WASHINGTON, DC-The Federal Deposit Insurance Corp. has finalized its safe-harbor rule that addresses the treatment of assets during a potential insolvency of an FDIC-backed institution. The rule has been subject to some debate since it was proposed; now at least one commercial real estate advocacy group as well as a government entity is concerned about one of its new provisions and the confusion it might create: a
5% risk retention mandate for all asset-backed securities including CMBS. (For more on Safe Harbor, watch for the next issue of Distressed Assets Investor.)

The FDIC’s safe harbor rule was developed to ensure assets transferred by financial institutions into a securitization pool are protected from the insolvency proceedings of that institution, the Commercial Real Estate Council explains. The existing safe harbor rule was scheduled to expire on September 30, but had been extended earlier this year. The inclusion of the risk-retention provision, along with an auto-conform provision to reconcile it with any jointly prescribed rules created in accordance with the new Dodd-Frank law, is creating some confusion, the CRE Council says.

For instance, it appears that the FDIC rule would be limited to just insured depository institutions and would be in effect until the completion of rulemaking under Dodd-Frank, which requires a joint rulemaking on risk retention within 270 days of enactment, followed by a one-year implementation for residential mortgage-backed securities and two years for all other asset classes. 

“Efforts to better align interests and strengthen our markets are important, but reforms should be coordinated by all regulators and considered by asset class to accommodate inherently different markets,” said Lisa Pendergast, president of the CRE Finance Council, in a prepared statement. “We are concerned that today’s action creates confusion, uncertainty and implementation issues by providing a temporary and one-size-fits-all approach that would impede a commercial real estate recovery at this critical time.” The Council did not return a call to GlobeSt.com in time for publication.

The FDIC’s final rule was also opposed by acting comptroller of the
currency John Walsh. The OCC, along with the Federal Reserve, the SEC and the FDIC, are responsible for promulgating rules related to the CMBS market. The CRE Finance Council's membership remains united in its view that the alignment of the interests of lenders, issuers and investors in the securitization process is essential.

The Council has long been an advocate within the industry for enhanced transparency and sound practices, and the association will continue to work with market participants and policymakers to build on the unparalleled level of disclosure and other safeguards that exist in the CMBS market.