OTS Rules Thrift Op Subs May Underwrite ABS

The OTS issued an interpretive letter ("P-2004-5") holding that thrifts may establish an operating subsidiary to own, sell and underwrite asset-backed securities ("ABS"). The thrift had conducted such ABS underwriting activities through a holding company subsidiary, but to save on discounts and commissions, now wished to perform the activities through an operating subsidiary. The ABS underwriting activities at issue concerned mortgage loans, automobile loans and receivables, and other consumer loans, including securities that are unrated or are rated less than investment grade. P-2004-5 holds that such activities are permissible either under existing direct OTS precedent, or as an incidental power. In connection with the securitization of unrated or less than investment grade securities of the type described in the letter, the OTS concludes that such securities are not the type of junk bonds that Congress intended to prohibit by Section 28 of the Federal Deposit Insurance Act.