Thursday, September 30, 2010

What FDIC Loss Sharing Compliance on Commercial Assets Looks Like

Compliance contracts have been awarded to FDIC Loss Share Agreement Contractors

“The scope of work under Loss Share Agreement (LSA) contracts, which have been awarded to the Contractors… encompasses oversight, surveillance and compliance monitoring of Loss Share Agreements (LSA) for Single Family (SF) and Non-Single Family (Non-SF) loss share loans, including whole loans and securities backed by SF and Non-SF loans. Under these contracts, certain assets of a failed bank(s) are identified as Loss Share Assets and passed to an acquiring bank(s) (Acquirer) under Purchase and Assumption Agreements (P&A) subject to Loss Share coverage.”

Compliance Contractors will conduct on-site reviews. Consistency of Credit Administration is Key

“During the pre-examination planning phase of on-site reviews, examiners will obtain a copy of any loss-sharing agreement and closely review the terms. The examination asset review will include a sample of commercial assets covered by LSAs, the volume of which will provide the examiner-in-charge with sufficient information to assess whether the acquiring institution applies its loan administration processes, credit risk management policies (including its loan review and credit grading policies), and loss recognition and charge-off standards to covered commercial assets in a manner consistent with its treatment of commercial assets not covered by LSAs. For covered single-family residential mortgages, the scope of asset reviews will be similar to a regular examination of such assets. The LSA and the covered assets are not being examined per se. LSAs are a risk mitigant and will be considered when assigning classifications and determining examination conclusions. However, if nonconformance with the terms of an LSA is apparent during an examination, examiners should contact the appropriate regional office which will advise the FDIC’s Division of Resolutions and Receiverships of identified issues.”