Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 60287 

(30) San Diego-Carlsbad-San Marcos, 

CA—consisting of the San DiegoCarlsbad-San Marcos, CA MSA; 

(31) San Jose-San Francisco-Oakland, 

CA—consisting of the San Jose-San 

Francisco-Oakland, CA CSA, plus the 

Salinas, CA MSA and San Joaquin 

County, CA; 

(32) Seattle-Tacoma-Olympia, WA— 

consisting of the Seattle-TacomaOlympia, WA CSA, plus Whatcom 

County, WA; 

(33) Washington-Baltimore-Northern 

Virginia, DC–MD–VA–WV–PA— 

consisting of the Washington-BaltimoreNorthern Virginia, DC–MD–VA–WV 

CSA, plus the Hagerstown-Martinsburg, 

MD–WV MSA, the York-HanoverGettysburg, PA CSA, and King George 

County, VA; and 

(34) Rest of U.S.—consisting of those 

portions of the United States and its 

territories and possessions as listed in 5 

CFR 591.205 not located within another 

locality pay area. 

[FR Doc. 2010–24495 Filed 9–29–10; 8:45 am] 

BILLING CODE 6325–01–P 

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. 

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 


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60288 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

1Of 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.’’ 

2 12 U.S.C. 1821(e)(13)(C). 

3 12 U.S.C. 1811 et seq. 4 12 U.S.C. 1821(e)(12). 5 12 U.S.C. 1821(e)(12). 

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. 

FAS 166 also affects the treatment of 

participations issued by an IDI, in that 

it defines participating interests as paripassu 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. 

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). 

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. 

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 


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Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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 assetbacked securities, severe declines in 

financial asset values and in mortgageand 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 


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60290 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

6FDIC Covered Bond Policy Statement, 73 FR 

43754 et seq. (July 28, 2008). 

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

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 


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Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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 


jdjones on DSK8KYBLC1PROD with RULES
60292 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

7 12 U.S.C. 1821(e)(10). 

Mae’s statute contains broad authority 

to enforce its contract with the lender/ 

issuer and its ownership rights in the 

mortgages backing Ginnie Maeguaranteed securities. In the event that 

an entity otherwise subject to the Rule 

issues both guaranteed and nonguaranteed 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 resecuritization. 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 timebased sequential pay or planned 

amortization and companion subtranches, 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 multitranche 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


jdjones on DSK8KYBLC1PROD with RULES
Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 60293 

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. 

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 thirdparty 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 NonTraditional 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. 

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 


jdjones on DSK8KYBLC1PROD with RULES
60294 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

9See, 12 U.S.C. 1823(e). 

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 DoddFrank 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 NonTraditional 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

The transaction should be an armslength, 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 


jdjones on DSK8KYBLC1PROD with RULES
Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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 


jdjones on DSK8KYBLC1PROD with RULES
60296 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

10See, 12 U.S.C. 1821(e)(13). 

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

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 selfhelp 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. 


jdjones on DSK8KYBLC1PROD with RULES
Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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. 

■ 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 

■ 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. 

■ 2. Revise § 360.6 to read as follows: 

§ 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 multistep 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 


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60298 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

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 timebased sequential pay or planned 

amortization and companion subtranches; 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 governmentsponsored 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, 


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Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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. 


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60300 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

(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 § 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 


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Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 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 selfhelp 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 selfhelp 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. 


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60302 Federal Register / Vol. 75, No. 189 / Thursday, September 30, 2010 / Rules and Regulations 

(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 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2010–0907; Directorate 

Identifier 2010–SW–044–AD; Amendment 

39–16436; AD 2010–20–02] 

RIN 2120–AA64 

Airworthiness Directives; Eurocopter 

France (Eurocopter) Model AS332C, L, 

L1, and L2 Helicopters 

AGENCY: Federal Aviation 

Administration, DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: This amendment adopts a 

new airworthiness directive (AD) for the 

specified Eurocopter model helicopters. 

This action requires replacing each 

affected hydraulic pump with an 

airworthy hydraulic pump. This 

amendment is prompted by the loss of 

the proper functioning of a hydraulic 

pump because of the deterioration of the 

pump seals and the loss of hydraulic 

fluid caused by incorrect positioning of 

the piston liner. The actions specified in 

this AD are intended to prevent loss of 

hydraulic power and subsequent loss of 

control of the helicopter. 

DATES: Effective October 15, 2010. 

Comments for inclusion in the Rules 

Docket must be received on or before 

November 29, 2010. 

ADDRESSES: Use one of the following 

addresses to submit comments on this 

AD: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590. 

• Hand Delivery: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590, 

between 9 a.m. and 5 p.m., Monday 

through Friday, except Federal holidays. 

You may get the service information 

identified in this AD from American 

Eurocopter Corporation, 2701 Forum 

Drive, Grand Prairie, TX 75053–4005, 

telephone (800) 232–0323, fax (972) 

641–3710, or at http:// 

www.eurocopter.com. 

Examining the Docket: You may 

examine the docket that contains the 

AD, any comments, and other 

information on the Internet at http:// 

www.regulations.gov, or in person at the 

Docket Operations office between 9 a.m. 

and 5 p.m., Monday through Friday, 

except Federal holidays. The Docket 

Operations office (telephone (800) 647– 

5527) is located in Room W12–140 on 

the ground floor of the West Building at 

the street address stated in the 

ADDRESSES section. Comments will be 

available in the AD docket shortly after 

receipt. 

FOR FURTHER INFORMATION CONTACT: Ed 

Cuevas, Aviation Safety Engineer, FAA, 

Rotorcraft Directorate, Safety 

Management Group, 2601 Meacham 

Blvd., Fort Worth, Texas 76137, 

telephone (817) 222–5355, fax (817) 

222–5961. 

SUPPLEMENTARY INFORMATION: 

Discussion 

The European Aviation Safety Agency 

(EASA), which is the Technical Agent 

for the Member States of the European 

Community, has issued EASA 

Emergency AD No. 2010–0043R1–E, 

dated March 26, 2010, to correct an 

unsafe condition for the specified 

Eurocopter model helicopters. EASA 

advises of the loss of the right-hand 

(RH) hydraulic power system on an 

AS332L2 helicopter. The pilot saw the 

hydraulic system ‘‘low level’’ warning 

light come on during the approach 

phase. Investigation revealed a 

hydraulic fluid leak from the hydraulic 

pump casing due to deterioration of the 

pump seals resulting from an incorrectly 

positioned compensating piston liner. 

EASA states that this non-compliant 

repair process was used by the 

following repair stations: HELIKOPTER 

SERVICE, ASTEC HELICOPTER 

SERVICE, and HELI-ONE. They further 

state that if this condition occurs on 

both pumps of a helicopter, it could 

result in loss of the RH and left-hand 

(LH) hydraulic power systems and 

consequently may lead to the loss of 

helicopter controllability. 

Related Service Information 

Eurocopter has issued an Emergency 

Alert Service Bulletin (EASB) with two 

numbers (01.00.78 and 01.00.43), dated 

March 11, 2010. EASB No. 01.00.78 

applies to United States typecertificated Model AS332C, L, L1, and 

L2 helicopters; civil Model AS332C1 

not type-certificated in the United 

States; and military Model AS332B, B1, 

M, M1, and F1 helicopters that are not 

type-certificated in the United States. 

EASB No. 01.00.43 applies to military 

Model AS532A2, U2, UC, AC, UL, AL, 

SC, and UE helicopters that are not 

type-certificated in the United States. 

The EASB specifies identifying affected 

hydraulic pumps, prohibiting flights for 

all helicopters fitted with two of the 

affected hydraulic pumps until at least 

one of the affected pumps is replaced, 

replacing all affected hydraulic pumps 

with airworthy pumps within 10 

months, and returning any affected 

hydraulic pump to have it checked and, 

where necessary, reconditioned. 

EASA classified this EASB as 

mandatory and issued EASA Emergency 

AD No. 2010–0043R1–E, dated March 

26, 2010, to ensure the continued 

airworthiness of these helicopters. 

FAA’s Evaluation and Unsafe Condition 

Determination 

These helicopters have been approved 

by the aviation authority of France and 

are approved for operation in the United 

States. Pursuant to our bilateral 

agreement with France, EASA, their 

technical representative, has notified us 

of the unsafe condition described in the 

EASA AD. We are issuing this AD 

because we evaluated all information 

provided by EASA and determined the 

unsafe condition exists and is likely to 

exist or develop on other helicopters of 

these same type designs. 

Differences Between This AD and the 

EASA AD 

We refer to flight hours as hours timein-service (TIS). We require each 

affected hydraulic pump be replaced 

with an airworthy pump within 15 

hours TIS. We do not use the calendar 

date used in the EASA AD because that 

date has already passed. 

FAA’s Determination and Requirements 

of This AD 

This unsafe condition is likely to exist 

or develop on other helicopters of the 

same type design. Therefore, this AD is 


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