The Federal Deposit Insurance Corporation (the “FDIC”) has received over 400 comment letters on its new program for the purchase of legacy loans (the “Legacy Loans Program”). A review of several of these comments letters reveals the complexity of the issues that will be involved in the implementation of the Legacy Loans Program. The comments address a large number of issues, including the role that would be played by the FDIC in making the Legacy Loans Program work.
Some basic terms of the Legacy Loans Program are already rather clear. Under the Legacy Loans Program, the Department of the Treasury (“Treasury”) and private investors would contribute equity capital on a 1-for-1 basis to form Public-Private Investment Funds (“PPIFs”). A PPIFs would purchase loan pools. Such purchases would be funded using the PPIF’s equity capital and the proceeds of debt issued by the PPIF. The PPIF could have a debt to equity leverage ratio of up to 6-to-1 with FDIC approval. The FDIC would provide various managerial oversight services, including conducting auctions of the loan pools, and would guarantee the debt financing issued by the PPIF. As currently proposed, the FDIC guarantee would be made on a non-recourse basis (secured only by the PPIF’s assets). In connection with each completed transaction under the Legacy Loans Program, Treasury would receive warrants and the FDIC would receive an annual guarantee fee.
Encouraging Participation. A number of suggestions were made concerning the manner in which the FDIC could encourage participation in the Legacy Loans Program. Some of these suggestions emphasized the importance of (1) promoting clarity and consistency with respect to the manner in which the Legacy Loans Program would operate and avoiding retroactive changes, (2) establishing reserve prices that would both encourage seller participation in auctions and assure potential buyers that if the reserve price were met there would be a commitment to complete the sale, (3) giving private investors as much flexibility as possible in deciding how to operate the PPIFs, (4) avoiding the imposition of executive compensation restrictions on private parties who participate in the Legacy Loans Program, (5) minimizing certain regulatory issues relating to ERISA and the Investment Company Act of 1940, (6) the resolution of certain tax issues that may arise depending on the structure of each PPIF, and (7) using standardized documents to make participation more attractive to smaller financial institutions.
The Auction Process. Suggestions were made concerning the manner in which the FDIC should conduct auctions for loan pools. Among these suggestions were (1) requiring assurance that transactions (as opposed to mere pricing exercises) would result from the auctions by use of reserve prices or other means, (2) allowing bidding on separate sub-pools within a loan pool, (3) using an initial round of preliminary indication of interest bidding, (4) using sealed bidding, and (5) considering use of privately negotiated transactions in some situations.
If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
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