[Federal Register Volume 75, Number 189 (Thursday, September 30, 2010)]
[Rules and Regulations]
[Pages 60287-60302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24595]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AD55
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 September 30, 2010
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The Federal Deposit Insurance Corporation (``FDIC'') has
adopted an amended regulation 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 a participation (the ``Rule''). The Rule continues
the safe harbor for financial assets transferred in connection with
securitizations and participations in which the financial assets were
transferred in compliance with the existing regulation. The Rule also
imposes further conditions for a safe harbor for securitizations or
participations issued after a transition period. On March 11, 2010, the
FDIC established a transition period through September 30, 2010. In
order to provide for a transition to the new conditions for the safe
harbor, the Rule provides for an extended transition period through
December 31, 2010 for securitizations and participations. The Rule
defines the conditions for safe harbor protection for securitizations
and participations for which transfers of financial assets are made
after the transition period; and clarifies the application of the safe
harbor to transactions that comply with the new accounting standards
for off balance sheet treatment as well as those that do not comply
with those accounting standards. The conditions contained in the Rule
will serve to protect the Deposit Insurance Fund (``DIF'') and the
FDIC's interests as deposit insurer and receiver by aligning the
conditions for the safe harbor with better and more sustainable
securitization practices by insured depository institutions (``IDIs'').
DATES: Effective September 30, 2010.
FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Office of the
Chairman, 202-898-8950; George Alexander, Division of Resolutions and
Receiverships, (202) 898-3718; Robert Storch, Division of Supervision
and Consumer Protection, (202) 898-8906; or R. Penfield Starke, Legal
Division, (703) 562-2422, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
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 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 360.6 (the
``Securitization Rule''). This rule provided that the FDIC as
conservator or receiver would 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 in the
form of a participation, provided that such transfer met 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. 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 sold and no longer reflected on the books
and records on an IDI.
The Securitization Rule provided a ``safe harbor'' by confirming
``legal isolation'' if all other standards for off balance sheet
accounting treatment, along with some additional conditions focusing on
the enforceability of the transaction, were met by the transfer in
connection with a securitization or a participation. Satisfaction of
``legal isolation'' was vital to securitization transactions because of
the risk that the pool of financial assets transferred into the
securitization trust could be recovered in bankruptcy or in a bank
receivership. If the transfer satisfied this condition, the
Securitization Rule confirmed that the transferred assets were
``legally isolated'' from the IDI in an FDIC conservatorship or
receivership. The Securitization Rule, thus, addressed only purported
sales which met the conditions for off balance sheet accounting
treatment under GAAP.
Since its adoption, the Securitization Rule has been relied on by
securitization participants 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. However, the implementation of new accounting rules has
created uncertainty for securitization participants.
Modifications to GAAP Accounting Standards
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. 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 may require some IDIs to
consolidate an issuing entity to which financial assets have been
transferred for securitization onto their balance sheets for financial
reporting purposes primarily because an affiliate of the IDI retains
control over
[[Page 60288]]
the financial assets.\1\ Given the 2009 GAAP Modifications, legal and
accounting treatment of a transaction may no longer be aligned. As a
result, the safe harbor provision of the Securitization Rule may not
apply to a transfer in connection with a securitization that does not
qualify for off balance sheet treatment.
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\1\ Of particular note, Paragraph 26A of FAS 166 introduces a
new concept that was not in FAS 140, as follows: ``* * * the
transferor must first consider whether the transferee would be
consolidated by the transferor. Therefore, if all other provisions
of this Statement are met with respect to a particular transfer, and
the transferee would be consolidated by the transferor, then the
transferred financial assets would not be treated as having been
sold in the financial statements being presented.''
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FAS 166 also affects the treatment of participations issued by an
IDI, in that it defines participating interests as pari-passu pro-rata
interests in financial assets, and subjects the sale of a participation
interest to the same conditions as the sale of financial assets.
Statement FAS 166 provides that transfers of participation interests
that do not qualify for sale treatment will be viewed as secured
borrowings. 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.
FDI Act Changes
In 2005 Congress enacted Section 11(e)(13)(C) \2\ of the Federal
Deposit Insurance Act (the ``FDI Act'').\3\ In relevant part, this
paragraph provides that generally no person may exercise any right or
power to terminate, accelerate, or declare a default under a contract
to which the IDI is a party, or obtain possession of or exercise
control over any property of the IDI, or affect any contractual rights
of the IDI, without the consent of the conservator or receiver, as
appropriate, during the 45-day period beginning on the date of the
appointment of the conservator or the 90-day period beginning on the
date of the appointment of the receiver. If a securitization is treated
as a secured borrowing, Section 11(e)(13)(C) could prevent the
investors from recovering monies due to them for up to 90 days.
Consequently, securitized assets that remain property of the IDI (but
subject to a security interest) would be subject to the stay, raising
concerns that any attempt by securitization noteholders to exercise
remedies with respect to the IDI's assets would be delayed. During the
stay, interest and principal on the securitized debt could remain
unpaid. The FDIC has been advised that this 90-day delay would cause
substantial downgrades in the ratings provided on existing
securitizations and could prevent planned securitizations for multiple
asset classes, such as credit cards, automobile loans, and other
credits, from being brought to market.
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\2\ 12 U.S.C. 1821(e)(13)(C).
\3\ 12 U.S.C. 1811 et seq.
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Analysis
The FDIC believes that several of the issues of concern for
securitization participants regarding the impact of the 2009 GAAP
Modifications on the eligibility of transfers of financial assets for
safe harbor protection can be addressed by clarifying the position of
the conservator or receiver under established law. Under Section
11(e)(12) of the FDI Act,\4\ the conservator or receiver cannot use its
statutory power to repudiate or disaffirm contracts to avoid a legally
enforceable and perfected security interest in transferred financial
assets. This provision applies whether or not the securitization meets
the conditions for sale accounting. The Rule clarifies that prior to
repudiation or, in the case of a monetary default, prior to the date on
which the FDIC's consent to the exercise of remedies becomes effective,
required payments of principal and interest and other amounts due on
the securitized obligations will continue to be made. In addition, if
the FDIC decides to repudiate the securitization transaction, the FDIC
will pay damages equal to the par value of the outstanding obligations,
less prior payments of principal received, plus unpaid, accrued
interest through the date of repudiation. The payment of such damages
will discharge the lien on the securitization assets. This
clarification in paragraphs (d)(4) and (e) of the Rule addresses
certain questions that were raised about the scope of the stay codified
in Section 11(e)(13)(C).
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\4\ 12 U.S.C. 1821(e)(12).
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An FDIC receiver generally makes a determination of what
constitutes property of an IDI based on the books and records of the
failed IDI. Given the 2009 GAAP Modifications, there may be
circumstances in which a sale transaction will continue to be reflected
on the books and records of the IDI because the IDI or one of its
affiliates continues to exercise control over the assets either
directly or indirectly. The Rule provides comfort that conforming
securitizations which do not qualify for off balance sheet treatment
will have access to the assets in a timely manner irrespective of
whether a transaction is viewed as a legal sale.
If a transfer of financial assets by an IDI to an issuing entity in
connection with a securitization is not characterized as a sale and is
properly perfected, the securitized assets will be viewed as subject to
a perfected security interest. This is significant because the FDIC as
conservator or receiver is prohibited by statute from avoiding a
legally enforceable and perfected security interest, except where such
an interest is taken in contemplation of insolvency or with the intent
to hinder, delay, or defraud the institution or the creditors of such
institution.\5\ Consequently, the ability of the FDIC as conservator or
receiver to reach financial assets transferred by an IDI to an issuing
entity in connection with a securitization, if such transfer is
characterized as a transfer for security, is limited by the combination
of the status of the entity as a secured party with a perfected
security interest in the transferred assets and the statutory provision
that prohibits the conservator or receiver from avoiding a legally
enforceable and perfected security interest.
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\5\ 12 U.S.C. 1821(e)(12).
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Thus, for securitizations that are consolidated on the books of an
IDI, the Rule provides a safe harbor in a conservatorship or
receivership. There are two situations in which consent to expedited
access to transferred assets will be given--(i) monetary default under
a securitization by the FDIC as conservator or receiver or (ii)
repudiation by the FDIC of the securitization agreements pursuant to
which the financial assets were transferred. The Rule provides that in
the event the FDIC is in monetary default under the securitization
documents due to its failure to pay or apply collections from the
financial assets received by it in accordance with the securitization
documents and the default continues for a period of ten (10) business
days after written notice to the FDIC, the FDIC will be deemed to
consent pursuant to Sections 12 U.S.C. 1821(e)(13)(C) and 12 U.S.C.
1825(b)(2) to the exercise of contractual rights under the documents on
account of such monetary default, and such consent shall constitute
satisfaction in full of obligations of the IDI and the FDIC as
conservator or receiver to the holders of the securitization
obligations.
The Rule also provides that in the event the FDIC repudiates the
securitization asset transfer agreement, the FDIC shall have the right
to discharge the lien on the financial assets included in the
securitization by paying damages in an amount equal to the par value of
the obligations in the securitization on the date of the
[[Page 60289]]
appointment of the FDIC as conservator or receiver, less any principal
payments received by the investors through the date of repudiation,
plus unpaid, accrued interest through the date of repudiation. The
payment of accrued interest is dependent on whether the FDIC has
received those funds through payments on the financial assets. If such
damages are not paid within ten (10) business days of repudiation, the
FDIC will be deemed to consent pursuant to Sections 12 U.S.C.
1821(e)(13)(C) and 12 U.S.C. 1825(b)(2) to the exercise of contractual
rights under the securitization agreements.
The Rule also confirms that, if the transfer of the assets in a
securitization is viewed as a sale for accounting purposes (and thus
the assets are not reflected on the books of an IDI), the FDIC as
receiver will not, in the exercise of its authority to disaffirm or
repudiate contracts, reclaim, recover, or recharacterize as property of
the institution or the receivership the transferred assets. However,
this safe harbor only applies if the transactions comply with the
requirements set forth in paragraphs (b) and (c) of the Rule.
Pursuant to 12 U.S.C. 1821(e)(13)(C), no person may exercise any
right or power to terminate, accelerate, or declare a default under a
contract to which the IDI is a party, or to obtain possession of or
exercise control over any property of the IDI, or affect any
contractual rights of the IDI, without the consent of the conservator
or receiver, as appropriate, during the 45-day period beginning on the
date of the appointment of the conservator or the 90-day period
beginning on the date of the appointment of the receiver. In order to
address concerns that the statutory stay could delay repayment of
investors in a securitization or delay a secured party from exercising
its rights with respect to securitized financial assets, the Rule
provides for consent by the conservator or receiver or, if the FDIC is
acting as servicer, for the agreement of the FDIC in that capacity, to
continue making required payments under the securitization documents
and continued servicing of the assets. In addition, the Rule allows for
the exercise of self-help remedies during the stay period of 12 U.S.C.
1821(e)(13)(C) ten (10) business days after notice is given following a
monetary default by the FDIC or, in the event that the FDIC does not
timely pay repudiation damages.
The FDIC recognizes that, as a practical matter, the scope of the
comfort that is provided by the Rule is more limited than that provided
in the Securitization Rule. However, the FDIC believes that the
requirements are necessary to support sustainable securitizations. The
safe harbor is not exclusive, and it does not address any transactions
that fall outside the scope of the safe harbor or that fail to comply
with one or more safe harbor conditions. The FDIC believes that its
safe harbor should promote responsible financial asset underwriting and
increase transparency in the market.
Previous Rulemakings
On November 12, 2009, the FDIC issued an Interim Final Rule
amending 12 CFR 360.6, 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, to provide for safe harbor treatment
for participations and securitizations until March 31, 2010, which was
further amended, on March 11, 2010, by a Final Rule extending the safe
harbor until September 30, 2010 (as so amended, the ``Transition
Rule''). Under the Transition Rule, all existing securitizations as
well as those for which transfers were made or, for revolving trusts,
for which beneficial interests were issued, on or prior to September
30, 2010, were permanently ``grandfathered'' so long as they complied
with the pre-existing Section 360.6.
At its December 15, 2009 meeting, the Board adopted an Advance
Notice of Proposed Rulemaking (``ANPR'') and, at its May 11, 2010
meeting, the Board adopted a Notice of Proposed Rulemaking (``NPR''),
each of which sought public comment on the scope of amendments to
Section 360.6 as well as on the requirements for the application of the
safe harbor. The FDIC considered all of the comments received in
response to the ANPR in formulating the NPR. The NPR and the public
comments received are discussed below in Sections III and IV.
Purpose of the Rule
The FDIC, as deposit insurer and receiver for failed IDIs, has a
unique responsibility and interest in ensuring that residential
mortgage loans and other financial assets originated by IDIs are
originated for long-term sustainability. The supervisory interest in
origination of quality loans and other financial assets is shared with
other bank and thrift supervisors. Nevertheless, the FDIC's
responsibilities to protect insured depositors and resolve failed
insured banks and thrifts and its responsibility to the DIF require
that when the FDIC provides a safe harbor consenting to special relief
from the application of its receivership powers, it must do so in a
manner that fulfills these responsibilities.
The evident defects in many subprime and other mortgages originated
and sold into securitizations requires attention by the FDIC to fulfill
its responsibilities as deposit insurer and receiver in addition to its
role as a supervisor. The defects and misalignment of incentives in the
securitization process for residential mortgages were a significant
contributor to the erosion of underwriting standards throughout the
mortgage finance system. While many of the troubled mortgages were
originated by non-bank lenders, insured banks and thrifts also made
many troubled loans as underwriting standards declined under the
competitive pressures created by the returns achieved by lenders and
service providers through the ``originate to distribute'' model.
Defects in the incentives provided by securitization through
immediate gains on sale for transfers into securitization vehicles and
fee income directly led to material adverse consequences for insured
banks and thrifts. Among these consequences were increased repurchase
demands under representations and warranties contained in
securitization agreements, losses on purchased mortgage and asset-
backed securities, severe declines in financial asset values and in
mortgage- and asset-backed security values due to spreading market
uncertainty about the value of structured finance investments, and
impairments in overall financial prospects due to the accelerated
decline in housing values and overall economic activity. These
consequences, and the overall economic conditions, directly led to the
failures of many IDIs and to significant losses to the DIF. In this
context, it would be imprudent for the FDIC to provide consent or other
clarification of its application of its receivership powers without
imposing requirements designed to realign the incentives in the
securitization process to avoid these devastating effects.
The FDIC's adoption of 12 CFR 360.6 in 2000 facilitated legal and
accounting analyses that supported securitization. In view of the
accounting changes and the effects they have upon the application of
the Securitization Rule, it is crucial that the FDIC provide
clarification of the application of its receivership powers in a way
that reduces the risks to the DIF by better aligning the incentives in
securitization to support sustainable lending and structured finance
transactions.
The Rule is fully consistent with the position of the FDIC in the
Final Covered Bond Policy Statement of July 15, 2008. In that Policy
Statement, the
[[Page 60290]]
FDIC Board of Directors acted to clarify how the FDIC would treat
covered bonds in the case of a conservatorship or receivership with the
express goal of thereby facilitating the development of the U.S.
covered bond market. As noted in that Policy Statement, it served to
``define the circumstances and the specific covered bond transactions
for which the FDIC will grant consent to expedited access to pledged
covered bond collateral.'' The Policy Statement further specifically
referenced the FDIC's goal of promoting development of the covered bond
market, while protecting the DIF and prudently applying its powers as
conservator or receiver.\6\
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\6\ FDIC Covered Bond Policy Statement, 73 FR 43754 et seq.
(July 28, 2008).
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The Rule is also consistent with the amendments to Regulation AB
proposed by the Securities and Exchange Commission (``SEC'') on April
7, 2010 (as so proposed to be amended, ``New Regulation AB''). The
proposed amendments represent a significant overhaul of Regulation AB
and related rules governing the offering process, disclosure
requirements and ongoing reporting requirements for securitizations.
New Regulation AB would establish extensive new requirements for both
SEC registered publicly offered securitization and many private
placements, including disclosure of standardized financial asset level
information, enhanced investor cash flow modeling tools and on-going
information reporting requirements. In addition New Regulation AB
requires certain certifications to the quality of the financial asset
pool, retention by the sponsor or an affiliate of a portion of the
securitization securities and third party reports on compliance with
the sponsor's obligation to repurchase assets for breach of
representations and warranties as a precondition to an issuer's ability
to use a shelf registration. The disclosure and retention requirements
of New Regulation AB are consistent with and support the approach of
the Rule.
To ensure that IDIs are sponsoring securitizations in a responsible
and sustainable manner, the Rule imposes certain conditions on
securitizations that are not grandfathered by the Rule's transition
provision and additional conditions on non-grandfathered
securitizations that include residential mortgages (``RMBS''),
including those that qualify as true sales, as a prerequisite for the
FDIC to grant consent to the exercise of the rights and powers listed
in 12 U.S.C. 1821(e)(13)(C) with respect to such financial assets. To
qualify for the safe harbor provision of the Rule, the conditions must
be satisfied for any securitization (i) for which transfers of
financial assets were made on or after December 31, 2010 or (ii) from a
master trust or revolving trust established after adoption of the Rule,
or from an open commitment not in effect on the date of adoption of the
Rule or which otherwise does not qualify to be grandfathered under the
transition provisions.
II. The NPR
On January 7, 2010, the FDIC published its Advance Notice of
Proposed Rulemaking Regarding Treatment by the FDIC as Conservator or
Receiver of Financial Assets Transferred by an IDI in Connection with a
Securitization or Participation After March 31, 2010 in the Federal
Register (75 FR 935 (Jan. 7, 2010)) soliciting public comment to
proposed amendments to the Securitization Rule. On May 17, 2010, the
FDIC published its Notice of Proposed Rulemaking Regarding Treatment by
the FDIC as Conservator or Receiver of Financial Assets Transferred by
an IDI in Connection with a Securitization or Participation After
September 30, 2010 (75 FR 27471 (May 17, 2010)). The NPR solicited
public comment on the Proposed Rule for 45 days.
III. Summary of Comments on the NPR
The FDIC received 22 comment letters on the Proposed Rule and held
one teleconference at which details of the NPR were discussed. The
letters included comments from trade associations, banks and rating
agencies, among others.
Several entities commented specifically on the need for greater
disclosure, and the comments included support for the requirement of
loan level data for residential mortgage loans. In addition, support
was expressed for risk retention; however, there were differing views
as to the level of required risk retention.
A number of commenters had objections to the Proposed Rule.
Objections fell mainly into the following categories: (1) With the
passage of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, the FDIC should only adopt conditions jointly with the other
federal regulators; (2) certain criteria were deemed to be too
qualitative in nature; (3) certain conditions were viewed as
potentially increasing costs to IDIs; and (4) the remedies available
under the safe harbor and legal isolation were perceived as lacking
clarity.
Joint action by the agencies. The FDIC undertook to revise its safe
harbor in light of accounting changes that came into effect for
reporting periods after November 15, 2009. At that point in time, the
outcome of financial regulatory reform proposals was unclear. The FDIC
did not delay its efforts because the accounting and legal bases for
the pre-existing safe harbor did not apply after November 2009. Given
the changed facts, industry urged the FDIC to evaluate the safe harbor
and provide guidance in light of the 2009 GAAP Modifications.
Beginning in the fall of 2009, FDIC staff discussed differing
approaches to the safe harbor regulation with the staff of all relevant
federal financial regulators and the Department of Treasury.
Accordingly, earlier this year the Securities and Exchange Commission
proposed New Regulation AB to govern required disclosures for shelf
registrations and private placements that were fully consistent with
the additional transparency requirements contained in the Proposed
Rule. As a result, the Rule and the SEC's proposed regulations are
fully consistent.
Nothing in the Rule is inconsistent with the Dodd-Frank
legislation. The provisions of the Dodd-Frank legislation substantively
address only the risk retention requirements and, pending further
regulatory action, require five percent risk retention. This is fully
consistent with the Rule as well.
Section 941 of Dodd-Frank requires the federal banking agencies,
including the FDIC, and the SEC to jointly prescribe regulations to
require any securitizer to retain an economic interest in a portion of
the credit risk for any assets involved in a securitization. Dodd-Frank
also requires regulations addressing retention of credit risk for
residential mortgages, and requires the agencies to define ``qualified
residential mortgages'' which are exempt from risk retention. Section
941 authorizes the rulemaking agencies to consider whether additional
exemptions, exceptions, or adjustments are appropriate. The regulations
covering securitizations involving residential mortgages must be
jointly issued by the foregoing agencies along with the Secretary of
the Department of Housing and Urban Development and the Federal Housing
Finance Agency. These regulations must be adopted within 270 days of
enactment of the Dodd-Frank legislation. In order to assure consistency
between the Rule and these required interagency regulations, the Rule
provides that upon the effective date of final regulations required by
[[Page 60291]]
Section 941(b), such final regulations shall exclusively govern the
requirement to retain an economic interest in a portion of the credit
risk of the financial assets under the Rule.
An important consideration is that different regulatory agencies
have different regulatory jurisdiction. The FDIC has regulatory
jurisdiction over the rules applied in the resolution of failed IDIs,
as the SEC has jurisdiction over disclosure requirements under the
securities laws. In exercising their different responsibilities, the
agencies may have to adopt rules addressing the same issues within
their regulatory mandate. In those cases, those rules should be
harmonized except where differences are appropriate to accomplish their
different regulatory missions. For the FDIC's safe harbor rule, the
FDIC is setting the conditions that define how it will apply its
receivership powers and, thereby, what types of transactions will be
entitled to the safe harbor protecting them from application of certain
of those powers. This was precisely what the FDIC did in 2000 when it
adopted the original version of Section 360.6. The interagency risk
retention rule required by the Dodd-Frank legislation will not address
all of the issues relevant to the application of those receivership
rules or to the availability of the safe harbor. In exercising the
FDIC's regulatory jurisdiction, the Rule addresses risk retention as
well as the other components of the safe harbor whereas the interagency
rule will solely address risk retention.
Certain criteria were too qualitative in nature. A number of
commenters noted that reliance on qualitative criteria or requirements
for continuing actions, such as ongoing disclosures, would make it more
difficult to de-link the rating of a securitization from that of the
sponsor. It is a debatable proposition that rating agencies cannot
evaluate qualitative information when they must rely on changing,
qualitative information in any ongoing surveillance of a rating.
Nonetheless, the Rule reflects revisions from the text of the Proposed
Rule and ties disclosures and many other requirements solely to the
contractual terms of the securitization documents. This will permit a
clearer assessment of whether a transaction meets the conditions in the
Rule. Certain other conditions included in the Proposed Rule that were
asserted to be vague were also modified to clarify terminology and
respond to the concerns expressed in comments.
Conditions potentially increase costs for IDIs. Comments received
in opposition to the conditions included disagreement that such
requirements would serve to promote more long-term sustainability for
loans and other financial assets originated by IDIs and assertions that
the conditions would impose additional costs on IDIs and competitively
disadvantage IDIs in relation to non-regulated securitization sponsors.
These comments reflect a misunderstanding of the purpose of the
conditions. The conditions are designed to provide greater clarity and
transparency to allow a better ongoing evaluation of the quality of
lending by banks and reduce the risks to the DIF from opaque
securitization structures and the poorly underwritten loans that led to
the onset of the financial crisis. In addition, these comments fail to
recognize that securitization as a viable liquidity tool in mortgage
finance will not return without greater transparency and clarity
because investors have experienced the difficulties provided by the
existing model of securitization. However, greater transparency is not
solely for investors, but will serve to more closely tie the
origination of loans to their long-term performance by requiring
disclosures of that performance. These conditions are supported by New
Regulation AB.
Remedies available under the safe harbor and legal isolation. A
number of commenters were concerned that damages payable for
repudiation of securitization transfer agreements would not include
payment of interest to the date of repudiation. The Rule has been
revised to specifically include in the calculation of repudiation
damages accrued interest through the date of repudiation, to the extent
received through payments on financial assets through the date of
repudiation.
Credit rating agencies expressed concern that in the absence of
clarification by the FDIC regarding the continuation of payments after
an IDI's failure and the payment of damages in the event of
repudiation, an IDI securitization might need to be linked to the IDI's
credit rating. The Rule addresses these issues in its provisions
consenting to payments being made prior to repudiation and in its
provisions relating to the amount of damages payable in the event of
repudiation by a conservator or receiver.
Some commenters also objected to the safe harbor's reliance on the
accounting treatment of the transfers of financial assets being
securitized and were critical of the Rule's treatment of financial
assets that did not obtain off balance sheet accounting treatment as
property of an insolvent IDI. Commenters suggested that the FDIC focus
instead on a legal sale analysis in determining whether a transfer of
assets was eligible for the safe harbor.
The FDIC has rejected this position because the Securitization Rule
as adopted in 2000, as well as the FDIC's longstanding evaluation of
the assets potentially subject to receivership powers, has been based
on the treatment of those assets as on or off balance sheet. This was
explicitly stated in the Securitization Rule. Moreover, it is
appropriate for the FDIC to rely on the books and records of a failed
IDI in administering a conservatorship or receivership and consider how
to apply a safe harbor for assets that are deemed part of the IDI's
balance sheet under GAAP.
Objections to the treatment of securitization transfers that do not
meet the requirements for off balance sheet treatment under the new
accounting rules are misplaced. Prior to the Securitization Rule,
securitization transactions were typically treated as secured
transactions or sales. As a result, under the Rule, if the transfer
does not meet the standards for off balance sheet treatment, the FDIC
will consider the transaction as a secured transaction if it meets the
requirements imposed on such transactions under the Rule and state law.
In this way, investors in securitization transactions that do not
qualify for off balance sheet treatment may still receive benefits of
expedited access to the securitized financial assets if they meet the
conditions specified in the Rule.
Comments relating to specific provisions of the NPR are discussed
below in the description of the Rule.
IV. The Rule
The Rule replaces the Securitization Rule as amended by the
Transition Rule. Paragraph (a) of the Rule sets forth definitions of
terms used in the Rule. It retains many of the definitions previously
used in the Securitization Rule but modifies or adds definitions to the
extent necessary to accurately reflect current industry practice in
securitizations. Pursuant to these definitions, the safe harbor does
not apply to certain government sponsored enterprises (``Specified
GSEs''), affiliates of certain such enterprises, or any entity
established or guaranteed by those GSEs. In addition, the Rule is not
intended to apply to the Government National Mortgage Association
(``Ginnie Mae'') or Ginnie Mae-guaranteed securitizations. When Ginnie
Mae guarantees a security, the mortgages backing the security are
assigned to Ginnie Mae, an entity owned entirely by the United States
government. Ginnie
[[Page 60292]]
Mae's statute contains broad authority to enforce its contract with the
lender/issuer and its ownership rights in the mortgages backing Ginnie
Mae-guaranteed securities. In the event that an entity otherwise
subject to the Rule issues both guaranteed and non-guaranteed
securitizations, the securitizations guaranteed by a Specified GSE are
not subject to the Rule.
Paragraph (b) of the Rule imposes conditions to the availability of
the safe harbor for transfers of financial assets to an issuing entity
in connection with a securitization. These conditions make a clear
distinction between the conditions imposed on RMBS from those imposed
on securitizations for other asset classes. In the context of a
conservatorship or receivership, the conditions applicable to all
securitizations will improve overall transparency and clarity through
disclosure and documentation requirements along with ensuring effective
incentives for prudent lending by requiring that the payment of
principal and interest be based primarily on the performance of the
financial assets and by requiring retention of a share of the credit
risk in the securitized loans.
The conditions applicable to RMBS are more detailed and include
additional capital structure, disclosure, documentation and
compensation requirements as well as a requirement for the
establishment of a reserve fund. These requirements are intended to
address the factors that caused significant losses in current RMBS
securitization structures as demonstrated in the recent crisis.
Confidence can be restored in RMBS markets only through greater
transparency and other structures that support sustainable mortgage
origination practices and require increased disclosures. These
standards respond to investor demands for greater transparency and
alignment of the interests of parties to the securitization. In
addition, they are generally consistent with industry efforts while
taking into account proposed legislative and regulatory initiatives.
Capital Structure and Financial Assets.
For all securitizations, the benefits of the Rule should be
available only to securitizations that are readily understood by the
market, increase liquidity of the financial assets and reduce consumer
costs. Consistent with New Regulation AB, the documents governing the
securitization will be required to provide that there be financial
asset level disclosure as appropriate to the securitized financial
assets for any resecuritizations (securitizations supported by other
securitization obligations). These disclosures must include full
disclosure of the obligations, including the structure and the assets
supporting each of the underlying securitization obligations, and not
just the obligations that are transferred in the re-securitization.
This requirement applies to all re-securitizations, including static
re-securitizations as well as managed collateralized debt obligations.
The Rule provides that securitizations that are unfunded or
synthetic transactions are not eligible for expedited consent under the
Rule. To support sound lending, the documents governing all
securitizations must require that payments of principal and interest on
the obligations be primarily dependent on the performance of the
financial assets supporting the securitization and that such payments
not be contingent on market or credit events that are independent of
the assets supporting the securitization, except for interest rate or
currency mismatches between the financial assets and the obligations to
investors.
For RMBS only, the Rule limits the capital structure of the
securitization to six tranches or less to discourage complex and opaque
structures. The most senior tranche could include time-based sequential
pay or planned amortization and companion sub-tranches, which are not
viewed as separate tranches for the purpose of the six tranche
requirement. This condition will not prevent an issuer from creating
the economic equivalent of multiple tranches by re-securitizing one or
more tranches, so long as they meet the conditions set forth in the
rule, including adequate disclosure in connection with the re-
securitization. In addition, RMBS cannot include leveraged tranches
that introduce market risks (such as leveraged super senior tranches).
Although the financial assets transferred into an RMBS will be
permitted to benefit from asset level credit support, such as
guarantees (including guarantees provided by governmental agencies,
private companies, or government-sponsored enterprises), co-signers, or
insurance, the RMBS cannot benefit from external credit support at the
issuing entity or pool level. It is intended that guarantees permitted
at the asset level include guarantees of payment or collection, but not
credit default swaps or similar items. The temporary payment of
principal and interest, however, can be supported by liquidity
facilities. These conditions are designed to limit both the complexity
and the leverage of an RMBS and therefore the systemic risks introduced
by them in the market. In addition, the Rule provides that the
securitization obligations can be enhanced by credit support or
guarantees provided by Specified GSEs. However, as noted in the
discussion of the definitions above, a securitization that is wholly
guaranteed by a Specified GSE is not subject to the Rule and thus not
eligible for the safe harbor.
Comments in response to the NPR expressed concern that a limitation
on the number of tranches of an RMBS would negatively affect the
ability of securitizations to meet investor objectives and maximize
offering proceeds. In addition, commenters argued that there should be
no restriction on external third party pool level credit support, while
one commenter stated that guarantees in RMBS transactions should be
permitted at the loan level only if issued by regulated third parties
with proven capacity to ensure prudent loan origination and satisfy
their obligations.
In formulating the Rule, the FDIC was mindful of the need to permit
innovation and accommodate financing needs, and thus attempted to
strike a balance between permitting multi-tranche structures for RMBS
transactions, on the one hand, and promoting readily understandable
securitization structures and limiting overleveraging of residential
mortgage assets, on the other hand.
The FDIC is of the view that permitting pool level, external credit
support in an RMBS can lead to overleveraging of assets, as investors
might focus on the credit quality of the credit support provider as
opposed to the sufficiency of the financial asset pool to service the
securitization obligations. However, the Rule has been revised to
permit pool level credit support by Specified GSEs.
Finally, although the Rule excludes unfunded and synthetic
securitizations from the safe harbor, the FDIC does not view the
inclusion of existing credit lines that are not fully drawn in a
securitization as causing such securitization to be an ``unfunded
securitization.'' The provision is intended to emphasize that the Rule
applies only where there is an actual transfer of financial assets. In
addition, to the extent an unfunded or synthetic transaction qualifies
for treatment as a qualified financial contract under Section (11)(e)
of the FDI Act, it would not need the benefits of the safe harbor
provided in the Rule in an FDIC receivership.\7\
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\7\ 12 U.S.C. 1821(e)(10).
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[[Page 60293]]
Disclosure
For all securitizations, disclosure serves as an effective tool for
increasing the demand for high quality financial assets and thereby
establishing incentives for robust financial asset underwriting and
origination practices. By increasing transparency in securitizations,
the Rule will enable investors (which may include banks) to decide
whether to invest in a securitization based on full information with
respect to the quality of the asset pool and thereby provide additional
liquidity only for sustainable origination practices.
The data must enable investors to analyze the credit quality for
the specific asset classes that are being securitized. The documents
governing securitizations must, at a minimum, require disclosure for
all issuances to include the types of information required under
current Regulation AB (17 CFR 229.1100-1123) or any successor
disclosure requirements with the level of specificity that applies to
public issuances, even if the obligations are issued in a private
placement or are not otherwise required to be registered.
The documents governing securitizations that will qualify under the
Rule must require disclosure of the structure of the securitization and
the credit and payment performance of the obligations, including the
relevant capital or tranche structure and any liquidity facilities and
credit enhancements. The disclosure must be required to include the
priority of payments and any specific subordination features, as well
as any waterfall triggers or priority of payment reversal features. The
disclosure at issuance will also be required to include the
representations and warranties made with respect to the financial
assets and the remedies for breach of such representations and
warranties, including any relevant timeline for cure or repurchase of
financial assets, and policies governing delinquencies, servicer
advances, loss mitigation and write offs of financial assets. The
documents must also require that periodic reports provided to investors
include the credit performance of the obligations and financial assets,
including periodic and cumulative financial asset performance data,
modification data, substitution and removal of financial assets,
servicer advances, losses that were allocated to each tranche and
remaining balance of financial assets supporting each tranche as well
as the percentage coverage for each tranche in relation to the
securitization as a whole. Where appropriate for the type of financial
assets included in the pool, reports must also include asset level
information that may be relevant to investors (e.g. changes in
occupancy, loan delinquencies, defaults, etc.). The FDIC recognizes
that for certain asset classes, such as credit card receivables, the
disclosure of asset level information is less informative and, thus,
will not be required.
The securitization documents must also require disclosure to
investors of the nature and amount of compensation paid to any mortgage
or other broker, the servicer(s), rating agency or third-party advisor,
and the originator or sponsor, and the extent to which any risk of loss
on the underlying financial assets is retained by any of them for such
securitization. The documents must also require disclosure of changes
to this information while obligations are outstanding. This disclosure
should enable investors to assess potential conflicts of interests and
how the compensation structure affects the quality of the assets
securitized or the securitization as a whole.
For RMBS, loan level data as to the financial assets securing the
mortgage loans, such as loan type, loan structure, maturity, interest
rate and location of property, will also be required to be disclosed by
the sponsor. Sponsors of securitizations of residential mortgages will
be required to affirm compliance in all material respects with
applicable statutory and regulatory standards for origination of
mortgage loans, including that the mortgages in the securitization pool
are underwritten at the fully indexed rate relying on documented income
\8\ and comply with supervisory guidance governing the underwriting of
residential mortgages, including the Interagency Guidance on Non-
Traditional Mortgage Products, October 5, 2006, and the Interagency
Statement on Subprime Mortgage Lending, July 10, 2007, and such other
or additional guidance applicable at the time of loan origination. None
of the disclosure conditions should be construed as requiring the
disclosure of personally identifiable information of obligors or
information that would violate applicable privacy laws.
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\8\ Institutions should verify and document the borrower's
income (both source and amount), assets and liabilities. For the
majority of borrowers, institutions should be able to readily
document income using recent W-2 statements, pay stubs, and/or tax
returns. Stated income and reduced documentation loans should be
accepted only if there are mitigating factors that clearly minimize
the need for direct verification of repayment capacity. Reliance on
such factors also should be documented. Mitigating factors might
include situations where a borrower has substantial liquid reserves
or assets that demonstrate repayment capacity and can be verified
and documented by the lender. A higher interest rate is not
considered an acceptable mitigating factor.
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The Rule also requires sponsors to disclose a third party due
diligence report on compliance with such standards and the
representations and warranties made with respect to the financial
assets.
Finally, the Rule requires that the securitization documents
require the disclosure by servicers of any ownership interest of the
servicer or any affiliate of the servicer in other whole loans secured
by the same real property that secures a loan included in the financial
asset pool. This provision does not require disclosure of interests
held by servicers or their affiliates in the securitization securities.
This provision is intended to give investors information to evaluate
potential servicer conflicts of interest that might impede the
servicer's actions to maximize value for the benefit of investors.
Documentation and Recordkeeping
For all securitizations, the operative agreements are required to
use as appropriate available standardized documentation for each
available asset class. It is not possible to define in advance when use
of standardized documentation will be appropriate, but certainly when
there is general market use of a form of documentation for a particular
asset class, or where a trade group has formulated standardized
documentation generally accepted by the industry, such documentation
must be used.
The Rule also requires that the securitization documents define the
contractual rights and responsibilities of the parties, including but
not limited to representations and warranties, ongoing disclosure
requirements and any measures to avoid conflicts of interest. The
documents are also required to provide authority for the parties to
fulfill their rights and responsibilities under the securitization
contracts.
Additional conditions apply to RMBS to address a significant issue
that has been demonstrated in the mortgage crisis by requiring that
servicers have the authority to mitigate losses on mortgage loans
consistent with maximizing the net present value of the mortgages.
Therefore, for RMBS, contractual provisions in the servicing agreement
must provide servicers with the authority to modify loans to address
reasonably foreseeable defaults and to take other action to maximize
the value and minimize losses on the securitized financial assets. The
documents must require servicers to apply industry best
[[Page 60294]]
practices related to asset management and servicing.
The RMBS documents may not give control of servicing discretion to
a particular class of investors. The documents must require that the
servicer act for the benefit of all investors rather for the benefit of
any particular class of investors. Consistent with the forgoing, the
documents must require the servicer to commence action to mitigate
losses no later than ninety (90) days after an asset first becomes
delinquent unless all delinquencies on such asset have been cured. A
servicer must also be required to maintain sufficient records of its
actions to permit appropriate review of its actions.
The FDIC believes that a prolonged period of servicer advances in a
market downturn misaligns servicer incentives with those of the RMBS
investors. Servicing advances also serve to aggravate liquidity
concerns, exposing the market to greater systemic risk. Occasional
advances for late payments, however, are beneficial to ensure that
investors are paid in a timely manner. To that end, the servicing
agreement for RMBS must not require the primary servicer to advance
delinquent payments of principal and interest by borrowers for more
than three (3) payment periods unless financing or reimbursement
facilities to fund or reimburse the primary servicers are available.
However, such facilities shall not be dependent for repayment on
foreclosure proceeds.
Compensation
The compensation requirements of the Rule apply only to RMBS. Due
to the demonstrated issues in the compensation incentives in RMBS, in
this asset class the Rule seeks to realign compensation to parties
involved in the rating and servicing of residential mortgage
securitizations.
The securitization documents are required to provide that any fees
payable credit rating agencies or similar third-party evaluation
companies must be payable in part over the five (5) year period after
the initial issuance of the obligations based on the performance of
surveillance services and the performance of the financial assets, with
no more than sixty (60) percent of the total estimated compensation due
at closing. Thus payments to rating agencies must be based on the
actual performance of the financial assets, not their ratings.
A second area of concern is aligning incentives for proper
servicing of the mortgage loans. Therefore, the documents must require
that compensation to servicers must include incentives for servicing,
including payment for loan restructuring or other loss mitigation
activities, which maximizes the net present value of the financial
assets in the RMBS.
Responses to the NPR stated that compensation to rating agencies
should not be linked to performance of a securitization because such
linkage will interfere with the neutral ratings process, and a rating
agency expressed the concern that such linkage might give rating
agencies an incentive to delay rating actions that would alert the
market to a deterioration. Concern was also expressed that this
provision could incentivize a rating agency to rate a transaction at a
level that is lower than the level that the rating agency believes to
be the appropriate level.
The FDIC notes that rating agencies must have procedures in place
to protect analytic independence and ensure the integrity of their
ratings. The comments misconstrue the precise terms of the safe harbor
requirement, which requires that compensation must be linked to the
performance of the assets, not the ratings. Accordingly, there is no
incentive to delay ratings actions.
Origination and Retention Requirements
To provide further incentives for quality origination practices,
several conditions address origination and retention requirements for
all securitizations. For all securitizations, the sponsor must retain
an economic interest in a material portion, defined as not less than
five (5) percent, of the credit risk of the financial assets. The
retained interest may be either in the form of an interest of not less
than five (5) percent in each credit tranche or in a representative
sample of the securitized financial assets equal to not less than five
(5) percent of the principal amount of the financial assets at
transfer. This retained interest cannot be sold, pledged or hedged
during the life of the transaction, except for the hedging of interest
rate or currency risk. If required to retain an economic interest in
the asset pool without hedging the credit risk of such portion, the
sponsor will be less likely to originate low quality financial assets.
The Rule provides that upon the effective date of final regulations
required by Section 941(b) of the Dodd-Frank legislation, such final
regulations shall exclusively govern the requirement to retain an
economic interest in a portion of the credit risk of the financial
assets under the Rule.
The Rule requires that RMBS securitization documents require that a
reserve fund be established in an amount equal to at least five (5)
percent of the cash proceeds due to the sponsor and that this reserve
be held for twelve (12) months to cover any repurchases required for
breaches of representations and warranties. This reserve fund will
ensure that the sponsor bears a significant risk for poorly
underwritten loans during the first year of the securitization.
In addition, the securitization documents must include a
representation that residential mortgage loans in an RMBS have been
originated in all material respects in compliance with statutory,
regulatory and originator underwriting standards in effect at the time
of origination and were underwritten at the fully indexed rate and rely
on documented income and comply with all existing supervisory guidance
governing the underwriting of residential mortgages, including the
Interagency Guidance on Non-Traditional Mortgage Products, October 5,
2006, and the Interagency Statement on Subprime Mortgage Lending, July
10, 2007, and such other or additional regulations or guidance
applicable at the time of loan origination.
The FDIC believes that requiring the sponsor to retain an economic
interest in the credit risk relating to each credit tranche or in a
representative sample of financial assets will help ensure quality
origination practices. A risk retention requirement that did not cover
all types of exposure would not be sufficient to create an incentive
for quality underwriting at all levels of the securitization. The
recent economic crisis made clear that, if quality underwriting is to
be assured, it will require true risk retention by sponsors, and that
the existence of representations and warranties or regulatory standards
for underwriting will not alone be sufficient.
Additional Conditions
Paragraph (c) of the Rule includes general conditions for all
securitizations and the transfer of financial assets. These conditions
also include requirements that are consistent with good banking
practices and are necessary to make the transactions comply with
established banking law.\9\
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\9\ See, 12 U.S.C. 1823(e).
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The transaction should be an arms-length, bona fide securitization
transaction and the documents must limit sales to affiliates, other
than to wholly-owned subsidiaries which are consolidated with the
sponsor for accounting and capital purposes, and insiders of the
sponsor. The securitization agreements must be in
[[Page 60295]]
writing, approved by the board of directors of the bank or its loan
committee (as reflected in the minutes of a meeting of the board of
directors or committee), and have been, continuously, from the time of
execution, in the official record of the bank. The securitization also
must have been entered into in the ordinary course of business, not in
contemplation of insolvency and with no intent to hinder, delay or
defraud the bank or its creditors.
The Rule applies only to transfers made for adequate consideration.
The transfer and/or security interest need to be properly perfected
under the UCC or applicable state law. The FDIC anticipates that it
will be difficult to determine whether a transfer complying with the
Rule is a sale or a security interest, and therefore expects that a
security interest will be properly perfected under the UCC, either
directly or as a backup.
The governing documents must require that the sponsor separately
identify in its financial asset data bases the financial assets
transferred into a securitization and maintain an electronic or paper
copy of the closing documents in a readily accessible form, and that
the sponsor maintain a current list of all of its outstanding
securitizations and issuing entities, and the most recent Form 10-K or
other periodic financial report for each securitization and issuing
entity. The documents must also provide that if acting as servicer,
custodian or paying agent, the sponsor is not permitted to commingle
amounts received with respect to the financial assets with its own
assets except for the time necessary to clear payments received, and in
event for more than two business days. The documents must require the
sponsor to make these records available to the FDIC promptly upon
request. This requirement will facilitate the timely fulfillment of the
receiver's responsibilities upon appointment and will expedite the
receiver's analysis of securitization assets. This will also facilitate
the receiver's analysis of the bank's assets and determination of which
assets have been securitized and are therefore potentially eligible for
expedited access by investors.
In addition, the Rule requires that the transfer of financial
assets and the duties of the sponsor as transferor be evidenced by an
agreement separate from the agreement governing the sponsor's duties,
if any, as servicer, custodian, paying agent, credit support provider
or in any capacity other than transferor.
The Safe Harbor
Paragraph (d)(1) of the Rule continues the safe harbor provision
that was provided by the Securitization Rule with respect to
participations so long as the participation satisfies the conditions
for sale accounting treatment set forth by generally accepted
accounting principles. In addition, last-in first-out participations
are specifically included in the safe harbor, provided that they
satisfy requirements for sale accounting treatment other than the pari-
passu, proportionate interest requirement that is not satisfied solely
as a result of the last-in first-out structure.
Paragraph (d)(2) of the Rule provides that for (i) any
participation or securitization for which transfers of financial assets
are made on or before December 31, 2010 or (ii) obligations of
revolving trusts or master trusts which issued one or more obligations
on or before the date of adoption of this Rule, or (iii) obligations
issued under open commitments up to the maximum amount of such
commitments as of the date of adoption of this Rule if one or more
obligations are issued under such commitments by December 31, 2010, the
FDIC as conservator or receiver will 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 the transferred financial assets notwithstanding that the
transfer of such financial assets does not satisfy all conditions for
sale accounting treatment under generally accepted accounting
principles as effective for reporting periods subsequent to November
15, 2009, so long as such transfer satisfied the conditions for sale
accounting treatment under generally accepted accounting principles in
effect for reporting periods prior to November 15, 2009. This provision
is intended to continue the safe harbor provided by the Transition
Rule.
Paragraph (d)(3) of the Rule addresses transfers of financial
assets made in connection with a securitization for which transfers of
financial assets were made after December 31, 2010 or securitizations
from a master trust or revolving trust established after the date of
adoption of this Rule or from an open commitment not satisfying the
requirements of paragraph (d)(2), that (in each case) satisfy the
conditions for sale accounting treatment under GAAP in effect for
reporting periods after November 15, 2009. For such securitizations,
the FDIC as conservator or receiver will 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, provided that such
securitizations comply with the conditions set forth in paragraphs (b)
and (c) of the Rule.
Paragraph (d)(4) of the Rule addresses transfers of financial
assets in connection with a securitization for which transfers of
financial assets were made after December 31, 2010 or securitizations
from a master trust or revolving trust established after the date of
adoption of the Rule or from an open commitment not satisfying the
requirements of paragraph (d)(2) or (d)(3), that (in each case) satisfy
the conditions set forth in paragraphs (b) and (c), but where the
transfer does not satisfy the conditions for sale accounting treatment
under GAAP in effect for reporting periods after November 15, 2009.
Paragraph (d)(4)(i) provides that if the FDIC is in monetary
default due to its failure to pay or apply collections from the
financial assets received by it in accordance with the securitization
documents, and remains in monetary default for ten (10) business days
after actual delivery of a written notice to the FDIC requesting
exercise of contractual rights because of such default, the FDIC
consents to the exercise of such contractual rights, including any
rights to obtain possession of the financial assets or the exercise of
self-help remedies as a secured creditor, provided that no involvement
of the receiver or conservator is required, other than consents,
waivers or the execution of transfer documents reasonably requested in
the ordinary course of business in order facilitate the exercise of
such contractual rights. This paragraph also provides that the consent
to the exercise of such contractual rights shall serve as full
satisfaction for all amounts due.
Paragraph (d)(4)(ii) provides that if the FDIC as conservator or
receiver gives a written notice of repudiation of the securitization
agreement pursuant to which assets were transferred and the FDIC does
not pay the damages due by reason of such repudiation within ten (10)
business days following the effective date of the notice, the FDIC
consents to the exercise of any contractual rights, including any
rights to obtain possession of the financial assets or the exercise of
self-help remedies as a secured creditor, provided that no involvement
of the receiver or conservator is required other than consents, waivers
or the execution of transfer documents reasonably requested in the
ordinary course of business in order facilitate the exercise
[[Page 60296]]
of such contractual rights. Paragraph 4(d)(ii) also provides that the
damages due for these purposes shall be an amount equal to the par
value of the obligations outstanding on the date of receivership less
any payments of principal received by the investors through the date of
repudiation, plus unpaid, accrued interest through the date of
repudiation to the extent actually received through payments on the
financial assets received through the date of repudiation, and that
upon receipt of such payment all liens on the financial assets created
pursuant to the securitization documents shall be released.
In computing amounts payable as repudiation damages, consistent
with the FDI Act the FDIC will not give effect to any provisions of the
securitization documents increasing the amount payable based on the
appointment of the FDIC as receiver or conservator.\10\
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\10\ See, 12 U.S.C. 1821(e)(13).
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Comments as to the scope of the safe harbor expressed concern with
the risk of repudiation by the FDIC, in particular, the risk that the
FDIC would repudiate an issuer's securitization obligations and
liquidate the financial assets at a time when the market value of such
assets was less than the amount of the outstanding obligations owed to
investors, thus exposing investors to market value risks relating to
the securitization asset pool.
The Rule addresses this concern. It clarifies that repudiation
damages will be equal to the par value of the obligations as of the
date of receivership, less payments of principal received by the
investors to the date of repudiation, plus unpaid, accrued interest
through the date of repudiation to the extent actually received through
payments on the financial assets received through the date of
repudiation. The Rule also provides that the FDIC consents to the
exercise of remedies by investors, including self-help remedies as
secured creditors, in the event that the FDIC repudiates a
securitization transfer agreement and does not pay damages in such
amount within ten business days following the effective date of notice
of repudiation. Thus, if the FDIC repudiates and the investors are not
paid the par value of the securitization obligations, plus unpaid,
accrued interest through the date of repudiation to the extent actually
received through payments on the financial assets received through the
date of repudiation, they will be permitted to obtain the asset pool.
Accordingly, exercise by the FDIC of its repudiation rights will not
expose investors to market value risks relating to the asset pool.
The comments also included a request that the safe harbor not
condition the FDIC's consent to the exercise of secured creditor
remedies on there being no involvement of the receiver or conservator.
The Rule clarifies that the FDIC will give ordinary course consents and
waivers in connection with the exercise of secured creditor remedies.
Comments also included concern that non-proportionate participation
arrangements, such as LIFO participations, entered into after September
30, 2010 that do not satisfy the criteria for ``participating
interests'' under the 2009 GAAP Modifications would no longer qualify
for sale treatment because the safe harbor is available only to
participations which satisfy sale accounting treatment. The vast
majority of participations are expected to satisfy the sale accounting
requirement. The Rule includes an additional provision to address LIFO
participations.
Consent to Certain Payments and Servicing
Paragraph (e) provides that prior to repudiation or, in the case of
monetary default, prior to the effectiveness of the consent referred to
in paragraph (d)(4)(i), the FDIC consents to the making of, or if
acting as servicer agrees to make, required payments to the investors
during the stay period imposed by 12 U.S.C. 1821(e)(13)(C). The Rule
also provides that the FDIC consents to any servicing activity required
in furtherance of the securitization (subject to the FDIC's rights to
repudiate the servicing agreements), in connection with securitizations
that meet the conditions set forth in paragraphs (b) and (c) of the
Rule.
Miscellaneous
Paragraph (f) requires that any party requesting the FDIC's consent
pursuant to paragraph (d)(4), provide notice to the FDIC together with
a statement of the basis upon the request is made, together with copies
of all documentation supporting the request. This includes a copy of
the applicable agreements (such as the transfer agreement and the
security agreement) and of any applicable notices under the agreements.
Paragraph (g) of the Rule provides that the conservator or receiver
will not seek to avoid an otherwise legally enforceable agreement that
is executed by an insured depository institution in connection with a
securitization solely because the agreement does not meet the
``contemporaneous'' requirement of 12 U.S.C. 1821(d)(9), 1821(n)(4)(I),
or 1823(e).
Paragraph (h) of the Rule provides that the consents set forth in
the Rule will not act to waive or relinquish any rights granted to the
FDIC in any capacity, pursuant to any other applicable law or any
agreement or contract except as specifically set forth in the Rule, and
nothing contained in the section will alter the claims priority of the
securitized obligations.
Paragraph (i) provides that except as specifically set forth in the
Rule, the Rule does not authorize, and shall not be construed as
authorizing the waiver of the prohibitions in 12 U.S.C. 1825(b)(2)
against levy, attachment, garnishment, foreclosure, or sale of property
of the FDIC, nor does it authorize nor shall it be construed as
authorizing the attachment of any involuntary lien upon the property of
the FDIC. The Rule should 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 mentioned, 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 right to consent under 12 U.S.C. 1821(e)(13)(C) or 12 U.S.C.
1825(b)(2) may not be assigned or transferred to any purchaser of
property from the FDIC, other than to a conservator or bridge bank. The
Rule can be repealed by the FDIC upon 30 days notice provided in the
Federal Register, but any repeal will not apply to any issuance that
complied with the Rule before such repeal.
V. Regulatory Procedure
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires an
agency to provide a Regulatory Flexibility Analysis, unless the agency
certifies that the rule would not have a significant economic impact on
a substantial number of small entities. 5 U.S.C. 603-605. The FDIC
hereby certifies that this rule will not have a significant economic
impact on a substantial number of small entities, as that term applies
to insured depository institutions.
[[Page 60297]]
B. Paperwork Reduction Act
This rule contains new information collection requirements subject
to the Paperwork Reduction Act (PRA).
The burden estimates for the applications are as follows:
1. 10K Annual Report
Non Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 1 time per year.
Average Time per Response: 27 hours.
Estimated Annual Burden: 1350 hours.
Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 1 time per year.
Average Time per Response: 4.5 hours.
Estimated Annual Burden: 225 hours.
2. 8K--Disclosure Form
Non Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 2 times per year.
Estimated Number of Annual Responses: 100.
Average Time per Response: 27 hours.
Estimated Annual Burden: 2,700 hours.
Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 2 times per year.
Estimated Number of Annual Responses: 100.
Average Time per Response: 4.5 hour.
Estimated Annual Burden: 450 hours.
3. 10D Reports
Non Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 5 times per year.
Estimated Number of Annual Responses: 250.
Average Time per Response: 27 hours.
Estimated Annual Burden: 6750 hours.
Reg AB Compliant:
Estimated Number of Respondents: 50.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 5 times per year.
Estimated Number of Annual Responses: 250.
Average Time per Response: 4.5 hours.
Estimated Annual Burden: 1,125 hours.
4. 12b-25
Estimated Number of Respondents: 100.
Affected Public: FDIC-insured depository institutions.
Frequency of Response: 1 time per year.
Estimated Number of Annual Responses: 100.
Average Time per Response: 2.5 hours.
Estimated Annual Burden: 250 hours.
C . 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 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 rule may be reviewed.
List of Subjects in 12 CFR Part 360
Banks, Banking, Bank deposit insurance, Holding companies, National
banks, Participations, Reporting and recordkeeping requirements,
Savings associations, Securitizations.
0
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation hereby amends 12 CFR part 360 as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
0
1. The authority citation for part 360 continues to read as follows:
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.
0
2. Revise Sec. 360.6 to read as follows:
Sec. 360.6 Treatment of financial assets transferred in connection
with a securitization or participation.
(a) Definitions.
(1) 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.
(2) Investor means a person or entity that owns an obligation
issued by an issuing entity.
(3) Issuing entity means an entity that owns a financial asset or
financial assets transferred by the sponsor and issues obligations
supported by such asset or assets. Issuing entities may include, but
are not limited to, corporations, partnerships, trusts, and limited
liability companies and are commonly referred to as special purpose
vehicles or special purpose entities. To the extent a securitization is
structured as a multi-step transfer, the term issuing entity would
include both the issuer of the obligations and any intermediate
entities that may be a transferee. Notwithstanding the foregoing, a
Specified GSE or an entity established or guaranteed by a Specified GSE
shall not constitute an issuing entity.
(4) Monetary default means a default in the payment of principal or
interest when due following the expiration of any cure period.
(5) Obligation means a debt or equity (or mixed) beneficial
interest or security that is primarily serviced by the cash flows of
one or more financial assets or financial asset pools, either fixed or
revolving, that by their terms convert into cash within a finite time
period, or upon the disposition of the underlying financial assets, and
by any rights or other assets designed to assure the servicing or
timely distributions of proceeds to the security holders issued by an
issuing entity. The term may include beneficial interests in a grantor
trust, common law trust or similar issuing entity to the extent that
such interests satisfy the criteria set forth in the preceding
sentence, but does not include LLC interests, partnership interests,
common or preferred equity, or similar instruments evidencing ownership
of the issuing entity.
(6) Participation means the transfer or assignment of an undivided
interest in all or part of a financial asset, that has all of the
characteristics of a ``participating interest,'' 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 upon
the borrower's default on the underlying obligation.
(7) Securitization means the issuance by an issuing entity of
obligations for which the investors are relying on the cash flow or
market value characteristics and the credit quality of transferred
financial assets (together with any external credit support
[[Page 60298]]
permitted by this section) to repay the obligations.
(8) Servicer means any entity responsible for the management or
collection of some or all of the financial assets on behalf of the
issuing entity or making allocations or distributions to holders of the
obligations, including reporting on the overall cash flow and credit
characteristics of the financial assets supporting the securitization
to enable the issuing entity to make payments to investors on the
obligations. The term ``servicer'' does not include a trustee for the
issuing entity or the holders of obligations that makes allocations or
distributions to holders of the obligations if the trustee receives
such allocations or distributions from a servicer and the trustee does
not otherwise perform the functions of a servicer.
(9) Specified GSE means each of the following:
(i) The Federal National Mortgage Association and any affiliate
thereof;
(ii) Federal Home Loan Mortgage Corporation and any affiliate
thereof;
(iii) The Government National Mortgage Association; and
(iv) Any federal or state sponsored mortgage finance agency.
(10) Sponsor means a person or entity that organizes and initiates
a securitization by transferring financial assets, either directly or
indirectly, including through an affiliate, to an issuing entity,
whether or not such person owns an interest in the issuing entity or
owns any of the obligations issued by the issuing entity.
(11) Transfer means:
(i) The conveyance of a financial asset or financial assets to an
issuing entity or
(ii) The creation of a security interest in such asset or assets
for the benefit of the issuing entity.
(b) Coverage. This section shall apply to securitizations that meet
the following criteria:
(1) Capital Structure and Financial Assets. The documents creating
the securitization must define the payment structure and capital
structure of the transaction.
(i) Requirements applicable to all securitizations:
(A) The securitization shall not consist of re-securitizations of
obligations or collateralized debt obligations unless the documents
creating the securitization require that disclosures required in
paragraph (b)(2) of this section are made available to investors for
the underlying assets supporting the securitization at initiation and
while obligations are outstanding; and
(B) The documents creating the securitization shall require that
payment of principal and interest on the securitization obligation must
be primarily based on the performance of financial assets that are
transferred to the issuing entity and, except for interest rate or
currency mismatches between the financial assets and the obligations,
shall not be contingent on market or credit events that are independent
of such financial assets. The securitization may not be an unfunded
securitization or a synthetic transaction.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) The capital structure of the securitization shall be limited to
no more than six credit tranches and cannot include ``sub-tranches,''
grantor trusts or other structures. Notwithstanding the foregoing, the
most senior credit tranche may include time-based sequential pay or
planned amortization and companion sub-tranches; and
(B) The credit quality of the obligations cannot be enhanced at the
issuing entity or pool level through external credit support or
guarantees. However, the credit quality of the obligations may be
enhanced by credit support or guarantees provided by Specified GSEs and
the temporary payment of principal and/or interest may be supported by
liquidity facilities, including facilities designed to permit the
temporary payment of interest following appointment of the FDIC as
conservator or receiver. Individual financial assets transferred into a
securitization may be guaranteed, insured or otherwise benefit from
credit support at the loan level through mortgage and similar insurance
or guarantees, including by private companies, agencies or other
governmental entities, or government-sponsored enterprises, and/or
through co-signers or other guarantees.
(2) Disclosures.
The documents shall require that the sponsor, issuing entity, and/
or servicer, as appropriate, shall make available to investors,
information describing the financial assets, obligations, capital
structure, compensation of relevant parties, and relevant historical
performance data set forth in paragraph (b)(2) of this section.
(i) Requirements applicable to all securitizations:
(A) The documents shall require that, on or prior to issuance of
obligations and at the time of delivery of any periodic distribution
report and, in any event, at least once per calendar quarter, while
obligations are outstanding, information about the obligations and the
securitized financial assets shall be disclosed to all potential
investors at the financial asset or pool level, as appropriate for the
financial assets, and security-level to enable evaluation and analysis
of the credit risk and performance of the obligations and financial
assets. The documents shall require that such information and its
disclosure, at a minimum, shall comply with the requirements of
Securities and Exchange Commission Regulation AB, 17 CFR 229.1100
through 1123 (to the extent then in effect) or any successor disclosure
requirements for public issuances, even if the obligations are issued
in a private placement or are not otherwise required to be registered.
Information that is unknown or not available to the sponsor or the
issuer after reasonable investigation may be omitted if the issuer
includes a statement in the offering documents disclosing that the
specific information is otherwise unavailable;
(B) The documents shall require that, on or prior to issuance of
obligations, the structure of the securitization and the credit and
payment performance of the obligations shall be disclosed, including
the capital or tranche structure, the priority of payments and specific
subordination features; representations and warranties made with
respect to the financial assets, the remedies for and the time
permitted for cure of any breach of representations and warranties,
including the repurchase of financial assets, if applicable; liquidity
facilities and any credit enhancements permitted by this rule, any
waterfall triggers or priority of payment reversal features; and
policies governing delinquencies, servicer advances, loss mitigation,
and write-offs of financial assets;
(C) The documents shall require that while obligations are
outstanding, the issuing entity shall provide to investors information
with respect to the credit performance of the obligations and the
financial assets, including periodic and cumulative financial asset
performance data, delinquency and modification data for the financial
assets, substitutions and removal of financial assets, servicer
advances, as well as losses that were allocated to such tranche and
remaining balance of financial assets supporting such tranche, if
applicable, and the percentage of each tranche in relation to the
securitization as a whole; and
(D) In connection with the issuance of obligations, the documents
shall require that the nature and amount of compensation paid to the
originator,
[[Page 60299]]
sponsor, rating agency or third-party advisor, any mortgage or other
broker, and the servicer(s), and the extent to which any risk of loss
on the underlying assets is retained by any of them for such
securitization be disclosed. The securitization documents shall require
the issuer to provide to investors while obligations are outstanding
any changes to such information and the amount and nature of payments
of any deferred compensation or similar arrangements to any of the
parties.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) Prior to issuance of obligations, sponsors shall disclose loan
level information about the financial assets including, but not limited
to, loan type, loan structure (for example, fixed or adjustable,
resets, interest rate caps, balloon payments, etc.), maturity, interest
rate and/or Annual Percentage Rate, and location of property; and
(B) Prior to issuance of obligations, sponsors shall affirm
compliance in all material respects with applicable statutory and
regulatory standards for origination of mortgage loans, including that
the mortgages are underwritten at the fully indexed rate relying on
documented income, and comply with supervisory guidance governing the
underwriting of residential mortgages, including the Interagency
Guidance on Non-Traditional Mortgage Products, October 5, 2006, and the
Interagency Statement on Subprime Mortgage Lending, July 10, 2007, and
such other or additional guidance applicable at the time of loan
origination. Sponsors shall disclose a third party due diligence report
on compliance with such standards and the representations and
warranties made with respect to the financial assets; and
(C) The documents shall require that prior to issuance of
obligations and while obligations are outstanding, servicers shall
disclose any ownership interest by the servicer or an affiliate of the
servicer in other whole loans secured by the same real property that
secures a loan included in the financial asset pool. The ownership of
an obligation, as defined in this regulation, shall not constitute an
ownership interest requiring disclosure.
(3) Documentation and Recordkeeping. The documents creating the
securitization must specify the respective contractual rights and
responsibilities of all parties and include the requirements described
in paragraph (b)(3) of this section and use as appropriate any
available standardized documentation for each different asset class.
(i) Requirements applicable to all securitizations. The documents
shall define the contractual rights and responsibilities of the
parties, including but not limited to representations and warranties
and ongoing disclosure requirements, and any measures to avoid
conflicts of interest; and provide authority for the parties, including
but not limited to the originator, sponsor, servicer, and investors, to
fulfill their respective duties and exercise their rights under the
contracts and clearly distinguish between any multiple roles performed
by any party.
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) Servicing and other agreements must provide servicers with
authority, subject to contractual oversight by any master servicer or
oversight advisor, if any, to mitigate losses on financial assets
consistent with maximizing the net present value of the financial
asset. Servicers shall have the authority to modify assets to address
reasonably foreseeable default, and to take other action to maximize
the value and minimize losses on the securitized financial assets. The
documents shall require that the servicers apply industry best
practices for asset management and servicing. The documents shall
require the servicer to act for the benefit of all investors, and not
for the benefit of any particular class of investors, that the servicer
must commence action to mitigate losses no later than ninety (90) days
after an asset first becomes delinquent unless all delinquencies on
such asset have been cured, and that the servicer maintains records of
its actions to permit full review by the trustee or other
representative of the investors; and
(B) The servicing agreement shall not require a primary servicer to
advance delinquent payments of principal and interest for more than
three payment periods, unless financing or reimbursement facilities are
available, which may include, but are not limited to, the obligations
of the master servicer or issuing entity to fund or reimburse the
primary servicer, or alternative reimbursement facilities. Such
``financing or reimbursement facilities'' under this paragraph shall
not be dependent for repayment on foreclosure proceeds.
(4) Compensation. The following requirements apply only to
securitizations in which the financial assets include any residential
mortgage loans. Compensation to parties involved in the securitization
of such financial assets must be structured to provide incentives for
sustainable credit and the long-term performance of the financial
assets and securitization as follows:
(i) The documents shall require that any fees or other compensation
for services payable to credit rating agencies or similar third-party
evaluation companies shall be payable, in part, over the five (5) year
period after the first issuance of the obligations based on the
performance of surveillance services and the performance of the
financial assets, with no more than sixty (60) percent of the total
estimated compensation due at closing; and
(ii) The documents shall provide that compensation to servicers
shall include incentives for servicing, including payment for loan
restructuring or other loss mitigation activities, which maximizes the
net present value of the financial assets. Such incentives may include
payments for specific services, and actual expenses, to maximize the
net present value or a structure of incentive fees to maximize the net
present value, or any combination of the foregoing that provides such
incentives.
(5) Origination and Retention Requirements.
(i) Requirements applicable to all securitizations.
(A) Prior to the effective date of regulations required under new
Section 15G of the Securities Exchange Act, 15 U.S.C. 78a et seq.,
added by Section 941(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the documents shall require that the sponsor
retain an economic interest in a material portion, defined as not less
than five (5) percent, of the credit risk of the financial assets. This
retained interest may be either in the form of an interest of not less
than five (5) percent in each of the credit tranches sold or
transferred to the investors or in a representative sample of the
securitized financial assets equal to not less than five (5) percent of
the principal amount of the financial assets at transfer. This retained
interest may not be sold or pledged or hedged, except for the hedging
of interest rate or currency risk, during the term of the
securitization.
(B) Upon the effective date of regulations required under new
Section 15G of the Securities Exchange Act, 15 U.S.C. 78a et seq.,
added by Section 941(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, such final regulations shall exclusively
govern the requirement to retain an economic interest in a portion of
the credit risk of the financial assets under this rule.
[[Page 60300]]
(ii) Requirements applicable only to securitizations in which the
financial assets include any residential mortgage loans:
(A) The documents shall require the establishment of a reserve fund
equal to at least five (5) percent of the cash proceeds of the
securitization payable to the sponsor to cover the repurchase of any
financial assets required for breach of representations and warranties.
The balance of such fund, if any, shall be released to the sponsor one
year after the date of issuance.
(B) The documents shall include a representation that the assets
shall have been originated in all material respects in compliance with
statutory, regulatory, and originator underwriting standards in effect
at the time of origination. The documents shall include a
representation that the mortgages included in the securitization were
underwritten at the fully indexed rate, based upon the borrowers'
ability to repay the mortgage according to its terms, and rely on
documented income and comply with all existing supervisory guidance
governing the underwriting of residential mortgages, including the
Interagency Guidance on Non-Traditional Mortgage Products, October 5,
2006, and the Interagency Statement on Subprime Mortgage Lending, July
10, 2007, and such other or additional regulations or guidance
applicable to insured depository institutions at the time of loan
origination. Residential mortgages originated prior to the issuance of
such guidance shall meet all supervisory guidance governing the
underwriting of residential mortgages then in effect at the time of
loan origination.
(c) Other requirements. (1) The transaction should be an arms
length, bona fide securitization transaction. The documents shall
require that the obligations issued in a securitization shall not be
predominantly sold to an affiliate (other than a wholly-owned
subsidiary consolidated for accounting and capital purposes with the
sponsor) or insider of the sponsor;
(2) The securitization agreements are in writing, approved by the
board of directors of the bank or its loan committee (as reflected in
the minutes of a meeting of the board of directors or committee), and
have been, continuously, from the time of execution in the official
record of the bank;
(3) The securitization was entered into in the ordinary course of
business, not in contemplation of insolvency and with no intent to
hinder, delay or defraud the bank or its creditors;
(4) The transfer was made for adequate consideration;
(5) The transfer and/or security interest was properly perfected
under the UCC or applicable state law;
(6) The transfer and duties of the sponsor as transferor must be
evidenced in a separate agreement from its duties, if any, as servicer,
custodian, paying agent, credit support provider or in any capacity
other than the transferor; and
(7) The documents shall require that the sponsor separately
identify in its financial asset data bases the financial assets
transferred into any securitization and maintain an electronic or paper
copy of the closing documents for each securitization in a readily
accessible form, a current list of all of its outstanding
securitizations and issuing entities, and the most recent Form 10-K, if
applicable, or other periodic financial report for each securitization
and issuing entity. The documents shall provide that to the extent
serving as servicer, custodian or paying agent for the securitization,
the sponsor shall not comingle amounts received with respect to the
financial assets with its own assets except for the time, not to exceed
two business days, necessary to clear any payments received. The
documents shall require that the sponsor shall make these records
readily available for review by the FDIC promptly upon written request.
(d) Safe harbor--(1) Participations. With respect to transfers of
financial assets made in connection with participations, 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, provided that such transfer
satisfies the conditions for sale accounting treatment under generally
accepted accounting principles, except for the ``legal isolation''
condition that is addressed by this section. The foregoing paragraph
shall apply to a last-in, first-out participation, provided that the
transfer of a portion of the financial asset satisfies the conditions
for sale accounting treatment under generally accepted accounting
principles that would have applied to such portion if it had met the
definition of a ``participating interest,'' except for the ``legal
isolation'' condition that is addressed by this section.
(2) Transition period safe harbor. With respect to:
(i) Any participation or securitization for which transfers of
financial assets were made on or before December 31, 2010 or
(ii) Any obligations of revolving trusts or master trusts, for
which one or more obligations were issued as of the date of adoption of
this rule, or
(iii) Any obligations issued under open commitments up to the
maximum amount of such commitments as of the date of adoption of this
rule if one or more obligations were issued under such commitments on
or before December 31, 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 the transferred financial assets
notwithstanding that the transfer of such financial assets 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 under generally accepted accounting
principles in effect for reporting periods before November 15, 2009,
except for the ``legal isolation'' condition that is addressed by this
paragraph and the transaction otherwise satisfied the provisions of
Sec. 360.6 in effect prior to the effective date of this regulation.
(3) For securitizations meeting sale accounting requirements. With
respect to any securitization for which transfers of financial assets
were made after December 31, 2010, or from a master trust or revolving
trust established after adoption of this rule or from any open
commitments that do not meet the requirements of paragraph (d)(2) of
this section, and which complies with the requirements applicable to
that securitization as set forth in paragraphs (b) and (c) of this
section, 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 such transferred financial assets, provided that such
transfer satisfies the conditions for sale accounting treatment under
generally accepted accounting principles in effect for reporting
periods after November 15, 2009, except for the ``legal isolation''
condition that is addressed by this paragraph (d)(3).
(4) For securitization not meeting sale accounting requirements.
With respect to any securitization for which transfers of financial
assets were made after December 31, 2010, or from a master trust or
revolving trust established after adoption of this rule or from any
open commitments that do not
[[Page 60301]]
meet the requirements of paragraph (d)(2) or (d)(3) of this section,
and which complies with the requirements applicable to that
securitization as set forth in paragraphs (b) and (c) of this section,
but where the transfer does not satisfy the conditions for sale
accounting treatment set forth by generally accepted accounting
principles in effect for reporting periods after November 15, 2009:
(i) Monetary default. If at any time after appointment, the FDIC as
conservator or receiver is in a monetary default under a securitization
due to its failure to pay or apply collections from the financial
assets received by it in accordance with the securitization documents,
whether as servicer or otherwise, and remains in monetary default for
ten (10) business days after actual delivery of a written notice to the
FDIC pursuant to paragraph (f) of this section requesting the exercise
of contractual rights because of such monetary default, the FDIC hereby
consents pursuant to 12 U.S.C. 1821(e)(13)(C) and 12 U.S.C. 1825(b)(2)
to the exercise of any contractual rights in accordance with the
documents governing such securitization, including but not limited to
taking possession of the financial assets and exercising self-help
remedies as a secured creditor under the transfer agreements, provided
no involvement of the receiver or conservator is required other than
such consents, waivers, or execution of transfer documents as may be
reasonably requested in the ordinary course of business in order to
facilitate the exercise of such contractual rights. Such consent shall
not waive or otherwise deprive the FDIC or its assignees of any
seller's interest or other obligation or interest issued by the issuing
entity and held by the FDIC or its assignees, but shall serve as full
satisfaction of the obligations of the insured depository institution
in conservatorship or receivership and the FDIC as conservator or
receiver for all amounts due.
(ii) Repudiation. If the FDIC as conservator or receiver provides a
written notice of repudiation of the securitization agreement pursuant
to which the financial assets were transferred, and the FDIC does not
pay damages, defined in this paragraph, within ten (10) business days
following the effective date of the notice, the FDIC hereby consents
pursuant to 12 U.S.C. 1821(e)(13)(C) and 12 U.S.C. 1825(b)(2) to the
exercise of any contractual rights in accordance with the documents
governing such securitization, including but not limited to taking
possession of the financial assets and exercising self-help remedies as
a secured creditor under the transfer agreements, provided no
involvement of the receiver or conservator is required other than such
consents, waivers, or execution of transfer documents as may be
reasonably requested in the ordinary course of business in order to
facilitate the exercise of such contractual rights. For purposes of
this paragraph, the damages due shall be in an amount equal to the par
value of the obligations outstanding on the date of appointment of the
conservator or receiver, less any payments of principal received by the
investors through the date of repudiation, plus unpaid, accrued
interest through the date of repudiation in accordance with the
contract documents to the extent actually received through payments on
the financial assets received through the date of repudiation. Upon
payment of such repudiation damages, all liens or claims on the
financial assets created pursuant to the securitization documents shall
be released. Such consent shall not waive or otherwise deprive the FDIC
or its assignees of any seller's interest or other obligation or
interest issued by the issuing entity and held by the FDIC or its
assignees, but shall serve as full satisfaction of the obligations of
the insured depository institution in conservatorship or receivership
and the FDIC as conservator or receiver for all amounts due.
(iii) Effect of repudiation. If the FDIC repudiates or disaffirms a
securitization agreement, it shall not assert that any interest
payments made to investors in accordance with the securitization
documents before any such repudiation or disaffirmance remain the
property of the conservatorship or receivership.
(e) Consent to certain actions. Prior to repudiation or, in the
case of a monetary default referred to in paragraph (d)(4)(i) of this
section, prior to the effectiveness of the consent referred to therein,
the FDIC as conservator or receiver consents pursuant to 12 U.S.C.
1821(e)(13)(C) to the making of, or if serving as servicer, shall make,
the payments to the investors to the extent actually received through
payments on the financial assets (but in the case of repudiation, only
to the extent supported by payments on the financial assets received
through the date of the giving of notice of repudiation) in accordance
with the securitization documents, and, subject to the FDIC's rights to
repudiate such agreements, consents to any servicing activity required
in furtherance of the securitization or, if acting as servicer the FDIC
as receiver or conservator shall perform such servicing activities in
accordance with the terms of the applicable servicing agreements, with
respect to the financial assets included in securitizations that meet
the requirements applicable to that securitization as set forth in
paragraphs (b) and (c) of this section.
(f) Notice for consent. Any party requesting the FDIC's consent as
conservator or receiver under 12 U.S.C. 1821(e)(13)(C) and 12 U.S.C.
1825(b)(2) pursuant to paragraph (d)(4)(i) of this section shall
provide notice to the Deputy Director, Division of Resolutions and
Receiverships, Federal Deposit Insurance Corporation, 550 17th Street,
NW., F-7076, Washington, DC 20429-0002, and a statement of the basis
upon which such request is made, and copies of all documentation
supporting such request, including without limitation a copy of the
applicable agreements and of any applicable notices under the contract.
(g) Contemporaneous requirement. The FDIC will not seek to avoid an
otherwise legally enforceable agreement that is executed by an insured
depository institution in connection with a securitization or in the
form of a participation solely because the agreement does not meet the
``contemporaneous'' requirement of 12 U.S.C. 1821(d)(9), 1821(n)(4)(I),
or 1823(e).
(h) Limitations. The consents set forth in this section do not act
to waive or relinquish any rights granted to the FDIC in any capacity,
pursuant to any other applicable law or any agreement or contract
except as specifically set forth herein. Nothing contained in this
section alters the claims priority of the securitized obligations.
(i) No waiver. Except as specifically set forth herein, this
section does not authorize, and shall not be construed as authorizing
the waiver of the prohibitions in 12 U.S.C. 1825(b)(2) against levy,
attachment, garnishment, foreclosure, or sale of property of the FDIC,
nor does it authorize nor shall it be construed as authorizing the
attachment of any involuntary lien upon the property of the FDIC. Nor
shall this section 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 mentioned, including but not
limited to any rights, powers or remedies of the FDIC regarding
transfers or other conveyances 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.
[[Page 60302]]
(j) No assignment. The right to consent under 12 U.S.C.
1821(e)(13)(C) or 12 U.S.C. 1825(b)(2), may not be assigned or
transferred to any purchaser of property from the FDIC, other than to a
conservator or bridge bank.
(k) Repeal. This section may be repealed by the FDIC upon 30 days
notice provided in the Federal Register, but any repeal shall not apply
to any issuance made in accordance with this section before such
repeal.
By order of the Board of Directors.
Dated at Washington, DC, this 27th day of September 2010.
Robert E. Feldman,
Executive Secretary, Federal Deposit Insurance Corporation.
[FR Doc. 2010-24595 Filed 9-28-10; 4:15 pm]
BILLING CODE 6714-01-P