[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]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Repudiation and Asset-backed Securitizations and Loan
Participations
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed statement of policy.
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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:
comments@fdic.gov. 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
