What if My Loan is Still with a Bridge Bank?

When Signature Bank and Silicon Valley Bank were placed in receivership, the Federal Deposit Insurance Corporation (FDIC) transferred their respective assets to “bridge depository institutions” a/k/a “bridge banks.”[1] The Signature Bridge Bank, N.A. and Silicon Valley Bridge Bank, N.A., subsequently sold “substantially all” of their assets to Flagstar Bank, N.A. (Flagstar) and First-Citizens Bank & Trust Company (First-Citizens), respectively, but excluded certain assets:

• $60 billion dollars of loans held by Signature Bridge Bank remain in receivership for disposition by the FDIC.[2]
• $90 billion in securities and “other assets” held by Silicon Valley Bridge Bank remain in receivership for disposition by the FDIC.[3]

Flagstar did not acquire merchant bank accounts, credit card loans, multi-family loans, construction loans, development loans and subscription finance loans.[4] The Wall Street Journal recently reported that the FDIC has retained Newmark Group to sell roughly $60 billion of SB loans that were not sold to Flagstar Bank.[5] These loans, many of which are reported to constitute New York-based commercial property loans, remain under FDIC receivership and are expected to be sold off at enough of a loss to cause reconsideration of the market value of property loans generally.[6] 

The FDIC as receiver and First-Citizens entered into a loss-share transaction for the commercial loans that First-Citizens purchased, under which the FDIC as receiver and First-Citizens will share in the losses and potential recoveries.[7] The FDIC projects that the loss-share transaction will maximize recoveries on these assets by keeping them in the private sector.[8] 

Am I still required to pay my loan?

Yes. The FDIC continues to instruct borrowers of loans, transferred or not, to continue making their loan payments as usual unless notified otherwise. [9] Borrowers who stop making their loan payments should expect to be defaulted. The FDIC is obligated to maximize the value of failed bank loan portfolios, and we fully expect that the FDIC as receiver and the purchaser(s) of loans from the bridge banks will seek to enforce them. Borrowers are well advised to avoid default status, with its accompanying increase in interest, penalties and fees. 

Interest on construction loans is normally funded by draws on the loan. Can the FDIC refuse to make advances and require borrowers to start paying out of pocket?

Loans transferred to Flagstar and First-Citizens should be serviced as usual.[10] As we have advised from the inception of this bank failure, none of the credit facilities administered by the FDIC as receiver, whether through a bridge bank or not, can be counted on for making future draws. Despite the intent of Congress that the bridge banks “should - continue to honor commitments” made by the failed banks to “creditworthy customers,” there is no requirement that the bridge banks must continue to do so.[11] Borrowers who are relying on these loan agreements to make future draws should be replacing them or at least putting contingency plans in place. The longer it takes for the FDIC to sell off failed bank assets the worse the outcomes tend to be. 

The FDIC as receiver can put and call assets to the bridge banks, and can “repudiate” within a reasonable time period any contract that was entered into before its appointment as receiver pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”), 12 U.S.C. § 1821(e).[12] Under § 1821(e)(3),  when the FDIC as receiver repudiates a contractual obligation, it relieves the FDIC from performing any unperformed obligations of the contract and only entitles the other party to make an administrative claim against the FDIC as receiver under FIRREA for actual direct compensatory damages against the assets of the failed financial institution. If the FDIC as receiver exercises its repudiation authority, it would render the borrower a limited-rights creditor of the failed bank, who would have to file an administrative proof of claim with the FDIC as receiver and may get paid nothing or next to nothing—years from now.[13]

Will the FDIC advance under existing loans that remain with the FDIC?

Advances by the FDIC as receiver are only available when, in the FDIC’s judgment, the advance improves the value or marketability of the assets. The FDIC offers this guidance:

Line of Credit and Construction and Development Loans

• When the FDIC is appointed receiver, it immediately begins analyzing loans that require special attention, such as unfunded and partial funded lines of credit, and construction and development loans.
• The role of receiver generally precludes continuing the lending operations of a failed bank; however, the FDIC will consider advancing funds if it determines in advance is in the best interest of the receivership, such as to protect or enhance collateral, or to ensure maximum recovery to the receivership.
• In very limited circumstances, the FDIC as receiver will consider emergency funding needs required to ensure the short term viability of a borrower, to protect or enhance collateral value, or for public safety.

Potential Outcomes to Funding Requests

Based on its analysis, the FDIC may:

• Make all or a portion of the requested loan advance, as justified by the analysis. If funds are advanced for a construction project, the FDIC may require use of a third party escrow firm to control disbursements.
• Undertake discussions with you to reach a mutually satisfactory agreement to restructure or modify the loan and funding commitment.
• Exercise its statutory right as receiver to repudiate its funding obligations with respect to the loan if it determines that these obligations are burdensome to the receivership and that repudiation would promote the orderly administration of the receivership.

https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/borrowers/

The FDIC’s strategy is to sell failed bank assets back into the marketplace as quickly as possible, in order to maximize their value.  For some assets that are troubled but marketable with incentives, the FDIC can enter into a loss-share agreement with the purchaser, as they did with First-Citizens. But for those assets that the FDIC is unable to sell because they are just too troubled to be marketed under that formula with acceptable losses the FDIC holds them back in receivership and liquidates them. 

The bridge banks have sold off substantially all of their assets and the FDIC as receiver is left with assets that it so far has not been able to market. The “leftover” construction and development loans and lines of credit may already no longer be drawable as a practical matter and at a minimum they are far more at risk now than they were before. Borrowers under loans that remain with the FDIC as receiver should look for alternative lenders or sources of capital, or both, now.

How we can help

Our highly experienced multi-disciplinary Task Force is assisting clients with navigating their individual situations.

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[1] 12 U.S.C. § 1821(n)(3). 

[2] https://www.fdic.gov/news/press-releases/2023/pr23021.html.

[3] https://www.fdic.gov/news/press-releases/2023/pr23023.html.

[4] See Purchase and Assumption Agreement among FDIC, receiver of Signature Bridge Bank, National Association, FDIC and Flagstar dated March 20, 2023, section 3.5(t)-(x), available at  https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/signature-ny-p-and-a.pdf.

[5] “Billions in Signature Bank Debt to be Sold by Newmark,” The Wall Street Journal, Mar. 29, 2023 8:01 EDT.

[6] See id.

[7] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/lossshare/index.html.

[8] https://www.fdic.gov/news/press-releases/2023/pr23023.html.

[9] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/signature-ny-faq.html; https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/silicon-valley-faq.html.

[10] See https://www.flagstar.com/promo/welcome-signature-bank-customers.html; https://www.firstcitizens.com/m-a/svb.

[11] 12 U.S.C. § 1821(n)(3)(B)(i). 

[12] See, e.g.,Lexon Ins. Co, Inc. v. FDIC, 7 F.4th 315 (5th Cir. 2021) (repudiation exercised 153 days after appointment of reeivership found reasonable; BKWSpokane, LLC v. FDIC, 663 F. App'x 524 (9th Cir. 2016) (same, 206 days); RTC v. CedarMinn Bldng. Ltd. Pp., 956 F.2d 1446 (8th Cir. 1992) (“FIRREA does not define reasonableness.”).

[13] See 12 U.S.C. § 1821(d) & (e); Perna v. Health One Credit Union, 983 F.3d 258, 277 (6th Cir. 2020) (citing  Battista v. FDIC, 195 F.3d 1113, 1117-19 (9th Cir. 1999)).