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Financial Institution Letters


May 23, 2002

SUBJECT: Interagency Advisory on the Unsafe and Unsound Use of Covenants Tied to Supervisory Actions in Securitization Documents

The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision have jointly issued the attached "Interagency Advisory on the Unsafe and Unsound Use of Covenants Tied to Supervisory Actions in Securitization Documents." This advisory alerts 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 be criticized as an unsafe and unsound banking practice. Covenants tied to supervisory actions are counter to the overall goal of banking supervision because their trigger can create or exacerbate liquidity and earnings problems leading to further deterioration in the organization's financial condition. In the event such covenants relate to the appointment of a conservator or receiver, they may also impede the FDIC's ability to take action in the best interests of the conservator or receivership.

For further information about this advisory, please contact Keith Ligon in the Division of Supervision on (202) 898-3618. For information about receivership powers and duties, please contact Michael Phillips in the Legal Division on (202) 898-3581.

Michael J. Zamorski

Attachment: Interagency Advisory On The Unsafe And Unsound Use Of Covenants Tied To Supervisory Actions In Securitization Documents

Distribution: FDIC-Supervised Banks (Commercial and Savings)

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).

Last Updated 05/23/2001

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