Loss-Share Questions and Answers

This video explains the way the FDIC uses loss share to maximize asset recoveries and minimizes
FDIC losses during the bank resolution process.
What is loss sharing?
Loss share is a eature that the Federal Deposit Insurance Corporation !FDIC" #rst introduced into
selected purchase and assumption transactions in $%%$. &nder loss share' the FDIC absorbs a
portion o the loss on a speci#ed pool o assets which maximizes asset recoveries and minimizes
FDIC losses. Loss share also reduces the FDIC(s immediate cash needs' is operationally simpler
and more seamless to ailed bank customers and moves assets )uickly into the private sector.
Does loss share put the taxpayer on the hook for additional losses down the
road?
*hen the FDIC calculates the estimated cost o a ailure' it takes into account all expected losses
on the assets covered in shared+loss agreements !,L-s". These current market assumptions are
built into the cost o ailure at the time o resolution. Thus' the cost o all expected uture
payments are recognized at the time o bank ailure and no losses are deerred. -ny loss sharing
payments are made rom receivership unds rom the speci#c ailed bank or thrit or' i those are
insu.cient' rom the FDIC(s Deposit Insurance Fund !DIF". The DIF is unded by assessments paid
by insured banks and thrits. It is not taxpayer unded.
How does loss sharing work?
The FDIC uses two orms o loss share. The #rst orm is or commercial assets and the second or
residential mortgages.
For commercial assets' the ,L-s cover an eight+year period with the #rst #ve years or losses and
recoveries and the #nal three years or recoveries only. The FDIC typically will reimburse /0
percent o losses incurred by the ac)uirer on covered assets up to a stated threshold amount
!generally the FDIC(s dollar estimate o the total pro1ected losses on loss share assets"' with the
assuming bank absorbing 20 percent.
Loss coverage may also be provided or loan or note sales' but such sales re)uire prior approval
by the FDIC. 3ecoveries on loans which experience loss events are split' in most instances' with
204 o the recovery going to the assuming bank and /04 to the FDIC.
For single+amily mortgages' the ,L-s are or ten years and have the same /0520 split as the
commercial assets. The FDIC provides coverage on three basic single+amily #rst lien mortgage
loss events6 modi#cation' short sale' and when the property is sold ater oreclosure. ,econd liens
are permitted to be charged o7 according to regulatory criteria when the #rst lien is not held by
the assuming bank.
,ince the inception o ,L-s' the basis or sharing losses with an assuming bank has undergone
some change. &ntil 8arch 29' 20$0' the FDIC shared losses with assuming banks on an /0520
basis until the losses exceeded an established threshold de#ned in the ,L-' ater which the basis
or sharing losses shited to a %:5: basis. ,haring losses on a %:5: basis was eliminated or all
,L-s executed ater 8arch 29' 20$0.
Does the FDI re!ei"e any #ene$ts if the assu%ing #ank %akes %oney on the
!o"ered assets?
;es. I there are recoveries on assets that have been charged o7 by the ailed bank or the
assuming bank' then the FDIC receives the ma1ority o the bene#t. The assuming bank will
reimburse the FDIC or /0 percent o the recoveries.
What types of losses on the assets are !o"ered and when does the FDI
rei%#urse the #uyer for those losses?
The FDIC covers credit losses as well as certain types o expenses associated with troubled assets
!such as advances or taxes and insurance' sales expenses' and oreclosure costs". The FDIC does
not cover losses associated with changes in interest rates.
For single+amily loans' the assuming bank is paid when the loan is modi#ed or the property is
sold. For commercial loans' the assuming bank is paid when the assets are written down
according to established regulatory guidelines or when the assets are sold.
How do you know that the FDI is getting the #est deal with loss share?
*hen the FDIC is preparing the sale o a ailing bank or thrit' the FDIC reaches out to numerous
potential bidders to bid or the customer deposits and the ailing bank(s assets. The sale relies on
a competitive bidding process. In addition' the FDIC uses #nancial advisors to estimate asset
values.
-ter the bids are received' the FDIC selects the least costly option. To acilitate that analysis' the
FDIC dictates the terms and conditions o a loss sharing arrangement and the assets to be
covered when potential assuming banks bid on a ailing bank. This allows the FDIC to more
)uickly analyze and compare each o the bids to determine which is the least costly to the
Deposit Insurance Fund. The terms and conditions also enable the FDIC to monitor the ,L-s
e7ectively.
Isn&t loss share %ore !ostly? If not' then how does it sa"e %oney? Aren&t you
still selling the assets?
Loss share saves the Deposit Insurance Fund money. In today(s markets' asset prices are low' and
the prices re)uently include steep li)uidity and risk discounts. These agreements enable the
FDIC to sell the assets today' but without re)uiring that the FDIC accept today(s low prices.
Instead' the FDIC sells to assuming banks in a way that aligns their incentives with the FDIC and
reduces the li)uidity and risk discounts. The assuming banks have the capacity and incentive to
service the assets e7ectively and minimize losses.
How #ig is the loss share progra%? How %u!h %oney has the FDI sa"ed?
Through <une =0' 20$=' the FDIC has entered into =02 shared+loss agreements with assuming
banks on initial asset balances totaling >2$?./ billion. -ssets currently covered under loss share
total >%$.= billion. The estimated savings exceed >?$.$ billion' compared to an outright cash sale
o those assets.
List o Loss ,hare -greements Failed @ank List since October 2000
Why don&t you use loss share for all failures?
,L-s are one way the FDIC can resolve the assets o a ailed bank' and may not be the best
alternative or every troubled bank. For each resolution' the FDIC analyzes all available
alternatives and accepts the least costly bid. ,ometimes the results indicate that the loss share
bids are more costly or the FDIC may not receive a loss share bid.
What type of o"ersight does the FDI ha"e o"er the SLAs?
The FDIC conducts annual on+site reviews and regular o7+site monitoring o records o covered
losses and overall compliance with the ,L-s. It also re)uires assuming banks to provide )uarterly
reports to ensure compliance with the program and to monitor the perormance o the assets.
Lastly' i the assuming bank is not in compliance with the ,L-' the FDIC has the right to stop
payments until the problem #ndings are resolved' and' in extreme cases' to sell the assets
through a bid process.
For SLAs that !o"er single-fa%ily loans' %ust the assu%ing #ank honor the
FDI&s loan %odi$!ation progra%?
The FDIC re)uires that assuming banks modiy loans using the Aome -7ordable 8odi#cation
Brogram !A-8B" i they are approved A-8B servicers. I the assuming bank is not a A-8B
approved servicer' it is re)uired' as part o its ,L-' to modiy loans using the FDIC(s standard
modi#cation program or ailed bank single+amily' owner+occupied loans. @oth programs ad1ust
the current loan terms to achieve an a7ordable payment by #rst reducing the loan interest rate'
then extending the loan term' and' where necessary' o7ering orbearance o principal. The goal is
to provide an a7ordable monthly payment based on a debt to income ratio or housing e)uivalent
to =$ percent o the borrower(s gross monthly income !including taxes and insurance payments".
The assuming bank can propose an alternative loan modi#cation program that will achieve the
goals o providing a7ordable payments consistent with cost e7ectiveness. I the FDIC concurs'
then the bank can adopt the alternative program.
What guidan!e has #een pro"ided to assu%ing #anks pertaining to the SLAs?
FDIC issues guidance memorandum to internal sta7 and assuming banks to clariy or provide a
detailed explanation o speci#c or general aspects o the ,L-s. The ollowing link has a copy o
the guidance and letters that have been issued6 3,-8 Cuidance
What !an(should a #orrower or #anker do if they are ha"ing a pro#le% with a
loss share #ank or LL partner?
*hen a borrower or banker is experiencing a problem with a loss share bank or LLC partner' they
should #rst try to initiate communications with the institution.
I the borrower or banker is unsuccessul in communicating with the loss share bank or LLC
partner' they can exercise one o several options in re)uesting support rom the FDIC6
Contact the 3isk ,hare -sset 8anagement !3,-8" policy group directly via e+mail
atborrowerin)uirylosDdic.gov
Complete a Customer -ssistance Enline Form
at https655www2.dic.gov5starsmail5index.asp
Contact the FDIC Call Center 5 E.ce o the Embudsman at $+/FF+2F:+==?2' via e+mail
atEmbudsmanDdic.gov' or through the Embudsman(s web site
atwww.dic.gov5regulations5resources5ombudsman5. The E.ce o the Embudsman is a
con#dential' neutral and independent source o inormation and assistance to anyone a7ected by
the FDIC in its regulatory' resolution' receivership' or asset disposition activities. They will in turn
work with other FDIC divisions and sub1ect matter experts to help resolve the issue.
Where !an I get additional infor%ation a#out the history and use of loss
share?
In $%%/' the FDIC published the book G8anaging the CrisisG detailing the FDIC and 3TC
experience rom $%/0 through $%%?. Chapter F is devoted to loss sharing and can be accessed
at6http655www.dic.gov5bank5historical5managing5
What are the data reporting re)uire%ents for assu%ing #anks?
The Loss ,hare Data ,peci#cations describe the detailed data reporting re)uirements or
assuming banks participating in loss share.