(Adds comments from SIFMA, CMSA trade groups, byline)
By Nancy Leinfuss
NEW YORK Feb 22 A proposal by the Federal Deposit Insurance Corp. to change rules designed to offer assurances to investors in securitized assets threatens to undermine the securitization market and choke off an important source of credit, said industry trade groups.
The American Securitization Forum (ASF) expressed its concerns in a letter to the FDIC on Monday, along with several other trade groups.
"We appreciate the FDIC's ongoing support for sustainable securitization but we are concerned that their proposals would greatly inhibit the restart of these critical markets," said Tom Deutsch, executive director of the ASF.
The FDIC is proposing to revise what is known as the safe harbor rule to include numerous preconditions, including requirements relating to a transaction's capital structure, disclosure, documentation, origination and compensation, the ASF said.
The safe harbor was originally created so that investors could look to securitized assets for payment without concern that the assets would be interfered with by the FDIC in the event of a bank failure.
Ralph Daloisio, chairman of the ASF board of directors and managing director at Natixis, said under the FDIC's proposals, investors would bear the burden of the loss of the safe harbor if any of the securitization preconditions are not satisfied by the sponsor.
"As an investor, it is imperative that I be able to determine whether the safe harbor will apply so that risks can be appropriately assessed and a transaction can be efficiently priced," said Daloisio.
If the aggregate burden is too great, the proposals could prevent U.S. insured depository institutions from re-engaging in the securitization markets and force them to rely solely on deposits or other sources of funding, which would seriously harm the availability of credit for consumers and small businesses, the ASF said.
In a securitization, lenders are able to remove debt such as auto loans, credit cards, student loans, residential and commercial mortgages, from their balance sheets, package them into securities and sell them to investors. This allows lenders to make new loans and keep credit flowing.
The proposed safe harbor would not only affect investors but could fundamentally change the economics of securitization for sponsors and potentially lead to the elimination of securitization in some sectors, the trade groups said.
"We support reasonable efforts to restore and reshape the securitization market, but we do not believe the proposed safe harbor is an appropriate means of regulation," said Chris Killian, vice president of the Securities Industry and Financial Markets Associations.
Killian said any regulatory changes should take into consideration views of various market participants and take into account the total impact "on the ability of institutions to utilize securitization to fund credit creation."
The Commercial Mortgage Securities Association urged the FDIC to work with Congress, the Obama administration and the other agencies that are developing securitization reforms to avoid conflicting or overlapping requirements that could impede the restoration of functioning credit markets.
The ASF is proposing that the applicability of the safe harbor not be conditioned upon the numerous requirements included in the FDIC's Advance Notice of Proposed Rulemaking and instead limit any requirements to clear conditions that allow investors to rely upon the safe harbor without fear that its benefits could disappear. (Editing by Leslie Adler)