Alert September 18, 2012

FDIC Issues Guidance on Credit Risk Management for Purchased Loan Participations

The FDIC issued a Financial Institution Letter (FIL-38-2012, the “FIL”) in which the FDIC cautioned state nonmember banks that before purchasing a participation in a loan they are expected to implement an appropriate credit risk management framework that should include “effective loan policy guidelines, written loan participation agreements, independent credit analysis and review procedures, and a comprehensive due diligence process.”  The FDIC noted in the FIL, however, that the FDIC is aware that purchasing banks sometimes have over-relied on the bank that has originated the loan, which “in some instances caused significant credit issues and contributed to bank failures.”  The FDIC noted that some instances where the purchasing bank has over-relied on the originating financial institution have involved the purchasing bank’s purchase of interests in loans where the borrower is from a different state or the borrower or obligor is in a business that is unfamiliar to the purchasing bank.  The  FIL emphasizes that the FDIC expects that banks that purchase loan participations will perform the “same degree of independent credit and collateral analysis as if they were the [originating bank.]"