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					                                                                                                                                                                      OCTOBER 4, 2010




                                                                      STRUCTURED FINANCE AND SECURITIZATION


                   FDIC Adopts Final Securitization Safe Harbor Rule
                   On September 27, 2010, by a vote of 4-1, the Federal Deposit Insurance Corporation (“FDIC”) adopted its final safe
                   harbor rule (the “Final Rule”) regarding treatment by the FDIC, as conservator or receiver, of securitizations issued
                   after September 30, 2010. 1 As further discussed below, the Final Rule adopts, with only a few modifications, the
                   FDIC’s May 11, 2010 proposed rule on the subject (the “Proposed Rule”). We summarized the Proposed Rule in a
                   client alert dated May 17, 2010. 2
                   The Final Rule, like the Proposed Rule, contains a number of conditions for its use aimed at reforming securitizations
                   by FDIC-insured depository institutions (“IDIs”). These conditions include requirements relating to risk retention,
                   disclosure and other matters that are addressed in different ways in the securitization provisions of the Dodd-Frank
                   Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and in the Securities and Exchange
                   Commission’s proposed amendments to its Regulation AB (“Proposed Regulation AB II”). 3 For this reason, many
                   market participants had requested the FDIC to defer adoption of the Final Rule and to work with the other regulatory
                   agencies to adopt a uniform approach to these matters under all of the frameworks. Officials at the Treasury
                   Department are also reported to have made such a request to the FDIC. 4




                   1   The Final Rule is available at http://www.gpo.gov/fdsys/pkg/FR-2010-09-30/pdf/2010-24595.pdf
                   Acting Comptroller of the Currency John Walsh voted against the Final Rule, stating that he was doing so because he believed it was
                   preferable for the FDIC to work with the other federal regulators to develop “a single policy on securitization across all markets and all
                   securitizers.”
                   2 Available at http://www.sidley.com/files/News/48ccc84d-81f8-4364-b8ab-02fb89c963ed/Presentation/NewsAttachment/f94e26b5-
                   c01e-4453-a689-0b5bd13f0f72/Structured_Finance_Securitization_Update_05.17.10v4.pdf
                   3We summarized the securitization provisions of the Dodd-Frank Act in a client alert dated July 6, 2010, available at
                   http://www.sidley.com/files/News/b2436757-7f6b-44ac-9e23-b9513276130e/Presentation/NewsAttachment/f95ec5b9-dd33-4e30-8a64-
                   bc11379a0510/Securitization%20Update_07.06.10.pdf
                   We summarized the SEC’s Proposed Regulation AB II in a client alert dated April 19, 2010, available at
                   http://www.sidley.com/files/News/1c27c371-4075-4087-93af-0325420e9a1a/Presentation/NewsAttachment/3a27feda-4a20-4b3a-badb-
                   0693e678db79/Structured_Finance_Update_04.19.10.pdf
                   4   See Wall Street Journal, Infighting Besets Financial Oversight Council, p. C2 (Sept. 30, 2010).


This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not
constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South
Dearborn, Chicago, IL 60603, 312.853.7000. Prior results do not guarantee a similar outcome.
                                                                                           Structured Finance and Securitization Update
                                                                                                                                 PAGE 2


The most significant changes to the Proposed Rule in the Final Rule are provisions that:
•     extend the current transitional safe harbor rule (the “Transitional Safe Harbor Rule”) so that securitizations that
      meet the Transitional Safe Harbor Rule 5 and are issued on or prior to December 31, 2010 are permanently
      grandfathered and therefore are not subject to the conditions of the Final Rule; 6
•     permanently grandfather securitizations (whether issued before or after December 31, 2010) by revolving trusts or
      master trusts that meet the Transitional Safe Harbor Rule and that issued any securities on or before September 27,
      2010;
•     “auto-conform” the risk-retention requirements of the Final Rule to the risk retention rules that are required to be
      adopted by the SEC and the federal banking and other regulators pursuant to Section 941(b) of the Dodd-Frank
      Act (the “Dodd-Frank Risk Retention Rules”), on the “effective date” of the Dodd-Frank Risk Retention Rules;
•     “auto-conform” the Final Rule’s minimum disclosure requirements to the Regulation AB disclosure requirements
      “then in effect,” which will result in the final Regulation AB II disclosure requirements becoming the Final Rule’s
      minimum disclosure requirements when the final Regulation AB II disclosure requirements become effective; and
•     modify the wording of most (although not all) of the conditions in the Proposed Rule to reduce subjectivity in
      determining whether such conditions have been complied with and provide more certainty that, if they are
      complied with on the closing date, the safe harbor provision will apply throughout the life of the securitization.
However, the Final Rule retains, largely unchanged, many features of the Proposed Rule that were subject to market
concern, including:
•     separate safe harbor rules for securitizations accounted for as sales (the “Accounting Sale Safe Harbor Rule”) and
      for securitizations accounted for as financings (the “Accounting Financing Safe Harbor Rule”), with the
      Accounting Financing Safe Harbor Rule providing less protection to investors than the Accounting Sale Safe
      Harbor Rule;
•     application of Regulation AB disclosure requirements to all private placements (regardless of whether they are
      pursuant to the SEC’s private placement safe harbors or are pursuant to the statutory Section 4(2) exemption or
      so-called 4(1½) exemption) and to other offerings that are exempt from registration under the Securities Act of
      1933, which goes far beyond what the SEC has proposed in Proposed Regulation AB II; and
•     for residential mortgage-backed securities (“RMBS”), significant additional conditions including requirements that:
                there generally be no more than 6 credit tranches,
                there be no external credit support at the issuing entity or pool level,
                a 5% reserve fund be maintained to cover repurchases for breaches of representations and warranties in
                 the first year after issuance, and
                a portion of rating agency fees be paid on a deferred basis.
We discuss these provisions in more detail below.




5 Securitizations meet the requirements of the Transitional Safe Harbor Rule if they would have qualified for sale accounting treatment

prior to the changes made to generally accepted accounting principles by FAS 166 and 167 (i.e., FAS 140 and FIN 46(R)) and meet the
other conditions of the FDIC’s original safe harbor rule.
6   The Transitional Safe Harbor Rule had previously been set to expire on September 30, 2010.
                                                                                                 Structured Finance and Securitization Update
                                                                                                                                       PAGE 3


Extension of the Transitional Safe Harbor Rule
The Final Rule extends the current Transitional Safe Harbor Rule to December 31, 2010, with the result that
securitizations to which assets are transferred on or before such date, and which qualify for the current Transitional
Safe Harbor Rule, are permanently grandfathered. Such securitizations are not required to comply with the Final Rule.
In addition, the Final Rule permanently grandfathers securitizations (whether issued before or after December 31, 2010)
by revolving trusts or master trusts that meet the Transitional Safe Harbor Rule and that issued any securities on or
prior to September 27, 2010. Such securitizations are also not required to comply with the Final Rule. 7


The Final Accounting Sale Safe Harbor Rule and Accounting Financing Safe Harbor
Rule
Despite requests from market participants that the FDIC adopt a uniform safe harbor rule that would provide equal
protections for securitizations accounted for as sales and those accounted for as financings, the Final Rule, like the
Proposed Rule, contains separate safe harbor rules — an Accounting Sale Safe Harbor Rule and an Accounting
Financing Safe Harbor Rule — with the Accounting Financing Safe Harbor Rule providing less protection to investors.
For securitizations that are accounted for as sales under FAS 166 and 167 and otherwise qualify for the Accounting
Sale Safe Harbor Rule, the Final Rule provides that the FDIC will not, as conservator or receiver, exercise its statutory
power to repudiate contracts in order to reclaim, recover or recharacterize as property of the IDI the assets transferred
by the IDI into the securitization.
For securitizations that are accounted for as financings under FAS 166 and 167 and otherwise qualify for the
Accounting Financing Safe Harbor Rule, the FDIC retains the ability to repudiate the securitization agreement (a
“repudiation”), even if at such time the market value of the underlying assets is not sufficient to pay principal and
interest contractually owed on the securitization. If the FDIC does not pay damages for such repudiation (which are
limited as to amount) 8 within 10 business days, investors are authorized to exercise contractual rights in accordance
with the securitization documents (including taking possession of the underlying assets and exercising self-help
remedies), “provided no involvement of the receiver or conservator is required” other than ordinary-course consents,
waivers, or execution of transfer documents. Investors are also authorized to exercise such contractual rights if the
FDIC fails to pay or apply collections from the securitization’s underlying assets received by it in accordance with the
securitization documents (a “monetary default”) for 10 business days after receipt of a written notice of such failure
(also subject to no involvement of the conservator or receiver being required).
The Final Rule, like the Proposed Rule, provides that the exercise of contractual rights, as described above, will not be
subject to the “stay” against the enforcement of rights set forth in the Federal Deposit Insurance Act, 9 and that the
FDIC will not attempt to reclaim any interest payments made to investors in accordance with the securitization
documents. However, beyond that, the actual protections accorded investors, particularly under circumstances in
which the value of the collateral is insufficient to pay principal and interest owed to them, has not been significantly
clarified from the Proposed Rule. Accordingly, how the more limited protections accorded by the Accounting
Financing Safe Harbor Rule would operate in an actual insolvency remains to be seen.



7 The Final Rule also permanently grandfathers obligations issued under open commitments up to the maximum amount of such

commitments as of September 27, 2010, if one or more obligations were issued under such commitments on or before December 31, 2010.
8 Damages are limited to the par value of the securities outstanding on the date of the appointment of the conservator or receiver, plus
accrued and unpaid interest to the date of repudiation to the extent actually received through payment on the securitization’s underlying
assets. Like the Proposed Rule, the Final Rule does not provide for payment of post-repudiation interest.
9   Such stay is in effect for 45 days (in the case of a conservatorship) or 90 days (in the case of a receivership). 12 U.S.C. § 1821(e)(13)(C).
                                                                                  Structured Finance and Securitization Update
                                                                                                                        PAGE 4


Conditions
The conditions to the Accounting Sale Safe Harbor Rule and Accounting Financing Safe Harbor Rule are identical and
are generally the same as those that were set forth in the Proposed Rule. Like the Proposed Rule, the Final Rule
contains conditions that apply to all securitizations and certain additional conditions that apply only to RMBS
transactions. The conditions for all securitizations and the additional conditions for RMBS are set forth below.
If any of the conditions are met on the closing date but subsequently fail to be complied with, the safe harbor
protections could be lost. In the Proposed Rule, many of the conditions were susceptible to failing after the closing
date or contained a subjective element that created the risk that compliance with the condition could be questioned
with 20/20 hindsight. The Final Rule modifies the wording of most (although not all) of the conditions in the
Proposed Rule in a manner that cures this defect. Among the conditions that, even after the Final Rule modifications,
appear to remain susceptible to failing after the closing date or remain subjective are the prohibition on hedging of risk
retention and the determination of whether a “representative sample” of assets retained to meet the Final Rule’s risk
retention requirement is truly representative.


Capital Structure
For all securitizations:
No resecuritizations or collateralized debt obligations are permitted unless the documents creating the securitization
require that disclosures complying with Regulation AB on the underlying assets are available to investors at inception
and while the securities are outstanding.
The documents creating the securitization must require that payments of principal and interest be based primarily on
performance of the underlying financial assets and, except for interest rate or currency mismatches, must not be
contingent on market or credit events that are independent of such financial assets. No synthetic or unfunded
securitizations are permitted.
For RMBS:
There can be no more than 6 credit tranches, and the securitization cannot include “sub-tranches” (other than time-
based sequential pay or planned amortization and companion sub-tranches in the most senior credit tranche), grantor
trusts or other structures.
External credit support or guarantees at the issuing entity or pool level are prohibited. However, credit support and
guarantees may be provided by Fannie Mae, Freddie Mac, Ginnie Mae and other specified GSEs. Liquidity facilities to
support temporary payment of principal and/or interest and credit support of individual assets (including mortgage
insurance) are permitted.


Disclosures
For all securitizations:
The securitization documents must require disclosure (on or prior to issuance of the securitization, at the time of
delivery of any periodic distribution report and, in any event, at least once per calendar quarter) at the security level and
the financial asset or pool level, “as appropriate, for the financial assets,” that at a minimum complies with Regulation
AB, “to the extent then in effect,” or “any successor disclosure requirements for public issuances.” Such disclosure is
required even if the securities are issued in a private placement or are not otherwise required to be registered under the
Securities Act of 1933. This goes beyond the SEC’s Proposed Regulation AB II which imposes Regulation AB
disclosure requirements on private placements that rely on the private placement safe harbors provided by Rule 144,
Rule 144A or Rule 506 under the Securities Act of 1933, but does not impose such requirements on privately-placed
                                                                                              Structured Finance and Securitization Update
                                                                                                                                    PAGE 5


securities offered under the statutory Section 4(2) exemption or resold under the so-called Section 4(1½) exemption or
on securities that are exempt from registration under the Securities Act of 1933.
The securitization documents must require that, on or prior to issuance, the structure of the securitization and the
credit and payment performance of the securities be disclosed, as well as the representations and warranties made with
respect to the underlying financial assets and the remedies and related cure periods for breaches of the representations
and warranties and policies governing delinquencies, servicer advances, loss mitigation, and write-offs of financial
assets.
The securitization documents must require that for so long as the securities are outstanding the issuing entity must
provide to investors information with respect to credit performance of the securities and the underlying financial assets,
including modification data.
In connection with the issuance of the securities, the securitization documents must require the issuer to disclose to
investors the nature and amount of compensation paid to any originator, sponsor, rating agency or third-party advisor,
any mortgage or other broker, and any servicer, and the extent to which any risk of loss on the underlying assets is
retained by any of those parties. The securitization documents must require the issuer to provide to investors any
changes to such information and the amount and nature of any payments of any deferred compensation to those
parties.
For RMBS:
Prior to issuance of the securities, sponsors must disclose loan-level information.
Prior to issuance, sponsors must affirm that they have complied in all material respects with all applicable statutory and
regulatory standards for the 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 any other or additional guidance
applicable at the time of loan origination. 10 Sponsors must also disclose a third-party due diligence report on
compliance with such standards and the representations and warranties made with respect to the mortgage loans.
The securitization documents must require that, prior to the issuance of the securities and while the securities are
outstanding, servicers disclose any ownership interest by the servicer or any affiliate of the servicer in other whole loans
secured by the same real property that secures a pool asset.


Documentation and Recordkeeping
For all securitizations:
The securitization documents must define the contractual rights and responsibilities of the parties and provide
authority for the parties to fulfill their respective duties, exercise their rights under the contracts and distinguish
between multiple roles of the parties.



10   The FDIC states in its release:
           [i]nstitutions 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.
                                                                                              Structured Finance and Securitization Update
                                                                                                                                    PAGE 6


For RMBS:
All servicing and other agreements must provide servicers with authority to mitigate losses on the underlying mortgage
loans consistent with maximizing the net present value of such loans. The servicer must have the authority to modify
the mortgage loans to address reasonably foreseeable defaults and to take other actions to maximize the value and
minimize losses on the mortgage loans. The securitization documents must require the servicer to act for the benefit
of all investors and not for the benefit of any particular class of investors and for the servicer to commence action to
mitigate losses no later than 90 days after a mortgage loan becomes delinquent, unless all delinquencies on such asset
have been cured, and that the servicer maintain records of its actions to permit full review by the trustee or other
representative of the investors.
The servicing agreement may not require a primary servicer to advance delinquent payments of principal and interest
for more than three payment periods, unless financing or reimbursement facilities that do not depend on foreclosure
proceeds for repayment are available.


Compensation (RMBS Only)
The securitization documents must require that any fees or other compensation for services payable to the credit rating
agencies shall be payable, in part, over the five-year period beginning after the securities are issued based on the
performance of surveillance services and the performance of the mortgage loans, with no more than 60% of the total
estimated compensation due at closing.
The securitization documents must provide that compensation to servicers include incentives for servicing, including
payment for loan restructuring or other loss mitigation, that maximizes the net present value of the assets.


Origination and Retention Requirements
For all securitizations:
Prior to the “effective date” of the Dodd-Frank Risk Retention Rules, the securitization documents must require that
the sponsor retain an economic interest in a material portion (defined as not less than 5%) of the credit risk of the
financial assets. Unlike the Dodd-Frank Risk Retention Requirement, the requirement is a one-size-fits-all requirement,
which does not vary based on asset class, underwriting standards or other factors or permit exemptions or
exceptions. 11 The retained interest may be either in the form of an interest of not less than 5% of each of the credit
tranches sold or transferred to investors or in the form of a “representative sample” of the securitized assets equal to
not less than 5% of the principal amount of the financial assets at transfer. 12 The retained interest may not be
transferred or hedged during the term of the securitization, nor (in a change from the Proposed Rule) can it be
“pledged.” The prohibition on hedging does not, however, preclude hedging interest rate risk or currency risk. Upon
the “effective date” of the Dodd-Frank Risk Retention Rules, the Final Rule will “auto-conform” to the Dodd-Frank
Risk Retention Rules, and the Dodd-Frank Risk Retention Rules will exclusively govern the risk-retention requirement
under the Final Rule. The Dodd-Frank Risk Retention Rules are scheduled to be adopted by April 15, 2011. However,
they will not apply to securitizations until one year after their adoption date (for mortgage-backed securities) and two
years after that date (for other asset-backed securities). Accordingly, it is unclear whether the phrase “effective date” in
the auto-conform provision of the Final Rule refers to the date on which the final Dodd-Frank Risk Retention Rules


11 Under the Dodd-Frank Act, the applicable regulators may jointly adopt or issue exemptions, exceptions or adjustments for classes of
institutions or assets with respect to the risk retention requirement and the prohibition on hedging, and the applicable regulators are
required to adopt regulations excluding “qualified residential mortgage loans” from the risk retention requirement. The Dodd-Frank Act
leaves to the regulators the form of risk retention and the duration of the risk retention requirement and also provides for the allocation of
risk retention between the sponsor and the originator as the regulators deem appropriate.
12   The Final Rule, like the Proposed Rule, is not specific as to how the “representative sample” methodology is intended to work.
                                                                                      Structured Finance and Securitization Update
                                                                                                                            PAGE 7


are published in the Federal Register or the date on which the Dodd-Frank Risk Retention Rules actually apply to
securitizations. 13
For RMBS:
Like the Proposed Rule, the Final Rule requires that the securitization documents provide for the establishment of a
reserve fund equal to at least 5% of the cash proceeds of the securitization payable to the sponsor to cover the
repurchase of any mortgage loans due to breaches of representations and warranties. The balance of the reserve fund
must be released to the sponsor one year after issuance.
The securitization documents must include a representation that the mortgage loans shall have been originated in all
material respects in compliance with statutory, regulatory and originator underwriting standards in effect at the time of
origination and have been underwritten at the fully indexed rate, based upon the borrower’s ability to repay.


Other General Requirements
The Final Rule also includes a number of general requirements that are largely unchanged from those contained in the
Proposed Rule. These include:
•    the transaction must be an arm’s-length, bona fide securitization transaction;
•    the securitization documents must require that the securities issued in the securitization cannot be sold
     predominantly to an affiliate or insider of the sponsor (in a modification from the Proposed Rule, securities may be
     sold to a wholly-owned subsidiary that is consolidated for accounting and capital purposes);
•    the securitization agreements must be in writing, approved by the board of directors of the IDI or its loan
     committee, and continue to be an official record of the IDI;
•    the securitization must have been entered into in the ordinary course of business, not in contemplation of
     insolvency or with the intent to hinder or defraud creditors;
•    the transfer of assets into the securitization must be properly perfected under the UCC or other applicable state
     law; in this regard, the FDIC states that even where there is a sale that does not need to be perfected under the
     UCC or other applicable law, the FDIC expects that a properly perfected backup security interest will be present;
•    the securitization documents must provide that amounts held by a sponsor as servicer, custodian or paying agent
     cannot be commingled with its own assets except for the time necessary to clear payments received and in any
     event for not more than two business days; as a result, it would appear that the common practice whereby
     securitization documents allow sponsors acting in those capacities to commingle assets during a collection period
     so long as they have the requisite rating is no longer permitted;
•    the transfer of financial assets and the duties of the sponsor as transferor must be evidenced by an agreement
     separate and apart from the agreement specifying the sponsor’s duties, if any, as servicer or in any capacity other
     than transferor; and
•    the securitization documents must 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



13In presenting the Final Rule to the FDIC Board, FDIC Senior Advisor Michael Krimminger stated that the Dodd-Frank Risk Retention
Rules would govern risk retention under the Final Rule “upon adoption,” and FDIC Vice Chairman Gruenberg said that the Final Rule
would auto-conform “once the joint rulemaking under Dodd-Frank was issued.”
                                                                                                         Structured Finance and Securitization Update
                                                                                                                                               PAGE 8


       securitization and issuing entity; the documents must further provide that the sponsor will make these records
       readily available to the FDIC promptly upon written request.
If you have any questions concerning the Final Rule, please contact your regular Sidley Austin LLP attorney.



The Structured Finance and Securitization Practice of Sidley Austin LLP
Sidley’s Structured Finance and Securitization practice is one of the largest and most experienced in the world. Now numbering more than
125 worldwide, our securitization lawyers have advised clients since the earliest days of securitization, including during the creation of the
mortgage-backed securities market in the 1970s, the asset-backed and commercial paper conduit markets in the 1980s and the commercial
mortgage-backed securities market in the 1990s. Today, our securitization lawyers are actively engaged on behalf of our clients in forging
new strategies and approaches to address the challenges facing the global financial markets and in helping our clients understand and
manage the increasingly complex legal and regulatory landscape. Our work includes not only advising on new securitization and structured
finance transactions, but also handling securitization restructuring and workouts.

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