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Subject: Covenants Tied to Supervisory Actions in Securitization Documents
Date: May 23, 2002
To: Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel
Description: Interagency Guidance
The guidance attached to this bulletin continues to apply to federal savings associations.
The attached "Interagency Advisory on the Unsafe and Unsound Use of Covenants Tied to Supervisory Actions in Securitization Documents" was issued jointly by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision on May 23, 2002. The purpose of this guidance is to alert both bankers and examiners to the safety and soundness implications of covenants associated with supervisory actions in securitization documents. Recent examinations have uncovered covenants that use certain supervisory actions as triggers for early amortization events or the transfer of servicing. Such covenants will, under appropriate circumstances, be criticized as an unsafe and unsound banking practice 1 because their trigger can create or exacerbate liquidity and earnings problems that can lead to further deterioration in the financial condition of the organization. In addition, in the event such covenants relate to the appointment of a conservator or receiver, they may impede the ability of the conservator or receiver to take action in the best interest of the conservatorship or receivership.
For further guidance on asset securitization issues contact Greg Coleman, Treasury and Market Risk at (202) 874-2777, or Kelly Ballard, Treasury and Market Risk at (202) 874-4917.
Michael L. Brosnan
1 While the banking agencies are concerned about the use of covenants linked to supervisory actions in general, this guidance pertains specifically to covenants that use supervisory actions as triggers for early amortization or the transfer of servicing.