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Bank Failures

A Borrower's Guide to an FDIC Insured Bank Failure

Last Updated: June 18, 2024
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In this guide, borrowers can find information on how the FDIC processes loans from failed financial institutions.

About the FDIC

  • The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency created in 1933 to promote public confidence and stability in the nation's banking system.
  • Throughout its history, the FDIC has provided insured depositors with prompt access to their funds whenever an FDIC-insured bank or savings association has failed and no insured depositor has ever lost any funds.

What is a Bank Failure?

  • A bank failure is the closing of a bank by a federal or state banking regulatory agency.
  • Typically, a bank is closed when it becomes critically undercapitalized or is unable to meet its obligations to depositors and others. The FDIC engages in the disposing of the failed bank’s assets in a manner that maximizes their value and settles the failed banks debts, including claims for deposits in excess of the insured limit.
  • A bank failure does not change your obligation as a borrower to make payments and comply with the terms of your loan.

Overview of the FDIC's Asset Disposition Process

  • One of the FDIC's primary goals is to return loans and other assets to the private sector as quickly and efficiently as possible. To accomplish this, the FDIC employs several strategies to dispose of loans:
    • Prior to a bank's failure, the FDIC offers some or all of the failing bank's assets for sale to healthy financial institutions (normally the institution that will be assuming the deposits upon the bank's closing) and to certain other potential acquirers in the broader financial market.
    • Loans not sold at the time of the bank’s closing are packaged and offered for sale through various means (e.g. cash sales, securitizations, and other structured sales) to the broader financial market, typically within a few months of the bank's failure.
    • Until the FDIC sells your loan, it undertakes the associated servicing responsibilities previously held by the failed bank.

Communication with Borrowers during Interim Servicing

  • When a bank fails, the FDIC sends written notice with payment instructions and points-of-contact to the borrowers whose loans it has retained as a result of the bank closing.
  • Because the FDIC is not a bank, it informs the borrowers that they are strongly encouraged to seek a new lender that will refinance their loan and serve as a replacement source of funding. In some instances, the FDIC may offer borrowers an incentive to refinance by offsetting some or all of the associated closing costs. The FDIC will also offset borrowers' outstanding loan balances versus the uninsured deposit balance (if any) of the same borrower, if certain parameters are met.

What to do if You Experience Financial Difficulties

  • If you are delinquent in making loan payments or can demonstrate financial hardship, you are encouraged to contact the FDIC to explore a loan workout program acceptable to you and the FDIC. Any proposal must be made in writing and will require current financial information and other supporting documentation needed by the FDIC to complete its analysis.
  • Typically, such a program involves modifying the terms of your loan so that payment amounts are consistent with your ability to repay.
  • If a loan modification is not feasible, the FDIC may consider a reasonable proposal to settle your debt for less than the amount owed. You should be aware that IRS regulations require the FDIC to report forgiveness of debt. You are advised to seek the counsel of your own tax professional.
  • In situations where acceptable repayment terms or a mutually agreeable settlement cannot be reached to resolve a delinquent loan, the FDIC may pursue other legal options.

Lines of Credit and Construction and Development Loans

  • When the FDIC is appointed receiver, it immediately begins analyzing loans that require special attention, such as unfunded and partially funded lines of credit, and construction and development loans.
  • The role of receiver generally precludes continuing the lending operations of a failed bank. However, the FDIC will consider advancing funds if it determines an advance is in the best interest of the receivership, such as to protect or enhance collateral, or to ensure maximum recovery to the receivership.
  • In very limited circumstances, the FDIC will consider emergency funding needs required to ensure the short-term viability of a borrower, to protect or enhance collateral value, or for public safety.

Borrower Requests for Additional Funding

  • If you submit a request for additional funding, the FDIC will conduct a thorough analysis to determine the best course of action for the receivership. The FDIC uses information contained in the failed bank's loan files to the extent it is available and considered reliable.
  • Because the files of failed banks are often incomplete or poorly documented, the FDIC may require additional information to perform its analysis and make a fact-based decision. Such information can include current financial statements, recent tax returns from borrowers and guarantors, and third-party reports such as market studies and appraisals.

Potential Outcomes to Funding Requests

  • Based on its analysis, the FDIC may:
    • Make all or a portion of the requested loan advance as justified by the analysis. If funds are advanced for a construction project, the FDIC may require use of a third-party escrow firm to control disbursements.
    • Undertake discussions with you to reach a mutually satisfactory agreement to restructure or modify the loan and funding commitment.
    • Exercise its statutory right as receiver to repudiate its funding obligations with respect to the loan if it determines that these obligations are burdensome to the receivership and that repudiation would promote the orderly administration of the receivership.

What to Expect if the FDIC Sells Your Loan

  • Holders of loans, including the FDIC, routinely sell performing and non-performing loans in the financial markets.
  • If the FDIC sells your loan—either at or subsequent to the time your bank is closed—the FDIC and/or the new owner will send you a notice of the transaction with payment mailing instructions.
  • The sale does not affect the terms of your loan. The new owner of your loan:
    • Must comply with all state and federal laws with respect to the ownership and servicing of your loan, including the Fair Debt Collection Practices Act.
    • Is entitled to collect all principal, interest, and other amounts owed.
    • Assumes the receiver's obligations and commitments.

Contacting the FDIC

  • FDIC representatives are available to meet with loan customers, normally, within one business day after the bank failure and, typically, at or near the failed bank's offices.
  • Immediately after a bank failure, you can reach FDIC staff by calling the failed bank's telephone number.
  • The FDIC also establishes a temporary, specific 1-800 Customer Service line for every failed bank. This number is published in the FDIC's press release for each failed bank. Press releases can be found for all bank failures at www.fdic.gov.

Additional Borrower Assistance

  • The FDIC Office of the Ombudsman is a confidential, neutral, and independent source of information and assistance to anyone affected by the FDIC in its regulatory, resolution, receivership, or asset disposition activities. The Office of the Ombudsman:
    • Works with other FDIC divisions and offices as a liaison to resolve issues.
    • Answers questions about FDIC policies and procedures.
    • Provides referrals to subject matter experts within the FDIC.
  • If you have a problem or complaint with the FDIC, you may contact the Office of the Ombudsman for confidential assistance by e-mail at ombudsman@fdic.gov or by calling 1-877-ASKFDIC (877-275-3342).

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