. Most members, however, supported extending purchases of agency debt and agency MBS through the first quarter of 2010.

International Supervisors Agree on Stronger Regulations

John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporter and Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; Co-Author CCH Financial Privacy Law Guide

The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision have announced that they have agreed to a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. These measures are intended to substantially reduce the probability and severity of economic and financial stress.

President Jean-Claude Trichet, who chairs the Group, noted that “the agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level”.

European Union Amends Capital Requirements Directive to Strengthen Securitization

James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The Council of the European Union has amended the Capital Requirements Directive in an effort to enhance the originate and distribute model and strengthen securitization practices. The amendments enhance the due diligence and transparency obligations on the originators of securitization operations and on investors. Under the new regime, investors should be able to assess the risks involved in structured products otherwise than solely by the means of the ratings given by rating agencies. In order to encourage better risk assessment, a "skin in the game" amendment requires originators to retain on their balance sheets 5 % of risks transferred or sold to investors.

Financial Crisis Commission Members Named

This story appeared in Bank Digest.

Democrat and Republican congressional leadership have announced appointments to the 10-member Financial Crisis Inquiry Commission, established by Congress to examine the domestic and global causes of the financial crisis.

The Commission will conduct a comprehensive examination of, and hold hearings on, more than 20 specific areas of inquiry related to the financial crisis including: fraud and abuse in the financial sector; state and federal regulatory enforcement; tax treatment of financial products; credit rating agencies; lending practices and securitization; unregulated financial products and practices; and corporate governance and executive compensation. The Commission will also examine the causes of major financial institutions that failed or were likely to fail had they not received exceptional government assistance. The Commission will provide its findings and conclusions in a final report due to Congress on Dec. 15, 2010.