FDIC Federal Register Citations

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 340

RIN 3064-AB37

Restrictions on the Sale of Assets from the Federal Deposit
Insurance Corporation

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is issuing
this rule to implement certain requirements of the Resolution Trust
Corporation Completion Act of 1993. Under that law, people or entities
that may have done certain acts that might have contributed to the
failure of an insured institution may not buy assets of failed
institutions from the FDIC. This rule establishes a self-certification
process as a prerequisite to the purchase of assets from the FDIC and
provides definitions of various terms in the law in order to make the
limitations of the law clearer.

EFFECTIVE DATE: July 1, 2000.

FOR FURTHER INFORMATION CONTACT: Steven K.Trout, Senior Resolutions
Specialist, Division of Resolutions and Receiverships, Federal Deposit
Insurance Corporation, Washington, DC 20429, telephone (202) 898-3758;
or Elizabeth Falloon, Counsel, Legal Division, Federal Deposit
Insurance Corporation, Washington, DC 20429, telephone (202) 736-0725.

SUPPLEMENTARY INFORMATION: The contents of this preamble are listed in
the following outline:

I. Background
II. Final Rule
III. Regulatory Analysis
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Small Business Regulatory Enforcement Fairness Act
D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families.

I. Background

The FDIC is required to issue regulations that accomplish two
things. First, the regulations must prohibit the sale of an asset of a
failed financial institution to certain individuals or entities who may
have contributed to the demise of that institution. Second, the
regulations must prohibit the sale of an asset using FDIC financing to
certain persons who have defaulted and engaged in fraudulent activities
with respect to a loan from the institution.

[[Page 14817]]

This requirement is found at section 20 of the Resolution Trust
Corporation Completion Act of 1993 (RTCCA or Act), which amended
section 11(p) of the Federal Deposit Insurance Act (FDI Act).
In order to meet this requirement, we published a notice of
proposed rulemaking in the Federal Register on September 21, 1999 (64
FR 51084) and solicited comments on the proposed rule. This rule
implements the statutory requirements and is somewhat broader than the
statutory minimum. The most significant way that the rule exceeds the
statutory minimum relates to whether the restriction goes beyond the
particular institution harmed by the particular wrongdoing. Under the
regulation, prospective purchasers who are prohibited from buying
assets of a failed institution may not purchase assets of any failed
institution. In contrast, the statutory requirements might only limit
the restriction to the assets of a particular institution.
Under the regulation, prospective purchasers are restricted from
buying assets from failed financial institutions for which the FDIC are
acting as conservator or receiver in certain circumstances.
Specifically, under Sec. 340.3 of the regulation, an individual or
entity (or its associated person, as that term is defined) that has
defaulted on obligations owed to a failed financial institution or the
FDIC that aggregate over $1 million, and has made fraudulent
misrepresentations in connection with any one of those obligations, is
prohibited from using FDIC financing to purchase assets of any failed
financial institution.
Section 340.4(a)(1) of the regulation provides that if an officer
or director of a failed financial institution (or a related entity)
participated in a material way in one or more transactions that
resulted in a substantial (greater than $50,000) loss to that failed
financial institution, the person would not be permitted to purchase an
asset of any failed institution from the FDIC. The rule defines when an
individual or entity has ``participated in a material way in a
transaction that caused a substantial loss to a failed institution,''
as this phrase is not defined in the statute. The definition includes
anyone who has been found by a court or tribunal (or, in certain
circumstances, has been alleged in formal legal proceedings) in
connection with a substantial loss to a failed institution to have (i)
violated any federal banking laws or to have breached a written
agreement with a federal banking agency or with the failed financial
institution; (ii) engaged in an unsafe or unsound practice in
conducting the affairs of the failed institution; or (iii) breached a
fiduciary duty to the failed institution.
Under Sec. 340.4(a)(2), if an individual or entity has, by federal
regulatory action, been removed from or barred from participating in
the affairs of any failed financial institution, the person would not,
regardless of the source of payment or financing, be permitted to
purchase an asset of any failed financial institution from the FDIC.
Under Sec. 340.4(a)(3), if a prospective purchaser or related
entity has demonstrated a pattern or practice of defalcation, as
defined in the rule, regarding an obligation to a failed financial
institution, the prospective purchaser would be barred from purchasing
any asset of any failed institution from the FDIC, regardless of the
source of financing or payment. The definition of ``pattern or practice
of defalcation'' requires more than one incident involving either
intent or reckless disregard for whether a loss was caused and requires
that the resulting loss be ``substantial''.
Finally, under Sec. 340.4(a)(4), a person who has defaulted on an
obligation to a failed institution and has been convicted of
committing, or conspiring to commit, any offense under section 215,
656, 657, 1005, 1006, 1007, 1014, 1032, 1341, 1343 or 1344 of Title 18
of the United States Code (generally having to do with financial
crimes, fraud and embezzlement) affecting any failed institution will
not be permitted to purchase any asset of any failed institution from
the FDIC.
In promulgating this regulation, we do not intend to imply that we
will provide seller financing in connection with any particular asset
sale just because a purchaser is not disqualified under the regulation.
Persons who want seller financing will have to satisfy other criteria,
such as creditworthiness. Further, we may promulgate other policies and
rules restricting purchasers' eligibility to buy assets from the FDIC.
The rule provides for implementation of the restrictions set forth
above through a self-certification process. All purchasers of assets
covered by the regulation must execute a Purchaser Eligibility
Certification in the form established by the FDIC. Federal, state and
local governmental agencies and instrumentalities and government-
sponsored entities such as Government National Mortgage Association,
Fannie Mae and Freddie Mac are excepted from the self-certification
requirement, but the Director of the FDIC's Division of Resolutions and
Receiverships (DRR), can require a certification from any prospective
purchaser if it appears that such a prospective purchaser would fall
within the restricted categories. In the final rule, a language change
has been made to Sec. 340.7 to clarify that the list of enumerated
organizations is not exclusive, and that other similar federally-
regulated, government-sponsored enterprises may be exempt from the
requirement of providing a certification unless otherwise required by
the Director of DRR.
The prohibitions do not apply to a sale or transfer of assets that
is part of a workout or settlement of obligations to a failed
institution.
Some of the requirements of this regulation have been in effect
under prior FDIC policies. The FDIC may continue to have additional
policy requirements relating to buyer qualifications that address other
policy goals.
In response to our Notice of Proposed Rulemaking we received two
comments. One of these comments came from a trade association, and the
other came from a financial institution, and both of them supported the
adoption of the proposed rule in its entirety.

II. Final Rule

We are adopting the proposed rule without substantive change.
However, section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102,
section 722, 113 Stat. 1338 (1999), requires the federal banking
agencies to use plain language in all rulemakings. Thus, we have made
numerous nonsubstantive changes to the regulation to ensure that it is
in plain language.

III. Regulatory Analysis

A. Paperwork Reduction Act

This rule requires the collection of certain information from
prospective purchasers of assets from the FDIC. The information is
collected through the completion of a Purchaser Eligibility
Certification form. The Office of Management and Budget (OMB) has
reviewed and approved this form in accordance with the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et. seq.). The Purchaser
Eligibility Certification has been assigned control number 3064-0135.
OMB clearance will expire on February 28, 2003.
The FDIC has a continuing interest in the public's opinion
regarding collections of information. Members of the public may submit
comments, at any time, regarding any aspect of these collections of
information. Comments may be sent to: Steven F. Hanft, Assistant
Executive Secretary (Regulatory Analysis), Federal Deposit Insurance
Corporation, Room F-4080,

[[Page 14818]]

550 17th Street NW., Washington, DC 20429.

B. Regulatory Flexibility Act

The only burden imposed by this regulation is the completion of a
certification form described above in the Paperwork Reduction Act
section. The burden produced by this requirement does not require the
use of professional skills or the preparation of special reports or
records and has a minimal impact, economic and time-wise, on those
individuals and entities that seek to purchase assets from the FDIC.
Moreover, this minimal burden is imposed only on those individuals and
entities voluntarily seeking to purchase assets from the FDIC.
Accordingly, the Board certifies that the final rule will not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). The provisions of the Regulatory Flexibility Act relating to an
initial and final regulatory flexibility analysis are not applicable.

C. Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Pub. L. 104-121) provides generally for agencies to report
rules to Congress and for Congress to review the rules. The reporting
requirement is triggered when the FDIC issues a final rule as defined
by the Administrative Procedure Act (APA) at 5 U.S.C. 551. Because the
FDIC is issuing a final rule as defined by the APA, the FDIC will file
the reports required by SBREFA.
The Office of Management and Budget has determined that this final
rule does not constitute a ``major rule'' as defined by SBREFA.

D. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

The FDIC has determined that this rule will not affect family well-
being within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).

List of Subjects in 12 CFR Part 340

Asset disposition, Banks, banking.

For the reasons set out in the preamble, the FDIC amends chapter
III of title 12 of the Code of Federal Regulations by adding a new part
340 to read as follows:

PART 340--RESTRICTIONS ON SALE OF ASSETS BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION

Sec.
340.1 What is the statutory authority for the regulation, what are
its purpose and scope, and can the FDIC have other policies on
related topics?
340.2 Definitions.
340.3 What are the restrictions on the sale of assets by the FDIC
if the buyer wants to finance the purchase with a loan from the
FDIC?
340.4 What are the restrictions on the sale of assets by the FDIC
regardless of the method of financing?
340.5 Can the FDIC deny a loan to a buyer who is not disqualified
from purchasing assets using seller-financing under this regulation?
340.6 What is the effect of this part on transactions that were
entered into before its effective date?
340.7 When is a certification required, and who does not have to
provide a certification?
340.8 Does this part apply in the case of a workout, resolution,
or settlement of obligations?

Authority: 12 U.S.C. 1819 (Tenth), 1821(p).

Sec. 340.1 What is the statutory authority for the regulation, what
are its purpose and scope, and can the FDIC have other policies on
related topics?

(a) Authority. The statutory authority for adopting this part is
section 11(p) of the Federal Deposit Insurance Act (FDI Act), 12 U.S.C.
1821(p). Section 11(p) was added to the FDI Act by section 20 of the
Resolution Trust Corporation Completion Act (Pub. L. 103-204, 107 Stat.
2369 (1993)).
(b) Purpose. The purpose of this part is to prohibit individuals or
entities who profited or engaged in wrongdoing at the expense of an
insured institution, or seriously mismanaged an insured institution,
from buying assets of failed financial institutions from the FDIC.
(c) Scope. The restrictions of this part generally apply to assets
of failed institutions owned or controlled by the FDIC in any capacity,
even though the assets are not owned by the insured institution that
the prospective purchaser injured. Unless we determine otherwise, this
part does not apply to the sale of securities in connection with the
investment of corporate and receivership funds pursuant to the
Investment Policy for Liquidation Funds managed by the FDIC as it is in
effect from time to time. In the case of a sale of securities backed by
a pool of assets that may include assets of failed institutions by a
trust or other entity, this part applies only to the sale of assets by
the FDIC to an underwriter in an initial offering, and not to any other
purchaser of the securities.
(d) The FDIC retains the authority to establish other policies
restricting asset sales. Neither section 11(p) of the FDI Act nor this
part in any way limits the authority of the FDIC to establish policies
prohibiting the sale of assets to prospective purchasers who have
injured any failed financial institution, or to other prospective
purchasers, such as certain employees or contractors of the FDIC, or
individuals who are not in compliance with the terms of any debt or
duty owed to the FDIC. Any such policies may be independent of, in
conjunction with, or in addition to the restrictions set forth in this
part.

Sec. 340.2 Definitions.

(a) Associated person of an individual or entity means:
(1) With respect to an individual:
(i) The individual's spouse or dependent child or any member of his
or her immediate household;
(ii) A partnership of which the individual is or was a general or
limited partner; or
(iii) A corporation of which the individual is or was an officer or
director;
(2) With respect to a partnership, a managing or general partner of
the partnership; or
(3) With respect to any entity, an individual or entity who, acting
individually or in concert with one or more individuals or entities,
owns or controls 25 percent or more of the entity.
(b) Default means any failure to comply with the terms of an
obligation to such an extent that:
(1) A judgment has been rendered in favor of the FDIC or a failed
institution; or
(2) In the case of a secured obligation, the property securing such
obligation is foreclosed on.
(c) FDIC means the Federal Deposit Insurance Corporation.
(d) Failed institution means any bank or savings association that
has been under the conservatorship or receivership of the FDIC or RTC.
For the purpose of this part, ``failed institution'' includes any
entity owned and controlled by a failed institution.
(e) Obligation means any debt or duty to pay money owed to the FDIC
or a failed institution, including any guarantee of any such debt or
duty.
(f) Person means an individual, or an entity with a legally
independent existence, including: a trustee; the beneficiary of at
least a 25 percent share of the proceeds of a trust; a partnership; a
corporation; an association; or other organization or society.
(g) RTC means the former Resolution Trust Corporation.

[[Page 14819]]

(h) Substantial loss means:
(1) An obligation that is delinquent for ninety (90) or more days
and on which there remains an outstanding balance of more than $50,000;
(2) An unpaid final judgment in excess of $50,000 regardless of
whether it becomes forgiven in whole or in part in a bankruptcy
proceeding;
(3) A deficiency balance following a foreclosure of collateral in
excess of $50,000, regardless of whether it becomes forgiven in whole
or in part in a bankruptcy proceeding;
(4) Any loss in excess of $50,000 evidenced by an IRS Form 1099-C
(Information Reporting for Discharge of Indebtedness).

Sec. 340.3 What are the restrictions on the sale of assets by the FDIC
if the buyer wants to finance the purchase with a loan from the FDIC?

A person may not borrow money or accept credit from the FDIC in
connection with the purchase of any assets from the FDIC or any failed
institution if:
(a) There has been a default with respect to one or more
obligations totaling in excess of $1,000,000 owed by that person or its
associated person; and
(b) The person or its associated person made any fraudulent
misrepresentations in connection with any such obligation(s).

Sec. 340.4 What are the restrictions on the sale of assets by the FDIC
regardless of the method of financing?

(a) A person may not acquire any assets from the FDIC or from any
failed institution if the person or its associated person:
(1) Has participated, as an officer or director of a failed
institution or of an affiliate of a failed institution, in a material
way in one or more transaction(s) that caused a substantial loss to
that failed institution;
(2) Has been removed from, or prohibited from participating in the
affairs of, a failed institution pursuant to any final enforcement
action by the Office of the Comptroller of the Currency, the Office of
Thrift Supervision, the Board of Governors of the Federal Reserve
System, the FDIC, or any of their successors;
(3) Has demonstrated a pattern or practice of defalcation regarding
obligations to any failed institution; or
(4) Has been convicted of committing or conspiring to commit any
offense under 18 U.S.C. 215, 656, 657, 1005, 1006, 1007, 1014, 1032,
1341, 1343 or 1344 affecting any failed institution and there has been
a default with respect to one or more obligations owed by that person
or its associated person.
(b) For purposes of paragraph (a) of this section, a person has
participated ``in a material way in a transaction that caused a
substantial loss to a failed institution'' if, in connection with a
substantial loss to a failed institution, the person has been found in
a final determination by a court or administrative tribunal, or is
alleged in a judicial or administrative action brought by the FDIC or
by any component of the government of the United States or of any
state:
(1) To have violated any law, regulation, or order issued by a
federal or state banking agency, or breached or defaulted on a written
agreement with a federal or state banking agency, or breached a written
agreement with a failed institution;
(2) To have engaged in an unsafe or unsound practice in conducting
the affairs of a failed institution; or
(3) To have breached a fiduciary duty owed to a failed institution.
(c) For purposes of paragraph (a) of this section, a person or its
associated person has demonstrated a ``pattern or practice of
defalcation'' regarding obligations to a failed institution if the
person or associated person has:
(1) Engaged in more than one transaction that created an obligation
on the part of such person or its associated person with intent to
cause a loss to any financial institution insured by the FDIC or with
reckless disregard for whether such transactions would cause a loss to
any such insured financial institution; and
(2) The transactions, in the aggregate, caused a substantial loss
to one or more failed institution(s).

Sec. 340.5 Can the FDIC deny a loan to a buyer who is not disqualified
from purchasing assets using seller-financing under this regulation?

The FDIC still has the right to make an independent determination,
based upon all relevant facts of a person's financial condition and
history, of that person's eligibility to receive any loan or extension
of credit from the FDIC, even if the person is not in any way
disqualified from purchasing assets from the FDIC under the
restrictions set forth in this part.

Sec. 340.6 What is the effect of this part on transactions that were
entered into before its effective date?

This part does not affect the enforceability of a contract of sale
and/or agreement for seller financing in effect prior to July 1, 2000.

Sec. 340.7 When is a certification required, and who does not have to
provide a certification?

(a) Before any person may purchase any asset from the FDIC that
person must certify, under penalty of perjury, that none of the
restrictions contained in this part applies to the purchase. The FDIC
may establish the form of the certification and may change the form
from time to time.
(b) Notwithstanding paragraph (a) of this section, a state or
political subdivision of a state, a federal agency or instrumentality
such as the Government National Mortgage Association, or a federally-
regulated, government-sponsored enterprise such as Fannie Mae or
Freddie Mac does not have to give a certification before it can
purchase assets from the FDIC, unless the Director of the FDIC's
Division of Resolutions and Receiverships, or his designee, in his
discretion, requires a certification of any such entity.

Sec. 340.8 Does this part apply in the case of a workout, resolution,
or settlement of obligations?

The restrictions of Secs. 340.3 and 340.4 do not apply if the sale
or transfer of an asset resolves or settles, or is part of the
resolution or settlement of, one or more obligations, regardless of the
amount of such obligations.

Dated at Washington, D.C. this 9th day of March, 2000.
By Order of the Board of Directors,
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 00-6823 Filed 3-17-00; 8:45 am]
BILLING CODE 6714-01-P