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FDIC Safe Harbor Rule

On September 27, 2010, the Federal Deposit Insurance Corporation (the "FDIC") adopted a final rule amending the safe harbor for insured U.S. depository institutions (each, an "IDI") regarding the treatment by the FDIC, as receiver or conservator, of financial assets transferred by an IDI in connection with a securitization or in the form of a participation (the "Safe Harbor Rule"). The Safe Harbor Rule is codified at 12 CFR § 360.6, where is replaced the FDIC’s original safe harbor rule that had been adopted in 2000 (the “Original Rule”), as modified by certain interim actions by the FDIC which established transitional periods for securitizations and participations completed or in process, first to March 31, 2010, then to September 30, 2010, and finally to December 31, 2010 pursuant to the Safe Harbor Rule. 

The Original Rule was intended to resolve issues raised by Financial Accounting Standards Board (“FASB”) Statement No. 125 (“SFAS 125”), which was shortly replaced by Statement No. 140 (“SFAS 140”) (a replacement of FASB Statement 125). Under SFAS 140, a transfer of financial assets was accounted for as a sale if the transferor surrendered control over the assets. One of the conditions for determining whether the transferor had surrendered control was that the assets had been isolated from the transferor (i.e., put presumptively beyond the reach of the transferor and its creditors in bankruptcy or receivership), known as the “legal isolation” condition.

The Original Rule provided that, subject to certain conditions, the FDIC would not, by exercise of its authority to disaffirm or repudiate contracts, reclaim, recover, or recharacterize as property of an IDI or the receivership of any assets transferred by the IDI in connection with a securitization or participation, provided that such transfer met all conditions for sale accounting treatment under generally accepted accounting principles (“GAAP”), other than the legal isolation condition as it applies to institutions for which the FDIC may be appointed conservator or receiver, which was addressed by the Original Rule.

In 2009 FASB adopted Statement No. 166 (“SFAS 166”) (an amendment of FASB Statement No. 140) and Statement No. 167 (“SFAS 167”), each of which is applicable to reporting periods that began on or after November 15, 2009. Under SFAS 166 and SFAS 167, many securitizations no longer qualified for sale treatment under GAAP and, as a result, no longer qualified under the safe harbor of the Original Rule.

In order to address the changes in GAAP, and to also subject the availability of the new safe harbors to more stringent conditions based on the FDIC’s belief that deficiencies in securitization practices led to many of the losses during the financial crisis which in turn led to claims upon the Depositor Insurance Fund administered by the FDIC, the FDIC Safe Harbor Rule provides four safe harbors for “legal isolation.”  

Regulatory Materials

Current FDIC Safe Harbor Rule:

Related Background Materials: