We address here further details of the Legacy Loan Program announced on March 23, 2009 by the United States Department of Treasury.
On March 23, 2009 and on March 26, 2009, the Federal Deposit Insurance Corporation (FDIC) conducted conference calls, one with the press and one with bankers.* During such calls, it was noted that:
- All selling banks in the Legacy Loan Program must be FDIC-insured and cannot be owned or controlled by a foreign bank. It is not anticipated that any FDIC-insured bank would be precluded from participating in the Legacy Loan Program, even if in poor financial condition. Banks under FDIC receivership will not be eligible to participate in the Legacy Loan Program.
- The FDIC is currently soliciting comments/recommendations as to how banks that sell assets to Public-Private Investment Funds (PPIFs) should be paid. Financing by the selling banks is a possibility, but the FDIC is soliciting comments as to whether it would be better to have the selling banks paid in cash, in which case there could be publicly-issued debt. The terms of the financing notes would vary from pool-to-pool and would be based on the cash flows of the assets being sold.
- The FDIC has not yet made any decisions regarding the specifics of the auction process for the Legacy Loan Program and the FDIC is open to having the auctions conducted on-line. It is anticipated that the FDIC will hire financial advisors for each pool sale and that each financial advisor would oversee the auction process, whatever that process may ultimately be. The FDIC intends to rely heavily on the comments that it receives from the marketplace when formulating the auction process.
- It is anticipated that the first round of auctions will involve pools of assets from a single seller. The second round, however, likely will involve pools of assets from multiple sellers. Furthermore, it is anticipated that construction loans would be included in the pools of assets to be auctioned.
- It is anticipated that the "stage of delinquency" of each of the loans in the pools would be priced into the bids. Assets do not have to be cash flowing to be eligible for auction.
- Sellers will have to make representations and warranties as to the assets sold. Representations and warranties would vary on a pool-by-pool basis.
- A private investor cannot invest in a PPIF if the PPIF is an "affiliate" of such private investor. The FDIC will use the definition of "affiliate" set forth in the Bank Holding Act when applying this rule. The term “affiliate” is defined in the Bank Holding Act as, "[A]ny company that controls, is controlled by, or is under common control with another company." The term "control" is not defined in such Act.
- The FDIC cannot yet predict a time frame for the first auction. The FDIC will have a better sense of timing after the comment period has closed.
- If the program is a success, the FDIC may expand the program to include the sale of real estate owned (REO) properties and/or consumer loans. For now, the focus is on commercial and residential real estate loans.