Real Estate Roundtable Weekly – FDIC Issues Final Risk-Retention Rule Omitting “Dodd-Frank” Language Allowing CMBS B-Piece Buyers to Satisfy New Requirements; Roundtable Concerned This Could Hurt Efforts to Restart Commercial Securitization Markets

The Federal Deposit Insurance Corp. (FDIC) on Monday gave final approval to rules requiring FDIC-insured institutions to retain 5% of the credit risk on securitizations completed after Dec. 31 of this year — in order to retain “safe harbor” protection from new accounting rules governing failed-bank assets (, Sept. 30).  

Rep. Barney Frank (D-MA), left, and Sen. Christopher Dodd

The FDIC risk-retention rules will apply until an interagency bank regulatory rule is issued on this subject, most likely sometime in 2010; the risk-retention rule is one of many required to implement the “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” enacted in July.

While the Dodd-Frank law requires sellers of securitized assets to retain 5% of the credit risk on any loan sold in a pool of loans backing an ABS issuance, it allows “B-piece” buyers of commercial mortgage-backed securities (CMBS) to satisfy the new risk retention/ “skin-in-the-game” requirement. (In turn, such third-party investors must perform due diligence, purchase a first-loss position, and retain this risk in accordance with the statute). This flexibility was urged by The Roundtable and others in the real estate community as a way to reduce the impact of new accounting rules (FAS 166, 167) on CMBS issuers.

Dodd-Frank also requires that regulators examine and report on the combined impact on credit availability of new accounting standards [Financial Accounting Standard (FAS) 166 and 167] and other regulatory changes, such as a “retention” mandate, before making any rulemakings. By law, the Fed, working with other agencies, has 90 days to report its findings to Congress with recommendations on statutory and regulatory changes that could be made to reduce the impact on credit availability.

Unfortunately, the FDIC’s new rule omits the alternative risk-retention arrangements for the CMBS market provided for under the Dodd-Frank legislation. The Roundtable is concerned that this could hurt efforts to restart the still dysfunctional securitization markets, where new issuance plummeted from $230 billion in 2007 to $0 in 2009, and only recently began to show signs of life again.  

The FDIC rule was adopted Sept. 27 by a vote of 4-1, with acting Comptroller of the Currency John Walsh casting the dissenting vote (Market Watch, Sept. 27).  He asserted that the rule, which applies only to depository institutions registered with the FDIC, would create a bifurcation in the securitization market because it does not apply to financial institutions that are not FDIC-insured depository institutions. The financial regulatory overhaul law enacted in July requires regulators to write risk retention rules for all financial institutions, not just depository institutions.

FDIC Chair Sheila Bair defended the agency’s new rule, which was under consideration by the FDIC for nearly a year, saying it “is fully consistent with the clear mandate of the Dodd-Frank Act to apply a 5% risk retention requirement unless sufficiently strong underwriting standards are in place to counter incentives for lax lending created by the originate-to-distribute model.”

Source:  Real Estate Roundtable


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