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FIL-57-2000 Attachment

[Federal Register: August 11, 2000 (Volume 65, Number 156)]

[Rules and Regulations]

[Page 49189-49192]

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

[DOCID:fr11au00-1]



 

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Rules and Regulations

Federal Register

________________________________________________________________________


 

This section of the FEDERAL REGISTER contains regulatory documents

having general applicability and legal effect, most of which are keyed

to and codified in the Code of Federal Regulations, which is published

under 50 titles pursuant to 44 U.S.C. 1510.


 

The Code of Federal Regulations is sold by the Superintendent of Documents.

Prices of new books are listed in the first FEDERAL REGISTER issue of each

week.


 

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[[Page 49189]]




 

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: Final rule.


 

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


 

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

adopted a rule regarding the treatment by the FDIC, as receiver or

conservator of an insured depository institution, of financial assets

transferred by the institution in connection with a securitization or

in the form of a participation. The rule resolves issues raised by

Financial Accounting Standards Board (FASB) Statement No. 125,

Accounting for Transfers and Servicing of Financial Assets and

Extinguishment of Liabilities (SFAS 125). The rule provides that with

respect to financial assets transferred by an institution in connection

with a securitization or in the form of a participation, and subject to

certain conditions described in the rule, the FDIC will not seek to

recover or reclaim such financial assets in exercising its statutory

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

Federal Deposit Insurance Act. The rule also provides that the FDIC

will not seek to enforce the ``contemporaneous'' requirement of

sections 11(d)(9), 11(n)(4)(I), and 13(e). The final rule applies to

securitizations and participations that are engaged in while the rule

is in effect, even if the rule is later repealed or amended.


 

EFFECTIVE DATE: September 11, 2000.


 

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, NW.,

Washington, DC 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. Background


 

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).

In addition, pursuant to 12 U.S.C. 1821(d)(9), 1821(n)(4)(I), and

1823(e), 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 by any person claiming an

adverse interest thereunder contemporaneously with the acquisition of

the asset by the institution. This is referred to as the

``contemporaneous'' requirement.

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 and its creditors, even in

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

condition.

Whether the legal isolation condition has been met is determined

primarily from a legal perspective. This determination involves

considerations of the kind of receivership into which the transferor

may be placed and the powers of the receiver to reach assets that were

transferred prior to its appointment. If the available evidence

provides reasonable assurance that the transferred assets would be

beyond the reach of the powers of a bankruptcy trustee or receiver for

the transferor, then a determination that the transferred assets have

been legally isolated is appropriate.

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 the 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 the

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

challenge the enforceability of an agreement executed in relation to a

transfer of financial assets in connection with a securitization or a

participation by asserting the ``contemporaneous'' requirement with

respect to such an agreement.

The final rule resolves these issues by clarifying the powers of

the FDIC as conservator or receiver with respect to financial assets

transferred by an insured depository institution in connection with a

securitization or in the form of a participation. The FDIC believes

that this clarification should provide sufficient assurance to

determine that the legal isolation condition is met.


 

[[Page 49190]]


 

II. Proposed Rule


 

In September 1999, the FDIC requested comments on a proposed rule

\1\ that provided 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. The proposed rule would apply 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 would be addressed

by the proposed rule. The proposed rule defined both ``securitization''

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

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

institution. ``Without recourse'' would mean that 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.

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


 

\1\ 64 FR 48968, Sept. 9, 1999.

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The proposed rule would 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 further provided that it 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 clarified that 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 further provided 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 was 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, the last paragraph of the proposed rule provided that the

rule would 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 would continue to be effective with

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


 

III. Summary of Comments


 

The FDIC received 14 comment letters concerning the proposed rule.

The vast majority of the commenters expressed support for the rule.

One commenter specifically requested that FDIC counsel issue,

concurrently with the adoption of the rule, a legal opinion confirming

that paragraph (g) of the rule will bind receivers or conservators

appointed after the repeal or amendment of the rule. In this

commenter's view, such an opinion would be necessary for legal

specialists ``* * * to render opinions that provide reasonable

assurance that the legal isolation condition of SFAS 125 is met.''

Other commenters disagreed with this view, but endorsed the issuance of

an FDIC legal opinion if this would resolve the issue. Two commenters

expressed the view that such an opinion was unnecessary.

The FDIC believes that the final rule more than adequately provides

reasonable assurance as to how the FDIC as conservator or receiver of a

depository institution would treat financial assets transferred by the

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

participation. Paragraph (g) of the rule, the safe harbor provision for

transfers made in connection with a securitization or in the form of a

participation that was in effect before any repeal or amendment of the

rule, is clear and unambiguous. The FDIC believes that an opinion by

FDIC counsel that paragraph (g) will bind receivers or conservators

appointed after any repeal or amendment of the rule would not add

anything that is not already contained in the rule itself or in this

preamble.

Other commenters sought clarification regarding the term ``without

recourse'' used in the definition of participation. While the presence

of recourse does not necessarily require that a transaction be

characterized as a security interest instead of as a sale, see Major's

Furniture Mart, Inc. v. Castle Credit Corporation, Inc., 602 F.2d 538

(3rd Cir. 1979), courts generally view a transaction as a participation

only if the buyer does not have recourse against the seller when a

default occurs on the underlying obligation. See, e.g., In re Sackman

Mortgage Corp., 158 B.R. 926, 931-34 (Bankr. S.D.N.Y. 1993). The final

rule maintains this distinction.

The final rule's definition of a participation as a transfer of an

interest in a loan or a lease without recourse by the buyer against the

lead should not exclude participations in which (a) the lead retains a

subordinated interest in the obligation, against which losses are

initially allocated; (b) the lead participated a loan in order to avoid

a statutory lending limit violation, with the option of reacquiring

some or all of the transferred interest when reacquisition would not

result in a lending limit violation; or (c) the participation agreement

provided for repurchase or compensation in connection with customary

representations and warranties regarding the underlying asset. Thus,

the meaning of the term ``recourse'', as used in the final rule,

differs from its meaning for purposes of the FDIC's risk-based capital

standards, 12 CFR Part 325, Appendix A.

One commenter expressed concern regarding the effect of the

proposed rule on (a) a transaction that purports to be a participation,

but includes recourse against the lead, and (b) a transaction that

purports to be a sale (not a participation) of all of a financial

asset, but includes recourse against the seller. A transaction that

purports to be a participation, but includes recourse against the lead,

is not encompassed by the rule; the FDIC, under certain


 

[[Page 49191]]


 

circumstances, may recover previously transferred assets as a result of

repudiation. As discussed, under the general legal view, a transaction

that purports to be a participation but includes recourse against the

lead would be characterized as a secured borrowing rather than as a

participation. If the FDIC repudiated such a transaction, it would be

entitled to recover any collateral to the extent that the value of the

collateral exceeds the claim for repudiation damages, which is

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

receiver.

On the other hand, a transaction that purports to be a sale (not a

participation) of all of a financial asset, even if it includes

recourse against the seller, which would be characterized as a sale

under the general legal view, should not need to be encompassed by the

rule; the FDIC would not be able to recover transferred assets as a

result of repudiation. In the case of a completed sale, the FDIC would

have nothing to repudiate if no further performance is required. Even

in the case of a sale transaction that imposes some continuing

obligation, a repudiation by the FDIC would relieve the FDIC from

future performance, but generally should not result in a recovery of

any property that was transferred by the institution before the

appointment of the conservator or receiver.


 

IV. Final Rule


 

The final rule is identical to the proposed rule except for the

following. First, the proposed rule's definition of the term

``participation'' included language that referred to ``the borrower's

default'' in describing the meaning of the term ``without recourse''.

Since a participation may involve a lease as well as a loan, the final

rule refers to ``a default on the underlying obligation'' instead of

``the borrower's default''.

Second, paragraph (g) of the final rule refers to any amendment of

the rule, in addition to any repeal. Paragraph (g) of the final rule

provides that any repeal or amendment of the rule by the FDIC shall not

apply to any transfers of financial assets made in connection with a

securitization or participation that was in effect before such repeal

or amendment. The revision is intended to make paragraph (g) more

effective as a safe harbor provision if the rule is ever repealed or

amended in such a way as to preclude subsequent transfers of financial

assets by depository institutions from satisfying the legal isolation

requirement of SFAS 125. As a result of paragraph (g), if the FDIC is

appointed as conservator or receiver of a depository institution after

any repeal or amendment of the rule, the rule will continue to be

effective with respect to a transfer that was made in connection with a

securitization or participation in effect before the repeal or

amendment. Thus, where a transfer of financial assets in connection

with a securitization or in the form of a participation is made by a

depository institution and the securitization or participation was in

effect before any repeal or amendment of the rule by the FDIC, such

transfer will continue to satisfy the legal isolation requirement

notwithstanding the repeal or amendment.

The rule is not intended to describe the exclusive circumstances in

which legal isolation may occur. For purposes of the rule, the term

``special purpose entity'' encompasses a trust (including a grantor or

owner trust), a corporation, and a limited liability company or

partnership organized in compliance with applicable state law.


 

V. Matters of Regulatory Procedure


 

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

final rule. Consequently, no information was submitted to the Office of

Management and Budget for review.


 

Regulatory Flexibility Act


 

The final 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 final

rule will not have a significant economic impact on a substantial

number of small business entities.


 

Small Business Regulatory Enforcement Fairness Act


 

The Office of Management and Budget has determined that the rule is

not a ``major rule'' within the meaning of the relevant sections of the

Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) (5

U.S.C. 801 et seq.). As required by SBREFA, the FDIC will file the

appropriate reports with Congress and the General Accounting Office so

that the final rule may be reviewed.


 

The Treasury and General Government Appropriations Act, 1999--

Assessment of Federal Regulations and Policies on Families


 

The FDIC has determined that this final 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 amends 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), 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 due

to a 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


 

[[Page 49192]]


 

Securities Act of 1933 (15 U.S.C. 77d), 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 demonstrably distinct 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

(12 U.S.C. 1821(d)(9), (n)(4)(I), 1823(e).

(g) This section may be repealed or amended by the FDIC upon 30

days notice and opportunity for comment provided in the Federal

Register, but any such repeal or amendment shall not apply to any

transfers of financial assets made in connection with a securitization

or participation that was in effect before such repeal or modification.


 

By order of the Board of Directors.


 

Dated at Washington, D.C. this 27th day of July, 2000.


 

Federal Deposit Insurance Corporation.

James D. LaPierre,

Deputy Executive Secretary.

[FR Doc. 00-20193 Filed 8-10-00; 8:45 am]

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