[Federal Register Volume 65, Number 156 (Friday, August 11, 2000)]
[Rules and Regulations]
[Pages 49189-49192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20193]



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  Federal Register / Vol. 65, No. 156 / Friday, August 11, 2000 / Rules 
and Regulations  

[[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.

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is in effect, even if the rule is later repealed or amended.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