The FDIC issued on November 13, 2009 an interim rule (the “Interim Rule”) continuing on a transitional basis the safe harbor provided at 12 C.F.R. §360.6 (the “Safe Harbor”) from the FDIC’s ability, as conservator or receiver, to recover assets securitized or participated out by a federally insured depository institution (an “IDI”).  The Interim Rule is intended to prevent substantial downgrades in the ratings on existing securitizations and to enable planned securitizations to be brought to market.  It is expected to remain effective until the FDIC and other regulatory agencies develop a permanent regulation to address the FDIC’s powers in this area.  The effectiveness and legal certainty of the Safe Harbor was threatened by changes to the “true sale” accounting rules upon which the Safe Harbor expressly relies (and in particular by FAS 166 and FAS 167, both adopted June 12, 2009.  See the June 16, 2009 Alert).  The accounting rules changes are effective for reporting periods which begin after November 15, 2009.

The Safe Harbor, which was implemented by FDIC rulemaking in 2000, clarified the limits of the FDIC’s authority, in its role as conservator or receiver of a failed IDI, to disaffirm or repudiate securitization or participation contracts in order to recover assets purportedly transferred or participated out by such IDI.  (The Safe Harbor is viewed as a clarification of the Federal Deposit Insurance Act because the FDIC’s power to repudiate contracts does not give it the right to recover previously transferred assets.)  The Safe Harbor provides that to the extent a securitization or a participation could be characterized as a sale under generally accepted accounting principles (“GAAP”), with the exception of the “legal isolation” requirement under GAAP (which requirement would be accomplished by the Safe Harbor itself), the transfer of the assets from the IDI would not be reclaimed, recharacterized, or recovered as the property of an IDI or a receivership of an IDI by the FDIC acting as conservator or receiver.  In addition to the requirement that the transfer satisfy the criteria for a true sale under GAAP (with the exception of the “legal isolation” requirement), the Safe Harbor requires that the IDI receive adequate consideration for the transferred assets, but eliminates the FDIC’s “contemporaneous” requirement with respect to otherwise enforceable transfers of assets in connection with a participation or a securitization.

Questions over the continuing availability of the Safe Harbor arose as a consequence of recent changes to GAAP that would make it impossible for some participations and most securitizations to satisfy the requirements of the Safe Harbor (absent the Interim Rule).  These changes, set forth in FAS 166 and FAS 167, amend FAS 140 and FAS 46(R), and will result in many securitizations and some participations being treated as secured borrowings rather than sales for accounting purposes.  Therefore, absent relief, many securitizations originated by IDIs after November 15, 2009 would not have satisfied the requirements of the Safe Harbor.

The Interim Rule provides temporary relief by making the Safe Harbor applicable to securitizations and participations in which the assets are transferred from IDIs, or, with respect to revolving securitization trusts, the beneficial interests are issued on or before March 31, 2010.  In order to take advantage of the Safe Harbor, a transaction’s structure must meet the sale accounting standards in effect prior to November 15, 2009. 

The FDIC also stated its intent to promulgate a new, permanent regulation to replace the Safe Harbor and take into account the new accounting regime for transactions in which assets will be transferred or beneficial interests issued after March 31, 2010.  In this regard, the FDIC anticipates publishing a Notice of Proposed Rulemaking seeking comment on the expected proposed rule on December 15, 2009.