Skip to Content

Rule

Transitional Safe Harbor Protection for 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

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble

AGENCY:

Federal Deposit Insurance Corporation (FDIC).

ACTION:

Final rule.

SUMMARY:

The Federal Deposit Insurance Corporation (“FDIC”) is amending its regulation, Defining Transitional Safe Harbor Protection for Treatment By The Federal Deposit Insurance Corporation As Conservator Or Receiver Of Financial Assets Transferred In Connection With A Securitization Or Participation. The amendment adds a new provision in order to continue for a limited time the safe harbor provision for securitizations that would be affected by recent changes to generally accepted accounting principles. In effect, the Final Rule permanently “grandfathers” all securitizations for which financial assets were transferred or, for revolving trusts, for which securities were issued prior to September 30, 2010 so long as those securitizations complied with the preexisting requirements under generally accepted accounting principles in effect prior to November 15, 2009. The transitional safe harbor will apply irrespective of whether or not the securitization satisfies all of the conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after November 15, 2009. In Start Printed Page 12963addition, the Final Rule confirms that section 360.6 will continue to protect participations.

DATES:

Effective March 18, 2010, the Board of Directors of the Federal Deposit Insurance Corporation confirms as final with changes, the interim rule published on November 17, 2010 (74 FR 59066) .

Start Further Info

FOR FURTHER INFORMATION CONTACT:

Michael Krimminger, Office of the Chairman, 202-898-8950; George Alexander, Division of Resolutions and Receiverships, 202 898-3718; or R. Penfield Starke, Legal Division, 703-562-2422, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

End Further Info End Preamble Start Supplemental Information

SUPPLEMENTARY INFORMATION:

I. Background

In 2000, the FDIC clarified the scope of its statutory authority as conservator or receiver to disaffirm or repudiate contracts of an insured depository institution (“IDI”) with respect to transfers of financial assets by an IDI in connection with a securitization or participation when it adopted a regulation codified at 12 CFR section 360.6 (“the Securitization Rule”). This rule provides that the FDIC as conservator or receiver will not use its statutory authority to disaffirm or repudiate contracts to reclaim, recover, or recharacterize as property of the institution or the receivership any financial assets transferred by an IDI in connection with a securitization or participation or in the form of a participation, provided that such transfer meets all conditions for sale accounting treatment under generally accepted accounting principles (“GAAP”). The rule was a clarification, rather than a limitation, of the repudiation power because such power authorizes the conservator or receiver to breach a contract or lease entered into by an IDI and be legally excused from further performance but it is not an avoiding power enabling the conservator or receiver to recover assets that were previously transferred by the IDI in connection with the contract. The Securitization Rule provided a “safe harbor” to permit transfers of financial assets by IDIs to an issuing entity in connection with a securitization or in the form of a participation to satisfy the “legal isolation” condition of GAAP as it applies to institutions for which the FDIC may be appointed as conservator or receiver. To satisfy the legal isolation condition, the transferred financial asset must have been presumptively placed beyond the reach of the transferor, its creditors, a bankruptcy trustee, or in the case of an IDI, the FDIC as conservator or receiver. Since its adoption, the Securitization Rule has been relied on by securitization participants, including rating agencies, as assurance that investors could look to securitized financial assets for payment without concern that the financial assets would be interfered with by the FDIC as conservator or receiver.

Recently, the implementation of new accounting rules has created uncertainty for securitization participants. On June 12, 2009, the Financial Accounting Standards Board (“FASB”) finalized modifications to GAAP through Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (“FAS 166”) and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”) (the “2009 GAAP Modifications”). The 2009 GAAP Modifications are effective for annual financial statement reporting periods that begin after November 15, 2009. For most IDIs, the 2009 GAAP Modifications were effective for reporting periods beginning after January 1, 2010. The 2009 GAAP Modifications made changes that affect whether a special purpose entity (“SPE”) must be consolidated for financial reporting purposes, thereby subjecting many SPEs to GAAP consolidation requirements. These accounting changes will require some IDIs to consolidate an issuing entity to which financial assets have been transferred for securitization on to their balance sheets for financial reporting purposes. Given the likely accounting treatment, securitizations could be considered to be an alternative form of secured borrowing. As a result, the safe harbor provision of the Securitization Rule may not apply to the transfer.

FAS 166 also affects the treatment of participations issued by an IDI, in that it defines a participating interest essentially as a pari-passu pro-rata interest in a financial asset and subjects the sale of a participation interest to the same conditions that are imposed on the sale of a financial asset. FAS 166 provides that a transfer of a participation interest that does not qualify for sale treatment will be viewed as a secured borrowing. While the GAAP modifications have some effect on participations, most participations are likely to continue to meet the conditions for sale accounting treatment under GAAP.

The 2009 GAAP Modifications affect the way securitizations are viewed by the rating agencies and whether they can achieve ratings that are based solely on the credit quality of the financial assets, independent from the rating of the IDI. Rating agencies are concerned with several issues, including the ability of a securitization transaction to pay timely principal and interest in the event the FDIC is appointed receiver or conservator of the IDI. Moody's, Standard & Poor's, and Fitch have expressed the view that because of the 2009 GAAP modifications and the extent of the FDIC's rights and powers as conservator or receiver, bank securitization transactions are unlikely to receive AAA ratings and would have to be linked to the rating of the IDI. Because of these uncertainties, securitization practitioners asked the FDIC to provide assurances regarding the position of the conservator or receiver as to the treatment of both existing and future securitization transactions. In response to industry concerns, the FDIC published an Interim Final Rule on November 17, 2010 (74 FR 59066) that addressed securitizations (and participations) issued before March 31, 2010.

II. The Interim Rule

The Interim Rule amended the Securitization Rule by renumbering existing paragraph (b) as clause (b)(1) of paragraph (b). The Interim Rule inserted a new clause (b)(2) of the Securitization Rule that addresses any securitization (i) for which transfers of financial assets were made or (ii), for revolving trusts, for which beneficial interests were issued on or before March 31, 2010. The interim rule provided that, for these securitizations, the FDIC as conservator or receiver shall not, in the exercise of its statutory authority to disaffirm or repudiate contracts, reclaim, recover, or recharacterize as property of the institution or the receivership any such transferred financial assets notwithstanding that such transfer does not satisfy all conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after November 15, 2009, if such transfer satisfied the conditions for sale accounting treatment set forth by generally accepted accounting principles in effect for reporting periods before November 15, 2009, except for the “legal isolation” condition that is addressed by the rule.

III. Summary of Comments Received

The FDIC requested comments on all aspects of the Interim Final Rule. The FDIC specifically requested that commenters respond to the following:Start Printed Page 12964

1. Do the changes to the accounting rules affect the application of the Securitization Rule to participations? If so, are there changes to the Interim Rule that are needed to protect different types of participations issued by IDIs more broadly?

2. Does the Interim Rule adequately encompass all transactions that should be included within its transitional safe harbor?

3. Is the transition period to March 31, 2010 sufficient to implement changes required by the Proposed Rule and to structure transactions to comply with the new generally accepted accounting principles?

In response to the request, the FDIC received two (2) comments from industry associations. A summary of the comments received follows.

The American Bankers Association (ABA) and the American Bankers Association Securities Association (ABASA) provided a joint comment letter to the FDIC and one other comment letter was received from the American Securitization Forum (ASF). Both comment letters stressed that loan securitization and participations are important mechanisms that facilitate financial intermediation and the provision of credit and therefore, market participants need to have certainty regarding the treatment of these transactions in a conservatorship or receivership of the issuer.

In specific reference to the first question posed in the interim rule, the ABA/ABASA commented that FAS 166 would prospectively affect the application of the Securitization Rule to participations. Therefore, it is important that the FDIC include participations in the protections afforded by the Interim rule. In addition, the ABA/ABASA suggested that the accounting treatment of a participation should not control its treatment by the FDIC in a receivership or conservatorship of the originating lender.

In response to question #2, the ABA/ABASA responded that it is possible that the changes to GAAP might impact other types of variable interest entities and other entities, such as pooled funds and joint ventures. Participations or securities held by these entities may be consolidated and recorded on bank balance sheets under certain circumstances and therefore, such entities should also be protected under the final rule. Participations are protected under the final rule's transitional safe harbor until September 30, 2010 to the extent that they would have received sale accounting treatment but for the GAAP Modifications. The FDIC will be addressing whether other types of entities should receive protection under the safe harbor in a separate rulemaking (see Advanced Notice of Proposed Rulemaking 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 After March 31, 2010, 75 FR 934, January 7, 2010).

In response to question #3, both the ABA/ABASA and ASF commented that the permanent grandfathering of securitization and participation issuances in process through March 31, 2010 does not provide an adequate period of time for issuers to adapt to new regulatory requirements relating to the securitization process, particularly if changes to the terms of the transactions are necessary. The ASF suggested that the grandfathering period be extended for another 12-18 months after March 31, 2010.

In light of the comments received, the FDIC has decided to extend the transitional safe harbor until September 30, 2010, so long as those securitizations and participations issued would have complied with the preexisting section 360.6 under generally accepted accounting principles in effect prior to November 15, 2009.

IV. The Final Rule

The Final Rule amends the Securitization Rule by renumbering existing paragraph (b) as clause (b)(1) of paragraph (b). The Final Rule inserts a new clause (b)(2) of the Securitization Rule that addresses any securitization (i) for which transfers of financial assets were made or (ii), for revolving trusts, for which beneficial interests were issued on or before September 30, 2010. The rule provides that, for these securitizations, the FDIC as conservator or receiver shall not, in the exercise of its statutory authority to disaffirm or repudiate contracts, reclaim, recover, or recharacterize as property of the institution or the receivership any such transferred financial assets notwithstanding that such transfer does not satisfy all conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after November 15, 2009, if such transfer satisfied the conditions for sale accounting treatment set forth by generally accepted accounting principles in effect for reporting periods before November 15, 2009, except for the “legal isolation” condition that is addressed by the rule.

V. Regulatory Procedure

A. Administrative Procedure Act

The Administrative Procedure Act (“APA”) provides that general notice of a proposed rulemaking shall be published and that interested persons shall have an opportunity to participate in the rulemaking by submitting written data, views, or arguments, except where the agency finds for good cause that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest. The FDIC has previously solicited and received comments regarding the Interim Final Rule. The FDIC for good cause finds that notice and public procedure with respect to this Final Rule would be impracticable, unnecessary, or contrary to the public interest because the 2009 GAAP Modifications become effective as of the financial reporting period starting on or after November 15, 2009 and retroactively apply to existing securitizations. The FDIC believes that it is in the best interest of the U.S. banking industry and economic for the FDIC to provide assurances with respect to the treatment of existing securitizations that will be affected by the 2009 GAAP Modifications.

The APA also provides that publication of a substantive rule shall be made not less than 30 days before its effective date except as otherwise provided by the agency for good cause found and published with the rule. Because of the retroactive application of the 2009 GAAP Modifications and the immediate need for assurances for securitization participants and the banking industry with respect to existing securitizations and participations, the FDIC invokes this good cause exception to make this Final Rule effective as of March 18, 2010.

B. Community Development and Regulatory Improvement Act

The Riegle Community Development and Regulatory Improvement Act (CDRIA) requires that any new rule prescribed by a Federal banking agency that imposes additional reporting, disclosures, or other new requirements on insured depository institutions take effect on the first day of a calendar quarter. 12 U.S.C. section 4802. This requirement does not apply because the Final Rule does not impose additional reporting, disclosures, or other new requirements on insured depository institution.

C. Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. section 601 et seq.), it is certified that Start Printed Page 12965the Interim Rule will not have a significant economic impact on a substantial number of small business entities. The Final Rule merely extends the safe harbor of section 360.6(b) to securitizations issued before September 30, 2010 and does not represent a change in the law.

E. 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.

F. Paperwork Reduction Act

No collection of information pursuant to section 3504(h) of the Paperwork Reduction Act (44 U.S.C. section 3501 et seq.) is contained in the final rule. Consequently, no information was submitted to the Office of Management and Budget for review.

Start List of Subjects

List of Subjects in 12 CFR Part 360

End List of Subjects Start Amendment Part

For the reasons stated above, the Board of Directors of the Federal Deposit Insurance Corporation confirms as final, the interim rule amending chapter III of title 12 of the Code of Federal Regulations by amending Part 360 published on November 17, 2010 (

End Amendment Part Start Part

PART 360—RESOLUTION AND RECEIVERSHIP RULES

End Part Start Amendment Part

1. The authority citation for part 360 continues to read as follows:

End Amendment Part Start Authority

Authority: 12 U.S.C. 1821(d)(1), 1821(d)(10)(C), 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.

End Authority Start Amendment Part

2. Amend § 360.6 by revising paragraph (b)(2) to read as follows:

End Amendment Part
Treatment by the Federal Deposit Insurance Corporation as conservator or receiver of financial assets transferred in connection with a securitization or participation.
* * * * *

(b) * * *

(2) With respect to any securitization for which transfers of financial assets were made, or for revolving trusts for which beneficial interests were issued, on or before September 30, 2010, the FDIC as conservator or receiver shall not, in the exercise of its statutory authority to disaffirm or repudiate contracts, reclaim, recover, or recharacterize as property of the institution or the receivership any such transferred financial assets notwithstanding that such transfer does not satisfy all conditions for sale accounting treatment under generally accepted accounting principles as effective for reporting periods after November 15, 2009, provided that such transfer satisfied the conditions for sale accounting treatment set forth by generally accepted accounting principles in effect for reporting periods before November 15, 2009, except for the “legal isolation” condition that is addressed by this rule.

* * * * *
Start Signature

Dated at Washington, DC, this 10th day of March 2010.

By Order of the Board of Directors.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

End Signature End Supplemental Information

[FR Doc. 2010-5707 Filed 3-18-10; 8:45 am]

BILLING CODE P