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FIL-95-99 Attachment B

[Federal Register: September 9, 1999 (Volume 64, Number 174)]

[Proposed Rules]

[Page 48968-48970]

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

[DOCID:fr09se99-11]


 

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Proposed Rules

Federal Register

________________________________________________________________________


 

This section of the FEDERAL REGISTER contains notices to the public of

the proposed issuance of rules and regulations. The purpose of these

notices is to give interested persons an opportunity to participate in

the rule making prior to the adoption of the final rules.


 

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[[Page 48968]]



 

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FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 360


 

RIN 3064-AC28


 

 

Treatment by the Federal Deposit Insurance Corporation as

Conservator or Receiver of Financial Assets Transferred by an Insured

Depository Institution in Connection With a Securitization or

Participation


 

AGENCY: Federal Deposit Insurance Corporation.


 

ACTION: Notice of proposed rulemaking.


 

-----------------------------------------------------------------------


 

SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) is

publishing for notice and comment a proposed rule regarding the

treatment by the FDIC, as receiver or conservator, of financial assets

transferred by an insured depository institution in connection with a

securitization or in the form of a participation. The purpose of the

rule is to resolve issues raised by Statement of Financial Accounting

Standards No. 125 (SFAS 125), as promulgated by the Financial

Accounting Standards Board (FASB), as to whether the FDIC's statutory

authority to repudiate contracts pursuant to section 11(e) of the

Federal Deposit Insurance Act (12 U.S.C. 1821(e)) would prevent a

transfer of financial assets by an insured depository institution in

connection with a securitization or in the form of a participation from

satisfying the ``legal isolation'' condition of SFAS 125. Failure to

satisfy this condition would prevent such a transfer from being

accounted for as a sale in financial statements and reports prepared in

accordance with generally accepted accounting principles (GAAP).

The proposed rule provides that the FDIC shall not, by exercise of

its statutory power to repudiate contracts, recover, reclaim, or

recharacterize as property of the institution or the receivership

financial assets that were transferred by an insured depository

institution in connection with a securitization or in the form of a

participation, provided that the transfer meets all conditions for sale

accounting treatment under GAAP, other than the ``legal isolation''

condition as it applies to an institution for which the FDIC may be

appointed as conservator or receiver, which the proposed rule is

intended to address. The proposed rule defines both ``securitization''

and ``participation,'' with ``participation'' specifically limited to

participations that are ``without recourse'' to the selling or ``lead''

institution. The proposed rule does not apply unless the insured

depository institution received adequate consideration for the transfer

of financial assets at the time of the transfer, and the documentation

effecting the transfer of financial assets reflects the intent of the

parties to treat the transaction as a sale, and not as a secured

borrowing, for accounting purposes. The proposed rule shall not be

construed as waiving or limiting any other rights or powers of the FDIC

as conservator or receiver of an insured depository institution to take

any action or exercise any power not specifically addressed in the

rule, including but not limited to any rights or powers of the FDIC

regarding any transfer taken in contemplation of the institution's

insolvency or with the intent to hinder, delay, or defraud the

institution or the creditors of such institution. The proposed rule

also provides that the FDIC shall not seek to avoid an otherwise

legally enforceable securitization agreement or participation agreement

executed by an insured depository institution solely because such

agreement does not meet the ``contemporaneous'' requirement of sections

11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act.

The proposed rule may be repealed by the FDIC upon 30 days notice

and opportunity for comment provided in the Federal Register, but in

the event of such repeal, the rule shall continue to be effective with

respect to any transfers made before the date of the repeal.


 

DATES: Written comments must be received by the FDIC on or before

November 8, 1999.


 

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

Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments

may be hand delivered to the guard station located at the rear of the

17th Street building 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 also be inspected and photocopied at

the FDIC Public Information Center, room 100, 801 17th Street, N.W.,

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


 

FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Division of

Resolutions and Receiverships, (202) 898-8950; Robert Storch, Division

of Supervision, (202) 898-8906; or Thomas Bolt, Legal Division, (202)

736-0168, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,

Washington, D.C. 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. Background


 

Under generally accepted accounting principles, a transfer of

financial assets is accounted for as a sale if the transferor

surrenders control over the assets. One of the conditions for

determining whether the transferor has surrendered control is that the

assets have been isolated from the transferor, i.e., put presumptively

beyond the reach of the transferor, its creditors, and a trustee in

bankruptcy or a receiver. This is known as the ``legal isolation''

condition. Where the transferor is an insured depository institution

for which the FDIC may be appointed as conservator or receiver, the

issue arises whether financial assets transferred by such institution

in connection with a securitization or in the form of a participation

would be put beyond the reach of the FDIC as conservator or receiver

for such institution in light of (i) the statutory authority of the

FDIC to repudiate contracts to which such institution is a party and

(ii) the provisions of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the

Federal Deposit Insurance Act regarding the enforceability of

agreements against the FDIC. The specific issues are whether the FDIC

might, in the exercise of its authority to repudiate contracts, avoid a

transfer of financial assets in connection with a securitization or in

the form of a participation, and recover such assets; and whether the

FDIC might, with respect to an agreement executed in relation to a

transfer of financial assets in connection with a securitization or


 

[[Page 48969]]


 

with respect to a participation, assert the requirement of sections

11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act

that to be enforceable against the FDIC, any agreement that tends to

diminish or defeat the FDIC's interest in an asset must be executed

contemporaneously with the acquisition of the asset by the institution

(the ``contemporaneous'' requirement).

Pursuant to 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.

Repudiation also entitles the other party to the contract to a claim

for damages, which are limited by statute to actual direct compensatory

damages determined as of the date of the appointment of the receiver or

conservator. See 12 U.S.C. 1821(e)(3).

Pursuant to sections 11(d)(9), 11(n)(4)(I), and 13(e) of the

Federal Deposit Insurance Act, no agreement that tends to diminish or

defeat the FDIC's interest in an asset acquired from an insured

depository institution is enforceable against the FDIC unless such

agreement meets certain requirements. One of those requirements is that

the agreement be executed by the depository institution and any person

claiming an adverse interest thereunder contemporaneously with the

acquisition of the asset by the institution.

In order for a transfer of financial assets by an insured

depository institution in connection with a securitization or in the

form of a participation to be accounted for as a sale, the proposed

rule provides that the FDIC shall not, by exercise of its authority to

disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim,

recover, or recharacterize as property of the institution or the

receivership any financial assets transferred by an insured depository

institution in connection with a securitization or in the form of a

participation. Although the repudiation of a securitization or

participation will not affect transferred financial assets, repudiation

will excuse the FDIC from performing any continuing obligations imposed

by the securitization or participation. If the FDIC, in order to

terminate such continuing obligations or duties, seeks to disaffirm or

repudiate an agreement or contract under which an insured depository

institution has transferred financial assets in connection with a

securitization or in the form of a participation, the FDIC will not

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

institution or the receivership such financial assets.

The proposed rule applies only to those securitizations or

participations in which the transfer of financial assets meets all

conditions for sale accounting treatment under generally accepted

accounting principles, other than the ``legal isolation'' condition as

it applies to institutions for which the FDIC may be appointed as

conservator or receiver, which the proposed rule is intended to

address.

As part of the definition of ``participation,'' the proposed rule

provides that a participation must be ``without recourse,'' that is,

the participation must not be 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 obligation. The term ``without recourse'' does not, however,

preclude the lead institution from retaining a subordinated interest in

the participated obligation, against which losses are initially

allocated.

The proposed rule does not apply unless the insured depository

institution received adequate consideration for the transfer of

financial assets at the time of the transfer, and the documentation

effecting the transfer of financial assets reflects the intent of the

parties to treat the transaction as a sale, and not as a secured

borrowing, for accounting purposes.

The proposed rule shall not be construed as waiving, limiting or

otherwise affecting the rights or powers of the FDIC to take any action

or to exercise any power not specifically limited by this section,

including, but not limited to any rights, powers or remedies of the

FDIC regarding transfers taken in contemplation of the institution's

insolvency or with the intent to hinder, delay, or defraud the

institution or the creditors of such institution, or that is a

fraudulent transfer under applicable law.

The proposed rule further provides that the FDIC shall not seek to

avoid an otherwise legally enforceable securitization agreement or

participation agreement executed by an insured depository institution

solely because such agreement does not meet the ``contemporaneous''

requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal

Deposit Insurance Act.

The proposed rule is intended to apply to securitizations and

participations that are engaged in by insured depository institutions

while the rule is in effect, even if the rule is later repealed.

Consequently, paragraph (g) provides that the rule will be effective

unless repealed by the FDIC upon 30 days notice and opportunity for

comment provided in the Federal Register, but in the event of such

repeal, the rule shall continue to be effective with respect to any

transfers made before the date of the repeal.


 

II. Paperwork Reduction Act


 

No collection of information pursuant to section 3504(h) of the

Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the

proposed rule. Consequently, no information was submitted to the Office

of Management and Budget for review.


 

III. Regulatory Flexibility Act


 

The proposed rule is consistent with the FDIC's current practice

and does not represent a change in the law with respect to

securitizations and participations. Pursuant to section 605(b) of the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is certified that

the proposed rule will not have a significant economic impact on a

substantial number of small business entities.


 

IV. The Treasury and General Government Appropriations Act, 1999--

Assessment of Federal Regulations and Policies on Families


 

The FDIC has determined that this proposed rule will not affect

family well-being within the meaning of section 654 of the Treasury and

General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.

2681 (1998).


 

List of Subjects in 12 CFR Part 360


 

Banks, banking, Savings associations.


 

For the reasons set out in the preamble, the FDIC Board of

Directors proposes to amend 12 CFR part 360 as follows:


 

PART 360--RESOLUTION AND RECEIVERSHIP RULES


 

1. The authority citation for part 360 is revised to read as

follows:


 

Authority: 12 U.S.C. 1821(d)(1), 1821(d)(11), 1821(e)(1),

1821(e)(8)(D)(i),


 

[[Page 48970]]


 

1823(c)(4), 1823(e)(2); Sec. 401(h), Pub.L. 101-73, 103 Stat. 357.


 

2. Section 360.6 is added to part 360 to read as follows:



 

Sec. 360.6 Treatment by the Federal Deposit Insurance Corporation as

conservator or receiver of financial assets transferred in connection

with a securitization or participation.


 

(a) Definitions. (1) Beneficial interest means debt or equity (or

mixed) interests or obligations of any type 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.

(2) 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.

(3) Participation means the transfer or assignment of an undivided

interest in all or part of a loan or a lease 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 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 obligation.

(4) Securitization means the issuance by a special purpose entity

of beneficial interests:

(i) The most senior class of which at time of issuance is rated in

one of the four highest categories assigned to long-term debt or in an

equivalent short-term category (within either of which there may be

sub-categories or gradations indicating relative standing) by one or

more nationally recognized statistical rating organizations; or

(ii) Which are sold in transactions by an issuer not involving any

public offering for purposes of section 4 of the Securities Act of

1933, as amended, or in transactions exempt from registration under

such Act pursuant to Regulation S thereunder (or any successor

regulation).

(5) Special purpose entity means a trust, corporation, or other

entity with a distinct standing at law separate from the insured

depository institution that is primarily engaged in acquiring and

holding (or transferring to another special purpose entity) financial

assets, 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.

(b) The FDIC shall not, by exercise of its authority to disaffirm

or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or

recharacterize as property of the institution or the receivership any

financial assets transferred by an insured depository institution in

connection with a securitization or participation, provided that such

transfer meets all conditions for sale accounting treatment under

generally accepted accounting principles, other than the ``legal

isolation'' condition as it applies to institutions for which the FDIC

may be appointed as conservator or receiver, which is addressed by this

section.

(c) Paragraph (b) of this section shall not apply unless the

insured depository institution received adequate consideration for the

transfer of financial assets at the time of the transfer, and the

documentation effecting the transfer of financial assets reflects the

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

secured borrowing, for accounting purposes.

(d) Paragraph (b) of this section 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

imposing continuing obligations or duties upon the insured depository

institution in conservatorship or receivership.

(e) Paragraph (b) of this section shall not be construed as

waiving, limiting or otherwise affecting the rights or powers of the

FDIC to take any action or to exercise any power not specifically

limited by this section, including, but not limited to, any rights,

powers or remedies of the FDIC regarding transfers taken in

contemplation of the institution's insolvency or with the intent to

hinder, delay, or defraud the institution or the creditors of such

institution, or that is a fraudulent transfer under applicable law.

(f) The FDIC shall not seek to avoid an otherwise legally

enforceable securitization agreement or participation agreement

executed by an insured depository institution solely because such

agreement does not meet the ``contemporaneous'' requirement of sections

11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act.

(g) This section may be repealed by the FDIC upon 30 days notice

and opportunity for comment provided in the Federal Register, but in

the event of such repeal, the section shall continue to be effective

with respect to any transfers made before the date of the repeal.


 

By order of the Board of Directors.


 

Dated at Washington, DC this 31st day of August, 1999.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 99-23384 Filed 9-8-99; 8:45 am]

BILLING CODE 6714-01-P

Last Updated: March 24, 2024