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FIL-1-99 Attachment

[Federal Register: December 30, 1998 (Volume 63, Number 250)]

[Notices]

[Page 71926-71928]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30de98-59]


 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

 

Repudiation and Asset-backed Securitizations and Loan

Participations


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Proposed statement of policy.


 

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SUMMARY: In response to inquiries from insured depository institutions,

accountants, and other parties involved in asset-backed securitizations

and loan participations, the Board of Directors of the FDIC (Board) is

proposing to adopt a Statement of Policy Regarding Treatment of

Securitizations and Loan Participations After Appointment of the

Federal Deposit Insurance Corporation as Conservator or Receiver

(Statement of Policy) to clarify how the FDIC will treat

securitizations and loan participations in its role as conservator or

receiver of insured depository institutions. The proposed Statement of

Policy provides that subject to certain conditions, the FDIC will not

attempt to reclaim, recover, or recharacterize as property of the

institution or the receivership estate in the case of a securitization,

the financial assets transferred by the insured depository institution

to a special purpose entity in connection with the securitization, or

in the case of a loan participation, the undivided interest transferred

to a participant in connection with the loan participation. It is

anticipated that the proposed Statement of Policy would provide helpful

guidance to insured depository institutions, accountants, and other

parties involved in securitizations and loan participations.


 

DATES: Comments must be received by March 1, 1999.


 

ADDRESSES: Send written comments to Robert E. Feldman, Executive

Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street NW, Washington, DC 20429. Comments may be

hand delivered to the guard station located at the rear of the 17th

Street building (located on F Street), on business days between 7:00

a.m. and 5:00 p.m. (FAX number (202) 898-3838; Internet address:

comments@fdic.gov. Comments may be inspected and photocopied at the

FDIC Public Information Center, Room 100, 801 17th Street NW,

Washington, DC, on business days between 9:00 a.m. and 4:30 p.m.


 

FOR FURTHER INFORMATION CONTACT: Michael H. Krimminger, Senior Policy

Analyst, Office of Policy Development, (202) 898-8950; Robert Storch,

Chief, Accounting Section, Division of Supervision, (202) 898-8906;

Thomas Bolt, Counsel, Legal Division, (202) 736-0168; Federal Deposit

Insurance Corporation, Washington, D.C. 20429.


 

SUPPLEMENTARY INFORMATION: Under section 11(e)(1) of the Federal

Deposit Insurance Act, 12 U.S.C. 1821(e)(1), the FDIC, as conservator

or receiver of any insured depository institution, may repudiate any

contract entered into by the institution before appointment of the

conservator or receiver. Insured depository institutions, accountants,

and other parties involved in asset-backed securitizations and loan

participations have raised questions about whether the repudiation of a

securitization or loan participation by the FDIC would result in the

FDIC's recovery of the transferred financial assets, in the case of a

securitization, or the undivided interest in a loan, in the case of a

loan participation. If so, transfers of such assets or interest by

insured depository institutions would likely not be accounted for as a

sale under generally accepted accounting principles, which require that

transferred assets be placed beyond the reach of the transferor, its

creditors, or a receiver for the transferor, in order for the transfer

to be accounted for as a sale.

The FDIC is considering whether to adopt the proposed Statement of

Policy to provide guidance as to its treatment of securitizations and

loan participations after its appointment as conservator or receiver of

an insured depository institution. The proposed Statement of Policy

provides that subject to certain conditions, the FDIC will not attempt

to reclaim, recover, or recharacterize as property of the institution

or the receivership estate (i) in the case of a securitization, the

financial assets transferred by the insured depository institution to a

special purpose entity in connection with the securitization, or (ii)

in the case of a loan participation, the undivided interest transferred

to a participant in connection with the loan participation.

The proposed Statement of Policy applies only to securitizations

and loan participations where (i) the criteria for sale accounting

under generally accepted accounting principles have been satisfied

(including the legal isolation test, as affected by the proposed

Statement of Policy); (ii) the documentation effecting the transfer of

financial assets, in the case of a securitization, or undivided

interest in a loan, in the case of a loan participation, reflects the

intent of the parties to treat the transaction as a sale, and not as a

secured borrowing (without regard to the intended treatment of the

transaction for tax purposes); and (iii) the institution received

adequate consideration for the transfer at the time it was made.

The proposed Statement of Policy is set forth below. Comment is

invited on all aspects of the proposal, including whether, after

adoption of the Statement of Policy by the FDIC, the transfer of

financial assets in connection with a securitization and the transfer

of an undivided interest in a loan in the form of a loan participation

by an insured depository institution would be accounted for as a sale

under generally accepted accounting principles.

The Statement of Policy proposed by the Board reads as follows:


 

Statement of Policy Regarding Treatment of Securitizations and Loan

Participations After Appointment of the Federal Deposit Insurance

Corporation as Conservator or Receiver


 

This Statement of Policy is issued by the Federal Deposit Insurance

Corporation (FDIC) to clarify the treatment of securitizations and loan

participations after appointment of the FDIC as conservator or receiver

of an insured depository institution.


 

I. Definitions


 

As used in this Statement of Policy, the following terms have the

following meanings:

A. ``Beneficial interest'' means debt or equity (or mixed)

interests or obligations issued by a special purpose entity that

entitle their holders to receive payments that depend primarily on the

cash flow from financial assets owned by the special purpose entity.


 

[[Page 71927]]


 

B. ``Financial asset'' means cash or a contract or instrument that

conveys to one entity a contractual right to receive cash or another

financial instrument from another entity. Financial assets may include,

but are not limited to, residential and commercial mortgage loans,

commercial and industrial loans, consumer receivables, trade

receivables, lease receivables, securities, and obligations satisfying

the definition of ``permitted assets'' for purposes of Section 860L(c)

of the Internal Revenue Code of 1986, as amended.

C. ``Loan participation'' means the transfer of an undivided

interest in all or part of the principal amount of a loan from a

seller, known as the ``lead'', to a buyer, known as the

``participant'', without recourse to the lead, pursuant to an agreement

between the lead and the participant. ``Without recourse'' means that

the loan participation is not subject to any agreement that requires

the lead to repurchase the participant's interest or to otherwise

compensate the participant upon the borrower's default on the

underlying loan. Use of the singular in this definition is intended to

refer also to loan participations that involve more than one loan or

more than one buyer.

D. ``Securitization'' means the issuance by a special purpose

entity of beneficial interests, the most senior class of which at time

of issuance is rated investment grade by one or more nationally

recognized statistical rating organizations, or which are sold in

transactions by an issuer not involving any public offering for

purposes of Section 4 of the Securities Act of 1933.

E. ``Special purpose entity'' means a trust, corporation, or other

entity with distinct standing at law from the insured depository

institution that is primarily engaged in acquiring and holding (or

transferring to another special purpose entity) financial assets (or

participations or other interests therein), and in activities related

or incidental thereto, in connection with the issuance by such special

purpose entity (or by another special purpose entity that acquires

financial assets directly or indirectly from such special purpose

entity) of beneficial interests.


 

II. Background


 

Under generally accepted accounting principles, one of the criteria

for a transfer of financial assets to be accounted for as a sale is the

``legal isolation'' of the transferred assets. Assets are deemed to be

legally isolated when they have been placed beyond the reach of the

transferor and its creditors, even in the case of a bankruptcy or

appointment of a receiver for the transferor. Accountants, auditors,

and other parties have raised concerns whether the legal isolation test

would be satisfied in the case of a transfer of financial assets by an

insured depository institution in connection with a securitization, or

the transfer of an interest in a loan by such institution in the form

of a loan participation, in light of the statutory power of the FDIC as

conservator or receiver to repudiate contracts entered into by such

institution. Specifically, questions have been raised about whether the

repudiation of a securitization or loan participation by the FDIC would

result in the FDIC's recovery of the transferred financial assets, in

the case of a securitization, or the undivided interest in a loan, in

the case of a loan participation. As guidance for parties who may

encounter this issue, the FDIC has resolved to issue this statement of

policy to clarify the effect of its statutory repudiation power on

securitizations and loan participations.

Pursuant to Section 11(e)(1) of the Federal Deposit Insurance Act,

12 U.S.C. 1821(e)(1), the FDIC, when acting as conservator or receiver

of any insured depository institution, has the power to disaffirm or

repudiate any contract or lease (i) to which the institution is a

party, (ii) the performance of which the conservator or receiver, in

the conservator's or receiver's discretion, determines to be

burdensome, and (iii) the disaffirmance or repudiation of which the

conservator or receiver determines, in the conservator's or receiver's

discretion, will promote the orderly administration of the

institution's affairs. Repudiation of a contract relieves the FDIC from

performing any unperformed obligations remaining under the contract and

entitles the other party to the contract to a claim for damages. Such

damages are limited by statute to actual direct compensatory damages

determined as of the date of the appointment of the conservator or

receiver.

The FDIC may exercise its statutory power to repudiate any contract

entered into by the institution, including agreements entered into in

connection with securitizations or loan participations. In order to

resolve issues raised about the effect of this statutory power on such

transactions, the FDIC has determined that, if certain conditions are

met, it will not seek to reclaim, recover, or recharacterize as

property of the institution or the receivership estate the financial

assets or undivided interest in a loan transferred by the institution

in connection with a securitization or loan participation,

respectively. Accordingly, the FDIC makes the following Statement of

Policy, which is intended to be of binding effect upon the FDIC in all

instances in which it is appointed as conservator or receiver of an

insured depository institution.


 

III. Statement of Policy


 

Subject to the following conditions, the FDIC will not attempt to

reclaim, recover, or recharacterize as property of the institution or

the receivership estate (i) in the case of a securitization, the

financial assets transferred by the insured depository institution to a

special purpose entity in connection with the securitization, or (ii)

in the case of a loan participation, the undivided interest transferred

to a participant in connection with the loan participation.


 

IV. Conditions


 

A. This Statement of Policy addresses only the exercise of the

FDIC's statutory repudiation power with respect to securitizations and

loan participations.

B. This Statement of Policy applies only to those securitizations

or loan participations where the criteria for sale accounting under

generally accepted accounting principles have been satisfied (including

the legal isolation test, as affected by this Statement of Policy); the

documentation effecting the transfer of financial assets, in the case

of a securitization, or undivided interest in a loan, in the case of a

loan participation, reflects the intent of the parties to treat the

transaction as a sale, and not as a secured borrowing (without regard

to the intended treatment of the transaction for tax purposes); and the

institution received adequate consideration for the transfer at the

time it was made.

C. This Statement of Policy shall not be construed as waiving,

limiting, or otherwise affecting the power of the FDIC as conservator

or receiver to disaffirm or repudiate any agreement or contract that

imposes continuing obligations and duties upon the insured depository

institution in conservatorship or receivership, which the conservator

or receiver, in its discretion, determines would be burdensome and the

disaffirmance or repudiation of which will promote the orderly

administration of the institution's affairs. As stated above, however,

should the FDIC, in order to terminate such continuing obligations or

duties, seek to disaffirm or repudiate an agreement or contract under

which an insured depository institution has transferred financial

assets in connection with a securitization or undivided interests in a

loan in the form of a loan participation, the FDIC will not


 

[[Page 71928]]


 

attempt to reclaim, recover, or recharacterize as property of the

institution or the receivership estate such financial assets or

undivided interests.

D. Nothing in this Statement of Policy shall be construed as

waiving, limiting, or otherwise affecting:

(1) The power of the FDIC to take any action or to exercise any

power not specifically addressed by this Statement of Policy;

(2) The power of the FDIC to take any action or pursue any legal

powers, rights, or remedies regarding any transfer that was made with

the intent to hinder, delay, or defraud the institution or its

creditors, or in contemplation of insolvency, or that is a fraudulent

transfer under applicable law; or

(3) Any causes of action, rights, or remedies, at law or in equity,

not specifically addressed by this Statement of Policy, that the FDIC

may have with respect to any contract entered into by any insured

depository institution.


 

By order of the Board of Directors.


 

Dated at Washington, D.C., this 18th day of December 1998.


 

Federal Deposit Insurance Corporation

Robert E. Feldman,

Executive Secretary.

[FR Doc. 98-34518 Filed 12-29-98; 8:45 am]

BILLING CODE 6714-01-P

Last Updated: March 24, 2024