FDIC Approves Transitional Safe Harbor on Securitizations in Light of New FASB Standards

The FDIC Board of Directors, responding to accounting standard changes promulgated by FASB, adopted an interim rule amending 12 C.F.R. § 360.6 to provide a transitional safe harbor effective immediately for all participations and securitizations in compliance with that rule as originally adopted in 2000. Under the rule, participations and securitizations completed or currently in process on or before March 31, 2010, in reliance on the FDIC’s existing regulation are “grandfathered” and continue to be protected by the safe harbor provisions of section 360.6 despite the changes adopted by FASB.

The changes are contained in FASB Statement no. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and Statement no. 167, Amendments to FASB Interpretation No. 46(R). The standards are effective for annual financial reporting periods beginning after Nov. 15, 2009.

Comments on the FDIC’s interim rule are due Dec. 27. Because of the retroactive application of the new FASB standards and the immediate need for assurances for securitization

participants and the banking industry with respect to existing securitizations and participations, the FDIC invoked the good cause exception in the Administrative Procedure Act to make the interim rule effective as of Nov. 12, 2009, the date the board approved it.

“The board’s action provides needed clarity to the financial markets,” said FDIC Chairman Sheila Bair in a press release. “With changing accounting rules, we need both to ensure that participations and securitizations that have relied on our existing regulation retain that protection and to consider needed reforms for securitization going forward.”

Bair said the FDIC staff would propose to the board at its December meeting a set of conditions that securitizations initiated after March 31, 2010, must meet to qualify for the safe harbor treatment.

The new FASB standards 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 will require some insured depository institutions to consolidate an issuing entity to which financial assets have been transferred for securitization on to their balance sheets for financial reporting purposes.

The safe harbor protection provided by the interim rule continues for the life of the participation or securitization if the financial assets were transferred into the transaction or, for revolving securitization trusts, beneficial interests were issued on or before March 31, 2010, and the participation or securitization complied with section 360.6. Under this transitional safe harbor, the participation or securitization will comply with the section 360.6 requirement that any transfers into the transaction meet all conditions for sale accounting treatment under GAAP, other than the “legal isolation” condition, if the transfers satisfied GAAP in effect for reporting periods prior to Nov. 15, 2009.

For participations and securitizations that meet those requirements, the interim rule provides that the FDIC will not, by exercise of its authority to disaffirm or repudiate contracts, seek to reclaim, recover or recharacterize as property of the institution or the receivership any financial assets transferred in connection with the securitization or participation, even if the transaction does not satisfy all conditions for sale accounting treatment under GAAP as effective for reporting periods after Nov. 15, 2009. As a result, any financial assets transferred into such securitizations or participations will not be treated as property of the institution or receivership, and consequently the consent requirement of 12 USC § 1821(e)(13)(C) will not apply.