Loss-Share Questions and Answers
The FDIC may offer loss share through a Shared Loss Agreement (SLA) along with the Purchase and Assumption agreements (P&A) as part of the resolution transaction for a failing bank. Loss share benefits the FDIC by keeping the assets in the private sector after a bank failure, which reduces FDIC’s immediate cash needs and minimizes both resolution and operating costs.
Under an SLA, the FDIC absorbs a portion of the loss on a specified pool of assets sold through the resolution of a failing bank - in effect sharing the loss with the purchaser of the failing bank.
No. When the FDIC calculates the estimated cost of a failure, it takes into account all expected losses on the assets covered in shared-loss agreements (SLAs). These current market assumptions are built into the cost of failure at the time of resolution. Thus, the cost of all expected future payments are recognized at the time of bank failure and no losses are deferred. Any loss sharing payments are made from receivership funds from the specific failed bank or thrift or, if those are insufficient, from the FDIC's Deposit Insurance Fund (DIF). The DIF is funded by assessments paid by insured banks and thrifts and it is not taxpayer funded.
The FDIC uses two forms of loss share. The first form is for commercial assets and the second for residential mortgages.
For commercial assets, the SLAs cover an eight-year period with the first five years for losses and recoveries and the final three years for recoveries only. The FDIC typically offers a range of coverage terms depending upon the market conditions and the location of the assets on covered assets up to a stated threshold amount (generally the FDIC's dollar estimate of the total projected losses on loss share assets).
Loss coverage may also be provided for loan or note sales, but such sales require prior approval by the FDIC. Recoveries on loans which experience loss events are split, in most instances, with 20% of the recovery going to the assuming bank and 80% to the FDIC.
For single-family mortgages, the SLAs are for ten years and have the same 80/20 split as the commercial assets. The FDIC provides coverage on three basic single-family first lien mortgage loss events: modification, short sale, and when the property is sold after foreclosure. Second liens are permitted to be charged off according to regulatory criteria when the first lien is not held by the assuming bank.
Since the inception of SLAs, the basis for sharing losses with an assuming bank has undergone some change. Until March 26, 2010, the FDIC shared losses with assuming banks on an 80/20 basis until the losses exceeded an established threshold defined in the SLA, after which the basis for sharing losses shifted to a 95/5 basis. Sharing losses on a 95/5 basis was eliminated for all SLAs executed after March 26, 2010.
Yes. If there are recoveries on assets that have been charged off by the failed bank or the assuming bank, then the FDIC receives 80 percent of the recoveries.
The FDIC covers credit losses as well as certain types of expenses associated with troubled assets (such as advances for taxes and insurance, sales expenses, and foreclosure costs). The FDIC does not cover losses associated with changes in interest rates.
For single-family loans, the assuming bank is paid when the loan is modified 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.
When the FDIC is preparing the sale of a failing bank or thrift, the FDIC reaches out to numerous potential bidders to bid for the customer deposits and the failing bank's assets. The sale relies on a confidential, competitive bidding process. In addition, the FDIC uses financial advisors to estimate asset values.
After the bids are received, the FDIC selects the least costly option. To facilitate that analysis, the FDIC may dictate the terms and conditions of a loss sharing arrangement and the assets to be covered when potential assuming banks bid on a failing bank. This allows the FDIC to more quickly analyze and compare each of 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 SLAs effectively.
When market conditions are at their worst, loss share can save the Deposit Insurance Fund money. As a result, loss share agreements enabled the FDIC to sell the assets, but without requiring that the FDIC accept the low prices prevalent at the time. Instead, the FDIC sold the assets to assuming banks at a discount and they were incented under the SLAs to service and manage the assets, resolving them at a higher recovery amount once market conditions improved, splitting the higher recovery with the FDIC.
During the recent Financial Crisis the FDIC entered into 590 Loss Share agreements with Acquiring Institutions from 304 Failed Bank receiverships covering $216.4 billion in assets. The estimated savings exceed $41 billion, compared to an outright cash sale of those assets.
The FDIC has developed a variety of resolution methods designed to enhance the marketability of a failing bank. SLAs are just one of the resolution methods the FDIC has available to utilize. Market conditions dictate the resolution types the FDIC offers for each failing bank and by law the FDIC must select the least costly resolution transaction for the failing bank.
The FDIC conducts annual on-site reviews and regular off-site monitoring of records of covered losses and overall compliance with the SLAs. It also requires assuming banks to provide quarterly reports to ensure compliance with the program and to monitor the performance of the assets. Lastly, if the assuming bank is not in compliance with the SLA, the FDIC has the right to stop loss share payments until the problem findings are resolved, and, in extreme cases, to sell the assets through a competitive bid process.
The terms of the SFSLA require the Acquirer to modify loans using an approved modification program for single-family, owner-occupied loans. One of the approved programs is the FDIC loan modification program which adjusts the current loan terms to achieve an affordable payment by first reducing the loan interest rate, then extending the loan term, and, where necessary, offering forbearance of principal. The goal of the FDIC program is to provide an affordable monthly payment.
The Acquirer can propose an alternative loan modification program that will achieve the goals of providing affordable payments consistent with cost effectiveness. If the FDIC concurs, then the Acquirer can use the alternative program.
Borrowers or other bankers with concerns should first initiate communication with the assuming institution for resolution. If unsuccessful in communicating with the loss share bank, borrowers or other bankers may request support from the FDIC as follows:
- Contact the Risk Share Asset Management policy group, which is responsible for administration of the loss share program, via e-mail at email@example.com
- Complete a Customer Assistance Online Form at https://ask.fdic.gov/FDICCustomerAssistanceForm, or
- Contact the FDIC Call Center / Office of the Ombudsman at 1-877-275-3342, via e-mail at Ombudsman@fdic.gov, or through the Ombudsman's web site at https://www.fdic.gov/regulations/resources/ombudsman
In 1998, the FDIC published the book “Managing the Crisis” detailing the FDIC and RTC experience from 1980 through 1994. Chapter 7 is devoted to loss sharing and can be accessed at: https://www.fdic.gov/bank/historical/managing
Banks periodically approach the FDIC with offers to terminate SLAs prior to their expiration. Subject to eligibility criteria, financial evaluation, and supervisory concurrence, the FDIC has approved the early termination of SLAs.
The FDIC only approves an early termination offer if the terms are less costly to the FDIC than the estimated costs of continuing with the SLAs for the duration of the contract.
Early termination program parameters have changed over time as market conditions have evolved and the shared loss program has matured.
The process begins with the assuming bank submitting an offer in writing. A third-party Financial Advisor is engaged by the FDIC to value the portfolios and estimate future losses and recoveries, which are modeled to account for the remaining terms of the SLAs. If the total estimated costs of continuing the SLAs are greater than the termination offer and the assuming bank is in compliance with the terms of the SLA, the FDIC can accept the offer subject to approval by the assuming bank's primary federal regulator as well as the FDIC's Division of Risk Management Supervision.
Yes, if the FDIC consents and the assuming bank satisfies the applicable provisions of the agreement.