By Dennis M. Hild
Treasury’s Troubled Asset Relief Program
The Treasury Department continues to implement aspects of the Troubled Asset Relief Program (TARP), which was part of the Emergency Economic Stabilization Act of 2008 (EESA) signed into law on Oct. 3, 2008. The application period for public banks to participate in the Capital Purchase Program (CPP) ended on Nov. 14. The Treasury released the second round of term sheets and CPP application materials for nonexchange-traded banks and thrifts (stock organizations not listed on Nasdaq, the New York Stock Exchange, or NYX); the application deadline for banks included in the second round was Dec. 8, 2008. The Treasury continues to review how to implement the program for mutuals and S-corporation banks. The term sheets for banks in this third category were not released as of the writing of this article.
Treasury Secretary Henry Paulson announced on Nov. 12 that the Treasury would not purchase troubled assets as was initially planned under TARP. Paulson said the current focus will remain on full implementation of the CPP, and the Treasury continues to evaluate other programs to support consumer access to credit outside of the banking system and to mitigate mortgage foreclosures.
More information on the Treasury’s implementation of EESA and TARP can be found on the Treasury’s Web site at: www.treas.gov/initiatives/eesa/
FDIC Loan Modification Program
The Federal Deposit Insurance Corp. (FDIC) posted information on its Web site on Nov. 20, 2008, about its loan modification program – “Mod in a Box” – that was used after IndyMac Federal Bank, FSB was placed in receivership in July 2008.
The program is designed to help banks and servicers take a streamlined approach to modifying loans that are at least 60 days past due or where default is reasonably foreseeable. In general, the modifications are made through a “waterfall approach” where the bank or servicer can adjust interest rates, extend loan terms, or forgive some principal on qualifying loans. These loans then go into a standardized net present value model (provided by the FDIC) to make sure the proposed loan modification is a better economic alternative than foreclosure for the investor. The bank or servicer can then use standard marketing materials provided by the FDIC to do a bulk mailing of the modified loan offers to all of the borrowers whose loans have been run through the streamlined qualification and modification process.
Additional detailed information and accompanying documents for the program can be found on the FDIC Web site at:
www.fdic.gov/consumers/loans/loanmod/loanmodguide.html
Agencies Issue Proposed Amendments to Appraisal Guidance
The federal financial institution regulatory agencies proposed revisions to the Interagency Appraisal and Evaluation Guidelines on Nov. 19, 2008, which address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions.
The proposed revisions are intended to update, clarify, or replace the existing guidance, particularly in the following areas:
- Independence of the appraisal and evaluation program;
- Minimum appraisal standards;
- Content of real estate evaluations;
- Review standards for appraisals and evaluations, including the use of automated tools or sampling methods;
- Portfolio monitoring and collateral valuation updates; and
- Appraisal exemptions and evaluation alternatives.
Financial institutions are encouraged to review the proposed standards and submit comments before Jan. 20, 2009, when the comment period closes. The full proposal and Federal Register notice can be found at:
http://edocket.access.gpo.gov/2008/pdf/E8-27401.pdf
Federal Banking Agencies Encourage Banks to Work With Creditworthy Borrowers
Federal banking regulators issued a joint statement on Nov. 12, 2008, about meeting the needs of creditworthy borrowers in light of numerous federal programs recently instituted to promote financial stability and mitigate the effects of current market conditions on insured depository institutions. In the release, the agencies clarified expectations that all banking organizations fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers.
The agencies urged all lenders and servicers to adopt systematic, proactive, and streamlined mortgage loan modification protocols and to review troubled loans using these protocols. (The FDIC subsequently released additional information on the loan modification program – see above.)
In implementing this statement, the agencies encouraged institutions to:
- Lend prudently and responsibly to creditworthy borrowers;
- Work with borrowers to preserve homeownership and avoid preventable foreclosures;
- Adjust dividend policies to preserve capital and lending capacity; and
- Employ compensation structures that encourage prudent lending.
Financial institutions should expect that adherence to the expectations in the interagency letter will be evaluated as part of safety and soundness and CRA
1 examinations.
The full statement is at:
www.fdic.gov/news/news/press/2008/pr08115.html
FDIC Finalizes Temporary Liquidity Guarantee Program
On Nov. 21, 2008, the FDIC adopted the final rule implementing the Temporary Liquidity Guarantee Program (TLGP), which was announced on Oct. 14, 2008. The deadline for all insured depository entities to take action on both the transaction account guarantee program and the debt guarantee program was Dec. 5, 2008.
The TLGP consists of two basic components:
- A guarantee of newly issued senior unsecured debt of banks, thrifts, and certain holding companies (the debt guarantee program); and
- Full guarantee of noninterest-bearing deposit transaction accounts, such as business payroll accounts, regardless of dollar amount (the transaction account guarantee program).
The FDIC expects banks to use funds generated through the TLGP to begin lending again to consumers and businesses. In its release of the final rule, the FDIC stressed that it is critical for lending to increase where credit has contracted, such as mortgage lending, consumer credit, and small-business lending.
Detailed information about the final rule implementing the TLGP can be found at:
www.fdic.gov/news/news/financial/2008/fil08132.html#body
FDIC Issues Quarterly Bank Profile for Third Quarter 2008
The FDIC held its quarterly banking profile briefing on Nov. 25, 2008, during which it provided a summary of financial results for all FDIC-insured institutions through Sept. 30, 2008. According to the FDIC report, the number of troubled institutions on the FDIC’s “problem list” as of Sept. 30, 2008, was 171, representing $116 billion in assets – up from 117 institutions and $78 billion in assets last quarter. The FDIC does not make this list publicly available.
The FDIC insurance fund decreased another $10 billion to $35 billion due to nine additional bank failures that occurred in the third quarter. Through Sept. 30, 2008, the total number of failed financial institutions is 13, with combined assets of $348 billion. FDIC Chairman Sheila Bair suggested the fund will decline further in the fourth quarter as a result of continuing bank failures, but that the new Depositors Insurance Fund restoration plan set to begin in 2009 will help replenish the fund.
Chairman Bair noted that smaller banks (those with less than $1 billion in assets) showed more signs of stress in the third quarter than in previous quarters and that loan loss provisions continued to mount as did levels of charge-offs and noncurrent loans.
The complete quarterly banking profile is at: www2.fdic.gov/qbp/2008sep/qbp.pdf
Dennis Hild is an executive with Crowe Horwath LLP in Washington, D.C. He can be reached at 866.390.5451 or
dennis.hild@crowehorwath.com.
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