[Federal Register Volume 73, Number 145 (Monday, July 28, 2008)]
[Notices]
[Pages 43754-43759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17168]
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FEDERAL DEPOSIT INSURANCE CORPORATION
Covered Bond Policy Statement
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final Statement of Policy.
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SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) is
publishing a final policy statement on the treatment of covered bonds
in a conservatorship or receivership. This policy statement provides
guidance on the availability of expedited access to collateral pledged
for certain covered bonds after the FDIC decides whether to terminate
or continue the transaction. Specifically, the policy statement
clarifies how the FDIC will apply the consent requirements of section
11(e)(13)(C) of the Federal Deposit Insurance Act (FDIA) to such
covered bonds to facilitate the prudent development of the U.S. covered
bond market consistent with the FDIC's responsibilities as conservator
or receiver for insured depository institutions (IDI). As the U.S.
covered bond market develops, future modifications or amendments may be
considered by the FDIC.
DATES: Effective Date: July 28, 2008.
FOR FURTHER INFORMATION CONTACT: Richard T. Aboussie, Associate General
Counsel, Legal Division, (703) 562-2452; Michael H. Krimminger, Special
Advisor for Policy, (202) 898-8950.
SUPPLEMENTARY INFORMATION:
I. Background
On April 23, 2008, the FDIC published the Interim Final Covered
Bond Policy Statement for public comment. 73 FR 21949 (April 23, 2008).
After carefully reviewing and considering all comments, the FDIC has
adopted certain limited revisions and clarifications to the Interim
Policy Statement (as discussed in Part II) in the Final Policy
Statement.\1\
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\1\ For ease of reference, the Interim Final Covered Bond Policy
Statement, published on April 23, 2008, will be referred to as the
Interim Policy Statement. The Final Covered Bond Policy Statement
will be referred to as the Policy Statement.
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Currently, there are no statutory or regulatory prohibitions on the
issuance of covered bonds by U.S. banks. Therefore, to reduce market
uncertainty and clarify the application of the FDIC's statutory
authorities for U.S. covered bond transactions, the FDIC issued an
Interim Policy Statement to provide guidance on the availability of
expedited access to collateral pledged for certain covered bonds by
IDIs in a conservatorship or a receivership. As discussed below, under
section 11(e)(13)(C) of the FDIA, any liquidation of collateral of an
IDI placed into conservatorship or receivership requires the consent of
the FDIC during the initial 45 days or 90 days after its appointment,
respectively. Consequently, issuers of covered bonds have incurred
additional costs from maintaining additional liquidity needed to insure
continued payment on outstanding bonds if the FDIC as conservator or
receiver fails to make payment or provide access to the pledged
collateral during these periods after any decision by the FDIC to
terminate the covered bond transaction. The Policy Statement does not
impose any new obligations on the FDIC, as conservator or receiver, but
does define the circumstances and the specific covered bond
transactions for which the FDIC will grant consent to expedited access
to pledged covered bond collateral.
Covered bonds are general, non-deposit obligation bonds of the
issuing bank secured by a pledge of loans that remain on the bank's
balance sheet. Covered bonds originated in Europe, where they are
subject to extensive statutory and supervisory regulation designed to
protect the interests of covered bond investors from the risks of
insolvency of the issuing bank. By contrast, covered bonds are a
relatively new innovation in the U.S. with only two issuers to date:
Bank of America, N.A. and Washington Mutual. These initial U.S. covered
bonds were issued in September 2006.
In the covered bond transactions initiated in the U.S. to date, an
IDI sells mortgage bonds, secured by mortgages, to a trust or similar
entity (``special purpose vehicle'' or ``SPV'').\2\ The pledged
mortgages remain on the IDI's balance sheet, securing the IDI's
obligation to make payments on the debt, and the SPV sells covered
bonds, secured by the mortgage bonds, to investors. In the event of a
default by the IDI, the mortgage bond trustee takes possession of the
pledged mortgages and continues to make payments to the SPV to service
the covered bonds. Proponents argue that covered bonds provide new and
additional sources of liquidity and diversity to an institution's
funding base.
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\2\ The FDIC understands that certain potential issuers may
propose a different structure that does not involve the use of an
SPV. The FDIC expresses no opinion about the appropriateness of SPV
or so-called ``direct issuance'' covered bond structures, although
both may comply with this Statement of Policy.
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The FDIC agrees that covered bonds may be a useful liquidity tool
for IDIs as part of an overall prudent liquidity management framework
and within the parameters set forth in the Policy Statement. While
covered bonds, like other secured liabilities, could increase the costs
to the deposit insurance fund in a receivership, these potential costs
must be balanced with diversification of sources of liquidity and the
benefits that accrue from additional on-balance sheet alternatives to
securitization for financing mortgage lending. The Policy Statement
seeks to balance these considerations by clarifying the conditions and
circumstances under which the FDIC will grant automatic consent to
access pledged covered bond collateral. The FDIC believes that the
prudential limitations set forth in the Policy Statement permit the
incremental development of the covered bond market, while allowing the
FDIC, and other regulators, the opportunity to evaluate these
transactions within the U.S. mortgage market. In fulfillment of its
responsibilities as deposit insurer and receiver for failed IDIs, the
FDIC will continue to review the development of the covered bond
marketplace in the U.S. and abroad to gain further insight into the
appropriate role of covered bonds in IDI funding and the U.S. mortgage
market, and their potential consequences for the deposit insurance
fund. (For ease of reference, throughout this discussion, when we refer
to ``covered bond obligation,'' we are referring to the part of the
covered bond transaction comprising the IDI's debt obligation, whether
to the SPV, mortgage bond trustee, or other parties; and ``covered bond
obligee'' is the entity to which the IDI is indebted.)
Under the FDIA, when the FDIC is appointed conservator or receiver
of an IDI, contracting parties cannot terminate agreements with the IDI
because of the insolvency itself or the appointment of
[[Page 43755]]
the conservator or receiver. In addition, contracting parties must
obtain the FDIC's consent during the forty-five day period after
appointment of FDIC as conservator, or during the ninety day period
after appointment of FDIC as receiver before, among other things,
terminating any contract or liquidating any collateral pledged for a
secured transaction.\3\ During this period, the FDIC must still comply
with otherwise enforceable provisions of the contract. The FDIC also
may terminate or repudiate any contract of the IDI within a reasonable
time after the FDIC's appointment as conservator or receiver if the
conservator or receiver determines that the agreement is burdensome and
that the repudiation will promote the orderly administration of the
IDI's affairs.\4\
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\3\ See 12 U.S.C. 1821(e)(13)(C).
\4\ See 12 U.S.C. 1821(e)(3) and (13). These provisions do not
apply in the manner stated to ``qualified financial contracts'' as
defined in Section 11(e) of the FDI Act. See 12 U.S.C. 1821(e)(8).
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As conservator or receiver for an IDI, the FDIC has three options
in responding to a properly structured covered bond transaction of the
IDI: (1) Continue to perform on the covered bond transaction under its
terms; (2) pay off the covered bonds in cash up to the value of the
pledged collateral; or (3) allow liquidation of the pledged collateral
to pay off the covered bonds. If the FDIC adopts the first option, it
would continue to make the covered bond payments as scheduled. The
second or third options would be triggered if the FDIC repudiated the
transaction or if a monetary default occurred. In both cases, the par
value of the covered bonds plus interest accrued to the date of the
appointment of the FDIC as conservator or receiver would be paid in
full up to the value of the collateral. If the value of the pledged
collateral exceeded the total amount of all valid claims held by the
secured parties, this excess value or over collateralization would be
returned to the FDIC, as conservator or receiver, for distribution as
mandated by the FDIA. On the other hand, if there were insufficient
collateral pledged to cover all valid claims by the secured parties,
the amount of the claims in excess of the pledged collateral would be
unsecured claims in the receivership.
While the FDIC can repudiate the underlying contract, and thereby
terminate any continuing obligations under that contract, the FDIA
prohibits the FDIC, as conservator or receiver from avoiding any
legally enforceable or perfected security interest in the assets of the
IDI unless the interest was taken in contemplation of the IDI's
insolvency or with the intent to hinder, delay, or defraud the IDI or
its creditors.\5\ This statutory provision ensures protection for the
valid claims of secured creditors up to the value of the pledged
collateral. After a default or repudiation, the FDIC as conservator or
receiver may either pay resulting damages in cash up to the value of
the collateral or turn over the collateral to the secured party for
liquidation. For example, if the conservator or receiver repudiated a
covered bond transaction, as discussed in Part II below, it would pay
damages limited to par value of the covered bonds and accrued interest
up to the date of appointment of the conservator or receiver, if
sufficient collateral was in the cover pool, or turn over the
collateral for liquidation with the conservator or receiver recovering
any proceeds in excess of those damages. In liquidating any collateral
for a covered bond transaction, it would be essential that the secured
party liquidate the collateral in a commercially reasonable and
expeditious manner taking into account the then-existing market
conditions.
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\5\ See 12 U.S.C. 1821(e)(12).
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As noted above, existing covered bond transactions by U.S. issuers
have used SPVs. However, nothing in the Policy Statement requires the
use of an SPV. Some questions have been posed about the treatment of a
subsidiary or SPV after appointment of the FDIC as conservator or
receiver. The FDIC applies well-defined standards to determine whether
to treat such entities as ``separate'' from the IDI. If a subsidiary or
SPV, in fact, has fulfilled all requirements for treatment as a
``separate'' entity under applicable law, the FDIC as conservator or
receiver has not applied its statutory powers to the subsidiary's or
SPV's contracts with third parties. While the determination of whether
a subsidiary or SPV has been organized and maintained as a separate
entity from the IDI must be determined based on the specific facts and
circumstances, the standards for such decisions are set forth in
generally applicable judicial decisions and in the FDIC's regulation
governing subsidiaries of insured state banks, 12 CFR 362.4.
The requests to the FDIC for guidance have focused principally on
the conditions under which the FDIC would grant consent to obtain
collateral for a covered bond transaction before the expiration of the
forty-five day period after appointment of a conservator or the ninety
day period after appointment of a receiver. IDIs interested in issuing
covered bonds have expressed concern that the requirement to seek the
FDIC's consent before exercising on the collateral after a breach could
interrupt payments to the covered bond obligee for as long as 90 days.
IDIs can provide for additional liquidity or other hedges to
accommodate this potential risk to the continuity of covered bond
payments but at an additional cost to the transaction. Interested
parties requested that the FDIC provide clarification about how FDIC
would apply the consent requirement with respect to covered bonds.
Accordingly, the FDIC has determined to issue this Final Covered Bond
Policy Statement in order to provide covered bond issuers with final
guidance on how the FDIC will treat covered bonds in a conservatorship
or receivership.
II. Overview of the Comments
The FDIC received approximately 130 comment letters on the Interim
Policy Statement; these included comments from national banks, Federal
Home Loan Banks, industry groups and individuals.
Most commenters encouraged the FDIC to adopt the Policy Statement
to clarify how the FDIC would treat covered bonds in the case of a
conservatorship or receivership and, thereby, facilitate the
development of the U.S. covered bond market. The more detailed comments
focused on one or more of the following categories of issues: (1) The
FDIC's discretion regarding covered bonds that do not comply with the
Policy Statement; (2) application to covered bonds completed prior to
the Policy Statement; (3) the limitation of the Policy Statement to
covered bonds not exceeding 4 percent of liabilities; (4) the eligible
collateral for the cover pools; (5) the measure of damages provided in
the event of default or repudiation; (6) the covered bond term limit;
and (7) federal home loan bank advances and assessments.
Certain banks and industry associations sought clarification about
the treatment of covered bonds that do not comply with the Policy
Statement by the FDIC as conservator or receiver. Specifically,
commenters asked the FDIC to clarify that if a covered bond issuance is
not in conformance with the Policy Statement, the FDIC retains
discretion to grant consent prior to expiration of the 45 or 90 day
period on a case-by-case basis. Under Section 11(e)(13)(C) of the FDIA,
the exercise of any right or power to terminate, accelerate, declare a
default, or otherwise affect any contract of the IDI, or to take
possession of any property of the IDI, requires the consent of the
conservator or receiver, as appropriate,
[[Page 43756]]
during the 45-day period or 90-day period after the date of the
appointment of the conservator or receiver, as applicable. By the
statutory terms, the conservator or receiver retains the discretion to
give consent on a case-by-case basis after evaluation by the FDIC upon
the failure of the issuer.
Comments from banks who issued covered bonds prior to the Policy
Statement requested either `grandfathering' of preexisting covered
bonds or an advance determination by the FDIC before any appointment of
a conservator or receiver that specific preexisting covered bonds
qualified under the Policy Statement. After carefully considering the
comments, the FDIC has determined that to `grandfather' or otherwise
permit mortgages or other collateral that do not meet the specific
requirements of the Policy Statement to support covered bonds would not
promote stable and resilient covered bonds as encompassed within the
Policy Statement. If preexisting covered bonds, and their collateral,
otherwise qualify under the standards specified in the Policy
Statement, those covered bonds would be eligible for the expedited
access to collateral provided by the Policy Statement.
A number of commenters requested that the limitation of eligible
covered bonds to no more than 4 percent of an IDI's total liabilities
should be removed or increased. Commenters also noted that other
countries applying a cap have based the limitation on assets, not
liabilities. The Policy Statement applies to covered bond issuances
that comprise no more than 4 percent of an institution's total
liabilities since, in part, as the proportion of secured liabilities
increases, the total unpledged assets available to satisfy the claims
of uninsured depositors and other creditors from the Deposit Insurance
Fund decrease. As a result, the FDIC must focus on the share of an
IDI's liabilities that are secured by collateral and balance the
additional potential losses in the failure of an IDI against the
benefits of increased liquidity for open institutions. The 4 percent
limitation under the Policy Statement is designed to permit the FDIC,
and other regulators, an opportunity to evaluate the development of the
covered bond market within the financial system of the United States,
which differs in many respects from that in other countries deploying
covered bonds. Consequently, while changes may be considered to this
limitation as the covered bond market develops, the FDIC has decided
not to make any change at this time.
A number of commenters sought expansion of the mortgages defined as
``eligible mortgages'' and the expansion of collateral for cover pools
to include other assets, such as second-lien home equity loans and home
equity lines of credit, credit card receivables, mortgages on
commercial properties, public sector debt, and student loans. Other
commenters requested that ``eligible mortgages'' should be defined
solely by their loan-to-value (LTV) ratios. After considering these
comments, the FDIC has determined that its interests in efficient
resolution of IDIs, as well as in the initial development of a
resilient covered bond market that can provide reliable liquidity for
well-underwritten mortgages, support retention of the limitations on
collateral for qualifying covered bonds in the Interim Policy
Statement. Recent market experience demonstrates that many mortgages
that would not qualify under the Policy Statement, such as low
documentation mortgages, have declined sharply in value as credit
conditions have deteriorated. Some of the other assets proposed are
subject to substantial volatility as well, while others would not
specifically support additional liquidity for well-underwritten
residential mortgages. As noted above, certain provisions of the Policy
Statement may be reviewed and reconsidered as the U.S. covered bond
market develops.
With regard to the comments that LTV be used as a guide to
determine an ``eligible mortgage,'' the FDIC does not believe that LTV
can substitute for strong underwriting criteria to ensure sustainable
mortgages. In response to the comments, and the important role that LTV
plays in mortgage analysis, the Policy Statement will urge issuers to
disclose LTV for mortgages in the cover pool to enhance transparency
for the covered bond market and promote stable cover pools. However, no
specific LTV limitation will be imposed.
Two commenters suggested that the Policy Statement should be
clarified to permit the substitution of cash as cover pool collateral.
The Policy Statement has been modified to allow for the substitution of
cash and Treasury and agency securities. The substitution of such
collateral does not impair the strength of the cover pool and may be an
important tool to limit short-term strains on issuing IDIs if eligible
mortgages or AAA-rated mortgage securities must be withdrawn from the
cover pool.
A number of commenters requested guidance on the calculation of
damages the receiver will pay to holders of covered bonds in the case
of repudiation or default. Under 12 U.S.C. 1821(e)(3), the liability of
the conservator or receiver for the disaffirmance or repudiation of any
contract is limited to ``actual direct compensatory damages'' and
determined as of the date of appointment of the conservator or
receiver. In the repudiation of contracts, such damages generally are
defined by the amount due under the contract repudiated, but excluding
any amounts for lost profits or opportunities, other indirect or
contingent claims, pain and suffering, and exemplary or punitive
damages. Under the Policy Statement, the FDIC agrees that ``actual
direct compensatory damages'' due to bondholders, or their
representative(s), for repudiation of covered bonds will be limited to
the par value of the bonds plus accrued interest as of the date of
appointment of the FDIC as conservator or receiver. The FDIC
anticipates that IDIs issuing covered bonds, like other obligations
bearing interest rate or other risks, will undertake prudent hedging
strategies for such risks as part of their risk management program.
Many commenters suggested that the 10-year term limit should be
removed to permit longer-term covered bond maturities. After reviewing
the comments, the FDIC agrees that longer-term covered bonds should not
pose a significant, additional risk and may avoid short-term funding
volatility. Therefore, the FDIC has revised the Interim Policy
Statement by increasing the term limit for covered bonds from 10 years
to 30 years.
A number of the Federal Home Loan Banks, and their member
institutions, objected to the inclusion of FHLB advances in the
definition of ``secured liabilities,'' any imposed cap on such
advances, and any change in assessment rates. Under 12 CFR part 360.2
(Federal Home Loan Banks as Secured Creditors), secured liabilities
include loans from the Federal Reserve Bank discount window, Federal
Home Loan Bank (FHLB) advances, repurchase agreements, and public
deposits. However, the Policy Statement does not impose a cap on FHLB
advances and has no effect on an IDI's ability to obtain FHLB advances
or its deposit insurance assessments. The Policy Statement solely
addresses covered bonds.
However, as noted above, where an IDI relies very heavily on
secured liabilities to finance its lending and other business
activities, it does pose a greater risk of loss to the Deposit
Insurance Fund in any failure. Should the covered bond market develop
as a significant source of funding for IDIs, and should that
development create
[[Page 43757]]
substantial increases in an IDI's reliance on secured funding, it would
increase the FDIC's losses in a failure and perhaps outweigh the
benefits of improved liquidity. As a result, it is appropriate for the
FDIC to consider the risks of such increased losses. Consideration of
these risks may occur in a possible future request for comments on
secured liabilities, but they are not addressed in this Policy
Statement.
III. Final Statement of Policy
For the purposes of this final Policy Statement, a ``covered bond''
is defined as a non-deposit, recourse debt obligation of an IDI with a
term greater than one year and no more than thirty years, that is
secured directly or indirectly by a pool of eligible mortgages or, not
exceeding ten percent of the collateral, by AAA-rated mortgage bonds.
The term ``covered bond obligee'' is the entity to which the IDI is
indebted.
To provide guidance to potential covered bond issuers and
investors, while allowing the FDIC to evaluate the potential benefits
and risks that covered bond transactions may pose to the deposit
insurance fund in the U.S. mortgage market, the application of the
policy statement is limited to covered bonds that meet the following
standards.
This Policy Statement only applies to covered bond issuances made
with the consent of the IDI's primary federal regulator in which the
IDI's total covered bond obligations at such issuance comprise no more
than 4 percent of an IDI's total liabilities. The FDIC is concerned
that unrestricted growth while the FDIC is evaluating the potential
benefits and risks of covered bonds could excessively increase the
proportion of secured liabilities to unsecured liabilities. The larger
the balance of secured liabilities on the balance sheet, the smaller
the value of assets that are available to satisfy depositors and
general creditors, and consequently the greater the potential loss to
the Deposit Insurance Fund. To address these concerns, the policy
statement is limited to covered bonds that comprise no more than 4
percent of a financial institution's total liabilities after issuance.
In order to limit the risks to the deposit insurance fund,
application of the Policy Statement is restricted to covered bond
issuances secured by perfected security interests under applicable
state and federal law on performing eligible mortgages on one-to-four
family residential properties, underwritten at the fully indexed rate
and relying on documented income, a limited volume of AAA-rated
mortgage securities, and certain substitution collateral. The Policy
Statement provides that the mortgages shall be underwritten at the
fully indexed rate relying on documented income, and comply with
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 additional guidance
applicable at the time of loan origination. In addition, the Policy
Statement requires that the eligible mortgages and other collateral
pledged for the covered bonds be held and owned by the IDI. This
requirement is designed to protect the FDIC's interests in any over
collateralization and avoid structures involving the transfer of the
collateral to a subsidiary or SPV at initiation or prior to any IDI
default under the covered bond transaction.
The FDIC recognizes that some covered bond programs include
mortgage-backed securities in limited quantities. Staff believes that
allowing some limited inclusion of AAA-rated mortgage-backed securities
as collateral for covered bonds during this interim, evaluation period
will support enhanced liquidity for mortgage finance without increasing
the risks to the deposit insurance fund. Therefore, covered bonds that
include up to 10 percent of their collateral in AAA-rated mortgage
securities backed solely by mortgage loans that are made in compliance
with guidance referenced above will meet the standards set forth in the
Policy Statement. In addition, substitution collateral for the covered
bonds may include cash and Treasury and agency securities as necessary
to prudently manage the cover pool. Securities backed by tranches in
other securities or assets (such as Collateralized Debt Obligations)
are not considered to be acceptable collateral.
The Policy Statement provides that the consent of the FDIC, as
conservator or receiver, is provided to covered bond obligees to
exercise their contractual rights over collateral for covered bond
transactions conforming to the Interim Policy Statement no sooner than
ten (10) business days after a monetary default on an IDI's obligation
to the covered bond obligee, as defined below, or ten (10) business
days after the effective date of repudiation as provided in written
notice by the conservator or receiver.
The FDIC anticipates that future developments in the marketplace
may present interim final covered bond structures and structural
elements that are not encompassed within this Policy Statement and
therefore the FDIC may consider future amendment (with appropriate
notice) of this Policy Statement as the U.S. covered bond market
develops.
IV. Scope and Applicability
This Policy Statement applies to the FDIC in its capacity as
conservator or receiver of an insured depository institution.
This Policy Statement only addresses the rights of the FDIC under
12 U.S.C. 1821(e)(13)(C). A previous policy statement entitled
``Statement of Policy on Foreclosure Consent and Redemption Rights,''
August 17, 1992, separately addresses consent under 12 U.S.C. 1825(b),
and should be separately consulted.
This Policy Statement 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 or shall it be construed
as authorizing the attachment of any involuntary lien upon the property
of the FDIC. The Policy Statement provides that it shall 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 Board of Directors of the FDIC has adopted a final Covered Bond
Policy Statement. The text of the Covered Bond Policy Statement
follows:
Covered Bond Policy Statement
Background
Insured depository institutions (``IDIs'') are showing increasing
interest in issuing covered bonds. Although covered bond structures
vary, in all covered bonds the IDI issues a debt obligation secured by
a pledge of assets, typically mortgages. The debt obligation is either
a covered bond sold directly to investors, or mortgage bonds which are
sold to a trust or similar entity (``special purpose vehicle'' or
``SPV'') as collateral for the SPV to sell covered bonds to investors.
In either case, the IDI's debt obligation is secured by a perfected
first
[[Page 43758]]
priority security interest in pledged mortgages, which remain on the
IDI's balance sheet. Proponents argue that covered bonds provide new
and additional sources of liquidity and diversity to an institution's
funding base. Based upon the information available to date, the FDIC
agrees that covered bonds may be a useful liquidity tool for IDIs as
part of an overall prudent liquidity management framework and the
parameters set forth in this policy statement. Because of the
increasing interest IDIs have in issuing covered bonds, the FDIC has
determined to issue this policy statement with respect to covered
bonds.
(a) Definitions.
(1) For the purposes of this policy statement, a ``covered bond''
shall be defined as a non-deposit, recourse debt obligation of an IDI
with a term greater than one year and no more than thirty years, that
is secured directly or indirectly by perfected security interests under
applicable state and federal law on assets held and owned by the IDI
consisting of eligible mortgages, or AAA-rated mortgage-backed
securities secured by eligible mortgages if for no more than ten
percent of the collateral for any covered bond issuance or series. Such
covered bonds may permit substitution of cash and United States
Treasury and agency securities for the initial collateral as necessary
to prudently manage the cover pool.
(2) The term ``eligible mortgages'' shall mean performing first-
lien mortgages on one-to-four family residential properties,
underwritten at the fully indexed rate \6\ and relying on documented
income, and complying with 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 additional guidance applicable at the time of loan origination.
Due to the predictive quality of loan-to-value ratios in evaluating
residential mortgages, issuers should disclose loan-to-value ratios for
the cover pool to enhance transparency for the covered bond market.
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\6\ The fully indexed rate equals the index rate prevailing at
origination plus the margin to be added to it after the expiration
of an introductory interest rate. For example, assume that a loan
with an initial fixed rate of 7% will reset to the six-month London
Interbank Offered Rate (LIBOR) plus a margin of 6%. If the six-month
LIBOR rate equals 5.5%, lenders should qualify the borrower at 11.5%
(5.5% + 6%), regardless of any interest rate caps that limit how
quickly the fully indexed rate may be reached.
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(3) The term ``covered bond obligation,'' shall be defined as the
portion of the covered bond transaction that is the insured depository
institution's debt obligation, whether to the SPV, mortgage bond
trustee, or other parties.
(4) The term ``covered bond obligee'' is the entity to which the
insured depository institution is indebted.
(5) The term ``monetary default'' shall mean the failure to pay
when due (taking into account any period for cure of such failure or
for forbearance provided under the instrument or in law) sums of money
that are owed, without dispute, to the covered bond obligee under the
terms of any bona fide instrument creating the obligation to pay.
(6) The term ``total liabilities'' shall mean, for banks that file
quarterly Reports of Condition and Income (Call Reports), line 21
``Total liabilities'' (Schedule RC); and for thrifts that file
quarterly Thrift Financial Reports (TFRs), line SC70 ``Total
liabilities'' (Schedule SC).
(b) Coverage. This policy statement only applies to covered bond
issuances made with the consent of the IDI's primary federal regulator
in which the IDI's total covered bond obligation as a result of such
issuance comprises no more than 4 percent of an IDI's total
liabilities, and only so long as the assets securing the covered bond
obligation are eligible mortgages or AAA-rated mortgage securities on
eligible mortgages, if not exceeding 10 percent of the collateral for
any covered bond issuance, Substitution for the initial cover pool
collateral may include cash and Treasury and agency securities as
necessary to prudently manage the cover pool.
(c) Consent to certain actions. The FDIC as conservator or receiver
consents to a covered bond obligee's exercise of the rights and powers
listed in 12 U.S.C. 1821(e)(13)(C), and will not assert any rights to
which it may be entitled pursuant to 12 U.S.C. 1821(e)(13)(C), after
the expiration of the specified amount of time, and the occurrence of
the following events:
(1) If at any time after appointment the conservator or receiver is
in a monetary default to a covered bond obligee, as defined above, and
remains in monetary default for ten (10) business days after actual
delivery of a written request to the FDIC pursuant to paragraph (d)
hereof to exercise contractual rights because of such monetary default,
the FDIC hereby consents pursuant to 12 U.S.C. 1821(e)(13)(C) to the
covered bond obligee's exercise of any such contractual rights,
including liquidation of properly pledged collateral by commercially
reasonable and expeditious methods taking into account existing market
conditions, provided no involvement of the receiver or conservator is
required.
(2) If the FDIC as conservator or receiver of an insured depository
institution provides a written notice of repudiation of a contract to a
covered bond obligee, and the FDIC does not pay the damages due
pursuant to 12 U.S.C. 1821(e) by reason of such repudiation within ten
(10) business days after the effective date of the notice, the FDIC
hereby consents pursuant to 12 U.S.C. 1821(e)(13)(C) for the covered
bond obligee's exercise of any of its contractual rights, including
liquidation of properly pledged collateral by commercially reasonable
and expeditious methods taking into account existing market conditions,
provided no involvement of the receiver or conservator is required.
(3) The liability of a conservator or receiver for the
disaffirmance or repudiation of any covered bond issuance obligation,
or for any monetary default on, any covered bond issuance, shall be
limited to the par value of the bonds issued, plus contract interest
accrued thereon to the date of appointment of the conservator or
receiver.
(d) Consent. Any party requesting the FDIC's consent as conservator
or receiver pursuant to 12 U.S.C. 1821(e)(13)(C) pursuant to this
policy statement should provide to the Deputy Director, Division of
Resolutions and Receiverships, Federal Deposit Insurance Corporation,
550 17th Street, NW., F-7076, Washington DC 20429-0002, 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 contract and of any applicable notices under the
contract.
(e) Limitations. The consents set forth in this policy statement 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. Nothing contained in this policy alters the claims priority
of collateralized obligations. Nothing contained in this policy
statement shall be construed as permitting the avoidance of any legally
enforceable or perfected security interest in any of the assets of an
insured depository institution, provided such interest is not taken in
contemplation of the institution's insolvency, or with the intent to
hinder,
[[Page 43759]]
delay or defraud the IDI or its creditors. Subject to the provisions of
12 U.S.C. 1821(e)(13)(C), nothing contained in this policy statement
shall be construed as permitting the conservator or receiver to fail to
comply with otherwise enforceable provisions of a contract or
preventing a covered bond obligee's exercise of any of its contractual
rights, including liquidation of properly pledged collateral by
commercially reasonable methods.
(f) No waiver. This policy statement 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 policy statement 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.
(g) No assignment. The right to consent under 12 U.S.C.
1821(e)(13)(C) may not be assigned or transferred to any purchaser of
property from the FDIC, other than to a conservator or bridge bank.
(h) Repeal. This policy statement may be repealed by the FDIC upon
30 days notice provided in the Federal Register, but any repeal shall
not apply to any covered bond issuance made in accordance with this
policy statement before such repeal.
By order of the Board of Directors.
Dated at Washington, DC this 22d day of July, 2008.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-17168 Filed 7-25-08; 8:45 am]
BILLING CODE 6714-01-P