On March 26, 2009, the Federal Deposit Insurance Corporation (FDIC) announced the opening of the public comment period for the Legacy Loans Program (LLP), a key effort in the Treasury Department's Public-Private Investment Program. The FDIC is requesting comment from interested parties on key terms of the proposed LLP.
We understand that the initial focus of the FDIC is expected to be loans related to commercial and residential real estate, including construction loans. Participating banks may sell loans with or without cash flow; the FDIC initially expects that such loans will be sold on a servicing-released basis.
Participating banks may include FDIC-insured banks of all sizes, although it is uncertain to what degree foreign-owned banks will be eligible to participate.
Each public-private investment fund (PPIF) formed under the LLP will be overseen by an advisor, who will also oversee the auction of the collateral pools. The FDIC initially expects to auction pools on a bank-by-bank basis. No decision has been made as to whether a participating bank may set a reserve price prior to auction. The type of auction has not been determined, but may take the form of a Dutch auction, an English outcry auction, sealed bid or online. While the FDIC will conduct due diligence prior to the auction, it has not been determined if potential bidders will have the opportunity to conduct their own due diligence post-auction and have put rights with respect to purchased loans.
Consideration paid to participating banks by investors will likely take the form of cash, notes or a combination thereof. The FDIC is also open to considering whether participating banks can receive an equity interest in the PPIF to offset any losses they incur from the sale of loans at auction.
The FDIC is still evaluating how equity holders of a PPIF (the investors and the Treasury in equal proportion) will make decisions with respect to any subsequent restructuring of purchased loans, and loans auctioned under the LLP can include those subject to modification under the Treasury's Making Home Affordable Program.
The FDIC expects to mitigate the risk of its guarantee based on the purchase price determined at auction and the equity contributions to the PPIF. The FDIC will also charge each PPIF a guarantee fee on the amount of PPIF debt outstanding. The FDIC will determine the amounts of debt it will guarantee (i.e. the leverage it will provide) on a per transaction basis. If the FDIC incurs any losses, it will seek to recoup them through a special assessment allocated to all FDIC banks (whether or not participating in the sales program).
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