Iowa Banking Law Blog

Initial Actions Relating to FDIC's Legacy Loans Program

On March 26, 2009, the Federal Deposit Insurance Corporation (the “FDIC”) issued a press release seeking comments on its new program for the purchase of legacy loans (the “Legacy Loans Program”).  The comment period extends until April 10, 2009.  Under the Legacy Loans Program, the Department of the Treasury and private investors would form Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools using their equity capital combined with debt financing to provide leverage guaranteed by the FDIC.   

 

It is worthwhile to review the questions on which the FDIC is seeking public comment.  Those questions demonstrate the scope of the issues presented and provide some idea about the ways in which the FDIC may implement the Legacy Loans Program.  FDIC Chairman Sheila C. Bair and members of the FDIC staff have been hosting telephone conference calls to discuss the Legacy Loans Program.  These conference calls also provide some preliminary indications of the policy choices that may be made by the FDIC. 

 

The FDIC is seeking public comment on questions relating to eligible asset categories, the extent of government equity participation, ways to encourage participation, issues relating to the permissible structure and operation of the PPIFs and PPIF auctions, servicing requirements, the appropriate role of asset managers and independent valuation consultants, pooling arrangements involving multiple banks, the oversight role of the FDIC and FDIC guarantee fees.  Discussion of some of these issues on telephone conference calls suggests that the FDIC intends to follow certain broad principles but that many details may depend on the FDIC’s evaluation of public comments.  

 

Some of the principles to which the FDIC already seems committed include (1) assuring the ability of all banks not in receivership to participate in the Legacy Loans Program, (2) encouraging participation by many private investors, (3) seeking transparency, arms-length transactions and competitive auctions of pools of loans, (4) placing an initial emphasis on residential and commercial real estate loans, (5) permitting risky loans and loans that do not have a positive cash flow to be included, (6) imposing reasonable limitations on the manner in which purchased loans are handled, (7) determining separately the amount of leverage to be provided for each transaction, and (8) providing a way for bidders to evaluate each pool of loans in advance of the auction.   

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

FDIC's Challenging Role in Legacy Loans Program

On March 23, 2009, the Department of the Treasury (“Treasury”), in conjunction with the Federal Deposit Insurance Corporation (the “FDIC”) and the Federal Reserve, announced the Public-Private Investment Program.  The Public-Private Investment Program has two separate aspects, the purchase of legacy loans and the purchase of legacy securities. 

 

FDIC Chairman Sheila C. Bair issued a statement welcoming the purchase of legacy loans (the “Legacy Loans Program”) as “a critical step forward in the process of restoring clarity to the markets.”  She noted the existence of “inherent challenges to implementing a program of this magnitude quickly” but indicated that the FDIC would begin immediately and would move forward “in a methodical and transparent fashion.”  It is no secret that from the inception of the credit crisis FDIC Chairman Bair has advocated addressing problems in the mortgage market, and she may see the Legacy Loans Program as a way of advancing that agenda. 

 

The operation of the Legacy Loans Program will depend to a great extent on actions to be taken by the FDIC.  Among other things, the FDIC’s ability to guarantee the debt of the Private-Public Investment Partnerships (“PPIFs”) that would purchase loan pools would be used to add leverage to the Legacy Loan Program.  Important practical issues include uncertainties about the details of the FDIC’s responsibilities and the difficulties the FDIC may encounter in attempting to carry out its responsibilities on a timely basis.  The challenges of implementation to be addressed by the FDIC include following actions:

 

·         Establish loan pool purchase criteria

·         Oversee formation, funding and operation of PPIFs

·         Agree with Treasury about allocation of costs and responsibilities

·         Evaluate whether particular loan pools meet criteria

·         Oversee initial due diligence and preparation of required marketing materials

·         Select third party evaluation firms to advise the FDIC

·         Determine appropriate leverage level for each sale

·         Pre-qualify private investors to bid at auction of loan pools

·         Establish criteria for information banks provide to the FDIC and to bidders

·         Conduct auctions of loan pools and select winning bid

·         Determine timeframes for banks to accept or reject winning bids

·         Issue guarantees of PPIF debt

·         Issue a “Guaranteed Secured Debt for PPIFs Term Sheet”

·         Establish and collect administrative fees and guarantee fees

 

If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

TARP and Iowa Banks

A recent Des Moines Register article provides some interesting discussion concerning Iowa financial institution's response to the TARP program as well as some of the pros and cons of program participation.  DMTH attorney L. Allyn Dixon Jr. provides some observations regarding the program's evolution and reminds readers that the TARP program remains one as to which the regulators can subsequently make changes to that can impact institutions that take or consider taking TARP funding.

A link to the article is attached.

http://www.desmoinesregister.com/article/20090308/BUSINESS/903080325/1029/Banks+face+decisions+on+accepting+federal+aid