[Federal Register Volume 63, Number 250 (Wednesday, December 30, 1998)]
[Notices]
[Pages 71926-71928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34518]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION


Repudiation and Asset-backed Securitizations and Loan 
Participations

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed statement of policy.

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

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: 
[email protected]. 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