Originally published November 12, 2009
Keywords: Federal Deposit Insurance Corporation, FDIC, securitization, US accounting standards, banks, sale treatment, Safe Harbor, repudiation power, credit card receivables
On November 12, 2009, the Board of the FDIC approved an interim rule that provides some crucial transitional relief relating to recent changes in US accounting standards for securitizations (see our June 22, 2009, Client Update " Big Changes to Securitization Accounting"). One of the key impacts of the accounting changes is that banks (among other entities) will no longer be able to achieve sale treatment in securitizations of credit card and other receivables using many traditional structures. Among other issues, this change creates uncertainty about the continuing availability of the FDIC's rule (the "Safe Harbor") relating to the treatment of securitizations in receivership or conservatorship (12 CF 360.6).
For transactions that satisfy its requirements, the Safe Harbor provides that the FDIC will not:
- Use its repudiation power to reclaim financial assets transferred by the institution in connection with a securitization, or
- Avoid an otherwise legally enforceable securitization agreement solely because the agreement does not meet the "contemporaneous" component of the "written agreement" requirements under the Federal Deposit Insurance Act.
The FDIC's agreement not to use its repudiation power is conditioned upon satisfaction by the subject securitization of the conditions for sale accounting (other than the legal isolation condition, since the Safe Harbor was meant to help satisfy that condition). Because the accounting changes make it difficult for securitizations to achieve sale accounting, this requirement threatens to make the repudiation portion of the Safe Harbor unavailable at least for transfers completed after the accounting changes take effect (January 1, 2010, for most banks).
This threat has created significant issues for some credit card banks because any securitization of credit card receivables completed in the remaining portion of 2009 would contemplate revolving sales of new receivables arising after the year's end. This legal uncertainty has effectively frozen issuance in the term markets by a number of the largest issuers. We believe that securitizations by bank originators can achieve legal isolation without the Safe Harbor through a common law true sale, and a number of our clients have continued to issue transactions rated on that basis.1 However, some large credit card trusts were apparently unable to obtain the necessary opinions to issue on that basis, due to structural, historical or other issues.
The interim rule addresses the possible loss of protection from the repudiation power by adding a new paragraph to the Safe Harbor that eliminates the requirement for transactions closed on or prior to March 31, 2010 to achieve sale accounting, so long as they meet the conditions for sale accounting that applied prior to the recent changes (again, other than the legal isolation condition). For revolving trusts, this relief applies to transfers made after March 31, 2010, so long as the related asset-backed securities were issued on or prior to that date.
We hope this relief will enable banks to resume issuing in reliance on the Safe Harbor through March 31, 2010. Even for transactions that are structured to achieve common law true sale, the interim rule provides welcome additional certainty.
Further amendments to the Safe Harbor are expected from the FDIC in December. These further amendments will address securitizations completed after March 31, 2010 and are likely to condition the availability of the Safe Harbor on compliance with some of the new standards for bank securitizations that are currently under debate. A staff memo and discussion at the Board's meeting indicate that the FDIC will consult with the other federal banking agencies and the SEC on the additional conditions. The FDIC has also asked for comments on three questions relating to the adequacy of the interim rule. However, the interim rule will be effective as of November 12, 2009.
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1 The preamble to the interim rule provides additional support for our views, noting that the repudiation portion of the Safe Harbor "was a clarification, rather than a limitation, of the repudiation power because such power authorizes the conservator or receiver to breach a contract or lease entered into by an [insured depository institution] and be legally excused from further performance but it is not an avoiding power enabling the conservator or receiver to recover assets that were previously transferred by the [insured depository institution] in connection with the contract."
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