- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN October I, 2008 

Honorable Ron Wyden 

United States Senate 

Washington, D.C. 20510 

Dear Senator Wyden: 

Thank you for sharing your views about Federal Deposit Insurance Corporation 

supervisory policies and their potential impact on the homebuilding industry in Oregon. 

You raise valid concerns about the weak housing market, which combined with the other 

financial stressors you mention, can significantly depress the public's confidence in the 

health of the economy. 

The FDIC, as part of its safety and soundness examination process, recommends 

that lenders take prudent steps to monitor and maintain current data for th~ir real estate 

portfolios, particularly given present economic circumstances. I can assure you that the 

FDIC is not prescriptive with respect to loan modifications or other actions. In addition, 

we strongly encourage banks to work with borrowers to develop mutually advantageous 

repayment arrangements. 

We recognize that a borrower's willingness and ability to repay a loan are 

fundamental to prudent lending and are more important than ever in a market where real 

estate values are declining. We encourage the institutions to look to the borrower and his 

repayment capacity rather than just the value of the underlying collateral. 

If you have further questions or comments, please do not hesitate to contact me at 

(202) 898-6974 or Eric Spitler, Director of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
RONWYDEN OIU:OON 

Z2J DIRKSEN SEW.TI. OFFCE BUILDING 

"""5HINCTON. DC 20510 

1202) 224-5244 tinittd ~tatr.s ~tnetr 

1202) 224-1280 (TDDt WASHINGTON, DC 20510-3703 

Ms. Sheila C. Bair 

Chainnan of the Board of Directors 

Federal Deposit lnsurance Corporation 

550 17th St, NW, Room 6076 

Washington, DC 20429 

Dear Chairman Bair: 

August 27, 2008 

COMMITTEES: 

C:OM."-ITTF.F. ON F.NF.RGY AND NATURAL IIESOI.JRCES 

SUBCOMMITTEE ON PUBUC I.ANOS ,.,., FOR£5TS 

SPEOA1.. COMMITTEE ON Af;NG 

SEUCT COMMITTEE ON MaUGENCE 

COMMITTll ON flNAl'CE 

FDIC 

SEP f6 2008 

OFFICE OF LEGISLATIVE AFFAIRS 

I write today to bring to your attention the potential consequences certain Federal Deposit 

Insurance Corporation (.FDIC) policies are poised to inflict upon Oregon's home building 

industry and small financial institutions and to ask you to consider alternative approaches that 

may lessen these impacts. 

As you know, the national housing market is experiencing a dramatic downturn in new home 

sales, resulting in a number of negative developments including, but not limited to, a decrease in 

the availability of credit and increases in unemployment in the homebuilding and wood products 

industries. Collectively, these events, among others, have had the effect of diminishing 

Americans' confidence in the ability of our economy to recover from the current slump. 

To its credit the FDIC has recently taken a number of steps to restore that confidence. While 

many of these measures have been thoroughly thought through, some of them may benefit from 

more in-depth review. 

For instance, in an effort to minimize the potential number of defaults, many banks have 

extended the terms of building loans as long as the borrower continues to make payments. Thi~ 

has allowed borrowers who ate holding larger inventories of new housing stock to maintain and 

market the properties beyond the closing date specified by the initial loan. 

However, FDIC appears to be ordering member banks to cease this practice, in effect forcing 

borrowers to sell their inventory at lower prices to pay off the construction Joans. According to 

Portland area real estate experts, this is depressing appraisal values and having a deflationary 

effect on housing stock in Oregon-something our state has mostly avoided to date. 

At the same time, the recent FDIC directive to member institutions to reassess the valuations of 

collateral underlying outstanding commercial homebuilding debt may actually be forcing • 

financially stable borrowers into default. It is my understanding that bo.rrowers whose newly 

assessed construction loans fail to meet the original 35% loan-to-valuation (LTV) ratio, are being 

forced to pay the financ;iaJ institutions an amount necessary to bring the loans into compliance 

with the original L 1V ratios. Due in part to the aforementioned sales downturn, many borrowers 

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may be unable to meet these new financial requirements and may be forced into insolvency. In 

that event. the lending banks will then be forced to assume ownership of the collateral housing 

inventory. 

Increasing the banks' Real Estate Owned (REO) assets may destabilize not just the real estate 

market, but also the liquidity of the participating banks. Imposing this kind of liquidity crunch 

on these banks seems counter to the FDIC's mission of maintaining stability and public 

confidence in the nation's financial system. 

For these reasons, and to avoid a further downward spiral in credit and housing n:iarkets, the 

public and the treasury might be better served by allowing banks to at least temporarily continue 

to extend the terms of development and construction loans as long as the borrower isn't 

otherwise in default If the borrowers can plan out their finances for a prescribed period of 

time-perhaps 12 months-then they may be willing to designate other, not yet at risk assets, 

toward the marketing and sale of the subject properties. 

As the homebuilding industry is a major contributor to the economic vibrancy of Oregon and the 

entire country, I ask you to carefully consider whether FDIC policies may be increasing the risk 

of default by borrowers and whether alternative policies, such as allowing banks to continue to 

extend development and construction loans as long as the borrower isn't otherwise in default, 

may reduce this risk as you carry out your monitoring and regulatory duties. Americans require 

and appreciate a vigorous FDJC, and will benefit from your careful exercise of your regulatory 

discretion. 

If I can be of help to you in this matter, please do not hesitate to contact me or my staff. I have 

asked Jay Ward, Director of Business Outreach to act as my liaison in this matter. He can be 

reached in my Portland, Oregon office at (503) 326-7525 or at Jay Ward@wyden.senate.gov. 

Thank you for your attention to this matter. 

Sincerely, 

Ron Wyden 

U.S. Senator 
e FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Hillary Rodham Clinton 

United States Senate 

Washington, D.C. 20510 

Dear Senator Clinton: 

October 16, 2008 

Thank you for your letter regarding proposals to acquire Wachovia Corporation, 

Charlotte, North Carolina. 

As you know, since the close of our bidding process, Wells Fargo & Company 

came forth with a new offer that does not require Federal Deposit Insurance Corporation 

assistance. On October 12, the Federal Reserve Board approved the application of Wells 

Fargo & Company to acquire Wachovia Corporation. 

If you have further questions or comments, please do not hesitate to contact me at 

898-6974 or Eric Spitler, Director f?f Legislative Affairs, at 898-3837. 

Sincerely, 

Sheila C. Bair 

,.. . 
8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Charles E. Schumer 

United States Senate 

Washington, D.C. 20510 

Dear Senator Schumer: 

October 16, 2008 

Thank you for your Jetter regarding proposals to acquire Wachovia Corporation, 

Charlotte, North Carolina. 

As you know. since the close of our bidding process, Wells Fargo & Company 

came forth with a new offer that does not require Federal Deposit Insurance Corporation 

assistance. On October 12, the Federal Reserve Board approved the application of Wells 

Fargo & Company to acquire Wachovia Corporation. 

If you have further questions or comments, please do not hesitate to contact me at 

898-6974 or Eric Spitler, Director of Legislative Affairs, at 898-3837. 

~incerely, 

Sheila C. Bair 
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FDII 

Federal DeDosit Insurance Comoratlon 

550 17th Street NW, Washlng1on, DC 20429 

Honorable Thad Cochran 

United States Senate 

Washington, D.C. 205l0 

Dear Senator Cochran: 

Office cl l.eglslalive Affairs 

October 16, 2008 

Chairman Bair asked me to respond to your letter regarding proposals to acqwre Wachovia 

Corporation. 

As you know, since the closing of our bid.ding process, Wells Fargo & Company came forth with 

an offer that docs not require Fcde:ral Deposit Insurance Corporation assistance. The acquisition 

was subsequently approved on October 12, 2008, by the Federal Reserve Board l.Dldcr its 

expedited procedures. The primary federal regulators of the banks and savings associations 

involved in the acquisitio~ imposed no objections. 

It is important to emphasize that the Wells Fargo acquisition fully protects all creditors including 

depositors, insured and uninsured. All banking customers of the merged institutions will be fully 

covered with no disruption in service. The quick resolution of Wachovia should provide 

assurance to depositors at a time when public confidence in the safety of their money is critically 

important. 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
·10/09/2005 16:21 Fil 

THAD COCHRAN 

--

Ms. Sheila C. Bair 

Chairman of the Board 

1:lnittd ~tatts ~matt 

WASHINGTON. DC 20510-2402 

October 9, 2008 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Washington, D.C. 20429 

Dear Ms. Bair: 

LA- O !-4 t!f/002/0003 

COMM1TTEE° ON 

~IA.llONS 

,.__ 

COMMITTEE ON 

AGIUClJL TURE. NUllUTlOH, 

AND FORES I R'f 

COMMITTcE ON 

RULESAND 

ADllfilS'TRAllON 

FDIC 

OCT 1 4 2008 

OFFICE OF LEGISLATIVE AFFAIRS . 

I want to thank you for all of your recent tireless efforts on behalf of the American 

people. I write to you to!1a¥ to share concerns that ha.vc been communicated to me by a. . group of interested Mississippians. · 

It is iny undemandhut that the dispute between Citigroup and Wells Fargo . regarding the acquisition of Wachovia is extremely complex and is constantly changing 

status. Because of the FDIC's involvement in this important matter, I am bringing to your 

attention the thoughts of my concerned constituents who have contacted my office on this 

topic. 

I would appreciate if you would take the time to review the concerns enumerated 

in the attached letter and would k~ their-thoughts, and the thoughts of other individual 

shareholders, in mind as this process moves forward.. 

Again. I thank you for all of your immeasurable and vital work. Please feel free to 

contact my office witli any questions regarding this matter. 

TC/pw 

THAD COCHRAN 

United States Senator 
1D/Q9/Z0O8 18:21 FAX 

The Honorable Thad Cochran 

United States Senate 

Dear Senator Cochran: 

lil!0003/0003 

I am contacting you as an Individual as to an urgent emergency request for your assistance In a aitical 

matter of great importance to re-bulkfa,g confidence In the U.S. economy and of grave importance to 

many· of your Mississippi constituents. · 

For eighteen years I was Chairman of the Board and Chief Executive officer of The Jefferson Bank, Biloxi, 

MS. Jefferson ~ held by Rrst Jefferson Corp., a one bank Holding Company. Jefferson was a small 

locally owned run sBlVice commarclal bank. Jefferson was very strong in capital and assets. In 1994 First 

Jefferson merged with SouthTrust Bank. During my time as Chairman of the Board & C. E.O. of the then 

SouthTrust Bank of South Mississippi we merged in Citizens 'National Bank, Pascagoula. MS., another 

very strong locally owned Mississippi bank. In 2004 SouthTrust Corp. merged with Wachovia. 

I know I need not review for you the recent events In the flnanclal sectors. However, 1he events of last 

. week-end relative to Wachovia and trn! forced sale by F~D.I.C. to Citibank ara unimaginable. W3chovia 

· was deallng In good faith with Wefts Fargo who was offering, at that tlme, $20 bilion on a typical stock for 

stock merger. I am told, and as confirmed in this week's WaD Street Jouma~ that when WeDs Fargo said 

over this past week-end that they needed a bit more time ID fina&ze their due diligence on the Wachovia 

loan portfofio that the regulators called in CHJ'bank and between 2:00 A.M. on Monday morning and 6:30 

A.M. on Monday morning, Wachovia's Board was forced ID agree to semng off the bank. assets for $2.1 

Bil6on with gov~me,rt assistance to some billlons of dollars, the: exact amount of which I am unsure. 

This was in exchange for the bank. not being taken over by the ragulatcrs. Tha news reports say that •this 

was not a bank failure•. Thus, the regulators were not the acquiring party and shareholder approval 

surely would have been required to sell roughly $700 bilfion n assets out of lhe bank corporation. Today 

Wells Fargo's Board has approved the purchase of Wachovia, not just bassets. but the enti"c bank 

Holding Company for $15 billion with no government assistance. The Citibank deal lelt the 662,000 

shareholders holding 2.1 bDr10n shares of Wachovia in a terrible position. Wells Fargo's offer surely does 

not make the shareholders whole, but does represent today a value of approximately $7.00 per share vs 

the $1.00 per share from Citibank. The Wens Fargo deal places the Wachovia shareholder in the only 

AAA rated bank in the U.S. and the opportunity, over time, to regain some of the lost value from the 

Wachovia high at the beginning of !:hi$ year at $52.00 per share. 

Reports today on CNN, Fox, etc. are saying.that Cibbank. supported by F.D.I.C., are trying ta block Wells 

Fargo's offer tc the shareholders of Wachovia. The shareholders of Wachovia have not approved the 

acram dawn• to Citibank. . 

The shareholders of Wachovia befieved in the core value of Wachovia, stood firm awaiting stability in the 

maricel My personal opinion is that when on last Friday the Congress of the United S1ates of American 

tumed down the "bail-out" bill that Wachovia became the sacrllclal lamb ID prove to the Congress how 

crttlcat the ·bail our blR was and what better way than when the markets opened on Monday moming 1he 

"forced sale• of Wachovia... Word v,as running wild of the week-end events between the parties 

interested In ac:qulrlng Wachovia and yes, of the "forced sate•. Thus when the market opened, the value 

of Wachovia •ran out the door". What else would one expect .. 

Assistance Is requested in your guidance of what should be done ID save the many Mississippi and U.S. 

sharehold~ who are at pen1 Those h:wGulf Coast residents who are franticaBy calling ma loday hold 

approximately 431,805 shares of Wachovia. This is awful. 

Thanking you, I am 

[ D'Auby H. schleil 

Chairman of u,a"!oard 

Community Bank of Mississippi 
G FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Carolyn B. Maloney 

Chairman 

Subcommittee on Financial Institutions 

and Consumer Credit 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Madam Chair: 

October 16, 2008 

Thank you for your letter regarding proposals to acquire Wachovia Corporation, 

Charlotte, North Carolina. 

As you know, since the close of our bidding process, Wells Fargo & Company 

came forth with a new offer that does not require Federal Deposit Insurance Corporation 

assistance. On October 12, the Federal Reserve Board approved the application of Wells 

Fargo & Company 10· acquire Wachovia Corporation. 

If you have further questions or comments, please do not hesitate to contact me at 

898-6974 or Eric Spitler, Director of Legislative Affairs, at 898-3837. 

Sincerely, 

Sheila C. Bair 
.c.AAOL YN B. MALONEY . 

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FDIC 

The Honorable Sheila Bair 

Chairman OCT - 8 2008 

Federal Deposit Insurance Campany 

550 17th Stzeet. NW 

Wa.mington, DC 20429 

Dear Chainnan Bair. 

OFFICE OF LEGISLATIVE AFFAIRS 

During these _difficult cconatnic times, whc:ce we have seen immense pressures in 

our C<lJlital marlccts and on our financial institutions, Congress and federal regulatars have 

been called upon to WOik quickly to best deal with a rapidly changing sitoation. One 

sitmtion that has been rccciving &igruficant attention for tQc way it has been handled in 

the last few.weeks is the fate of Wachovia CQrporation. 

It ia my understanding that there arc a variety of options now under consideration 

regarding the outcome of Wachovia Corporation. It is my hope that any decision that is 

made regarding this situation is done as quickly as possible and in a way that is fair to all 

the parties and that most benefits~tbc broader economic system. 

I stand ready to wo:ck: with you on this and on other matters as we move forward. 

I thank you for you altenti.on in getting this situation ICSolvcd as quickly and as 

beneficially as possfble to all parties. Please do not hcsit,a.tc to contact me with any 

questions you may ha-ve. 

,, 
- FEDERAL DEPOSIT INSURANCE. CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Robin Hayes 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Hayes: 

October 16, 2008 

Thank you for your letter regarding proposals to acquire _Wachovia Corporation,. 

Charlotte, North Carolina. 

Since the close of our bidding process, Wells Fargo & Company came forth with 

a new offer that does not require Federal Deposit Insurance Corporation assistance. On 

October 12, the Federal Reserve Board approved the application of Wells Fargo & 

Company to acquire Wachovia Corporation. 

If you have further questions or comments, please· do not hesitate to .contact me at 

898-6974 or Eric Spitler, Director o,f Legislative Affairs, at 898~3837. 

Sincerely, 

Sheila C. Bair 
L_ttUD 1-

ROBIN HAYES 

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, OCT :- 3 22J:; i 

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October 3, 2008 

Shm;l&Bair 

Cbainnao, Fedt::ral Deposit lnmnμlcc Corporation 

550 l 7flt S1rcct, NW · OFFICE CF LEGiSl,AT/~'E AFFA!RS 

W asbington DC 20429 

Dear Cbanman l3air: 

I am writing yo1J with sincere co~ over FDIC's annomiced opposition to the mcrga 

bctwecn. Wacbovia and Wells Fargo. · 

I ccrtmnly undetstand why the otbc::rparty is oppos~ - as evidenced by the tmms of this 

la.test merger. they got a great deal and they want to keep it 

But fur the life of me, I cannot t:mdcmand why the FDIC would stand in the way ofW acbovia entering into an agreement that seems better fur their employees, .sbsreboldcrs, 

customers and the community aroll!ld them. And since FDIC is not part of this merger, it 

wollld seem that it's better for the taxpayer as well. 

From all accounts, the merger a:nnounced Monday was anything but a. negotiated deal 

with two willing parties. · It was a fui:ced ammgcmcat with FDIC in the middle. 

I don't understand wl;iy FDIC has taken 1hc position they ha.ve, but I would like to know. 

I eagerly await your response. . 

Robin Hayes, · 

Member of Congress 
FDl8 

Federal Deooslt Insurance Con,oratlon 

550 17th Slraet NW, Washington, DC 20429 

Honorable Mike Hewitt 

Senate Republican Leader 

Washington State Senate 

314 Legislative Building 

Olympia, Washington 98504 

Dear Senator Hewitt: 

Ollk:e d Legislative Affai's 

October 16, 2008 

Chairman Bair asked me to respond to your letter regarding the failure of Washington Mutual 

Banlc. 

On September 25, 2008, the Office of Thrift Supervision declared Washington Mutual Bank 

insolvent and the Federal Deposit Insurance Corporation was appointed receiver. The FDIC has 

facilitated a transfer of all the assets and most of the liabilities of Washington Mutual Banlc to 

JPMorgan Chase. JPMorgan Chase paid a premium of $1.88 billion to acquire those assets and 

liabilities. 

JPMorgan Chase purchased assets with a book value of$298.7 billion. Additionally, they 

acquired liabilities totaling $258.5 billion. The actual market value of those assets is yet to be 

determined. However, according to media reports issued by JPMorgan Chase, they immediately 

wrote down the book value of the assets by $30 billion. 

Alan Fishman, Chief Executive Officer of Washington Mutual Bank, did in fact have a golden 

parachute agreement which could have paid him $11.6 million for what in effect was three weeks 

work. That agreement was between Mr. Fishman and the bank holding company, Washington 

Mutual, Inc. Since the FDIC docs not regulate bank holding companies. the FDIC did not 

approve that agreement. Additionally, the FDIC is unable to stop the holding company from 

paying that bonus. However, the holding company has now declared bankruptcy, so it is highly 

unlikely that the bonus could be paid even if Mr. Fishman were to file a claim in the bankruptcy 

couzt. 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

:Oirector 

Office of Legislative Affairs 
09/26/2005 14:00 F.U 

314 Legislative BuJlding. 

PO Box46(16 

Olympia, ·w1,. 98S!)f-006 · 

. Via· facsimile 20~-898-3500 

September 26, 2008 

Was~gton State Senate 

Senator Mike Hewitt . Senate Republican Leader 

· 16th Legislative Distrjct 

Phom:: (36o) 786-7630 

PAX:. e6D) 786-1266 

e-mail: hewitt.milcc.Olcg. wa..gov 

FDlC 

Shella Bair. Chairman SEP 2 9 2008 , . , . 

Federal qeposlt Insurance Corporation 

3501 N. Fairfax Dr. 

Arftngton, VA 22226 OFFICE Of LEGISLATIVE AFFAIRS 

Dear Chairman B13ir, 

. . 

On September 25, 2006, the operations of Washington Mutual Bank were seized by federal 

regufators. Washington Mutual was then sold in a transaction facilitated by the Office of Thrift 

Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC). According to news 

reports, the FDIC allowed Washington Mutuars $134.7 billion in assets to b~ sold to JPMorgan 

Chase for $1.9 bilHon. On June 30111 of this year, Washington Mutual's assets were valued at 

ayer $186 bilfion. 

Th~nkfully, the customers.ofWashtngtoh Mutual will be protected. Shareholders and 

bondholders, however, will reportedly be wiped oul The Washington· State Investment Board is 

reporting that i~ fund will lose $47 iniln'an reducing the amount of retirement funds available to 

Washing~n state workers. 

The New Yotk.'Tir'nes Is. nOV'.I ~~porting an .analysis by James F. Reda and Associates shows that 

· Alan H. Fishman, Washington Mutual's chief e~cutive, will be eligible for $11.6 million in cash 

severance an~ will get to keep ~i~ .$7.5 milllior, signing bonus. Mr. Fishman began working for 

Washington Mutual September 9. So, this multimillion dollar golden parachute is in exchange 

for two and a l:!alf weeks service .. This i.n. unconscionable. If shareholders and bondholders are 

!~ft unprotected, the head of the bank should not be profiting at this level of compensation. ·.·.. . . . - . Mr. Fishr:nan·~ compensation _COf'l'!~~-.on.to_p of K~ry Killinger - long_ time Washington Mutual 

chief executive - receiving an eight.-figure severance package earlier this month valued at more 

than $~2 r11il_l~oi,. . . · · 

The.FDIC. of course, did not approve Killinger's golden parachute. Did you give approval to the 

reported severance portion of Mr. ~shrnan's parachute? 

., . . . . . 

~ai-lier .this month, it vias reported that tlie chief of ~~cutive 

0

6f Fannie Mae - Daniel Mudd -

and the chief of executive of f=reddie Mac ...:.. Richard Syron - were in fine for multl-milrian dollar 

severance packages. In Mr. ~dd's case, it was reported the package could be worth as much 

~ $~.4 mlUion. In Mr .. Syro11's case,-.it was reported ha was In line for as mt.1ch as $15.5 million. -· . - . . . . 

. :-
D9/?6/2008 14;00 FAX 

When the outrage over these packages grew, James-Lockart. director of the Federal Housing 

Finance Agency banned both men from receMng the golden parachute porfions of their 

packages.. · 

l understand the anger of the many Washington Mutual shareholders in Washington state. I · 

strongly object to outrageously iarge executive a:>mpensation for a·chief executive wittl a 2 1⁄2 

wee~ tenure wt,en Washington Mutual's sf:lareholders ge~ nothing. 

laloo2 

For decency sake, I Implore you to consider these shareholders - especiaRy lower ~nd middle 

income people whose retirement safety nets have just been wiped out. Please do the right 

·thing. 

The Federal Housing Finance Agency acted on a golden parachute situation very similar to this 

one in the case of F.redcfie. Mac; and Fannie Mae. If you failed to act on this matter when you had 

control of Washington Mub.Jal and now beHeve you cannot press for this action, I would fike an 

explanation of your reasonini:, for failing to do so. . 

. I look f~rward t~lliyour _pro~P! ~p~nse. 

r Mike Hewitt, Leader · 

Washington State Senate Republican Caucus 

·c~: . . Senator· Christopher Oodd, Chair, Banking, Housing and Urban Affairs Committee, u .S. Senate 

Senator Richard Shelby, Ranking, Banking, Housing and Urban Affairs Committee, U.S. Senate 

ftepre$entative ~arhey Fraryks, Chair, Financial Services Committee, U.S. House of Representatives 

Repm:,entatlve Spen'cer Bachus,· Ranking, Fnancial Services Committee, U.S. House of R~presentalives 

Senator Patty Murray, U.S. Senate . 

Senator ~aria Cantw.,11, U.S. Senate ' . 

. Representative Jay lnslae, U.S. Housi= of Representatives 

1 Representative Rick Larsen, U.S. House of Representatives 

·Reprosen~Uve ijr~n .~lrd, U.S. House of Representatives 

Representative "Doc• Hastings, U.S. House of Representatives 

Representative Cathy McMorris Rodgers, U.S. House of Representatives 

R.epresentative Norin Dicks, U.S. House of Representatives 

.. R,epresentative Dave Reichert, U.S. House of Representatives . 

.Representative Ad~fTI Smith, U.S. House of Representatives 

Mr. Jolin fleich~ Director. Office ofTtlflft Supervision · 

ScoU Jarvis~ Dlre~r. Washingf9n State Department of Financial Institutions· 

S~afQf ~~en B~~~Y,.~air, financl'..S~ Institutions and lnsuraric~ Committee, Washjngton State Senate 

Senator Don 13enton, Ri!nkihg, Financial Institutions and Insurance Committee, Washington State Senate 

Reptesentatrve Sieve Kirby, ChJ:Sir,.lnsurance, Financial Services and Consumer Protection Committee 

Washington State t-iouse of R,et:>,resentatives . . · • 

Bepreserit.ative Oi:in Roach, Ranlcirig, ·1ns~nce, Flnancial Services and Consumer Protection 

Comm~, Washington State Hous!3_or ~~presentatlyes 

Rob McKenna, Washington State A~l'ney General · 
FDI• 

Federal Deoosit Insurance Corooratlon 

550 17th Streel NW, Washinglal. DC .!>429 

Honorable Virginia Foxx 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman Foxx: 

Office a Legislalive Affairs 

October 16, 2008 

Chairman Bair asked me to respond to your letter regarding proposals to acquire Wachovia 

Corporation. · 

AB you know, since the closing of our bidding process, Wells Fargo & Company came forth with 

an offer that does not require Federal Deposit Insurance O:xporation assistance. The acquisition 

was subsequently approved on October 12, 2008, by the Federal Reserve Board under its 

expedited procedures. The primary federal regulators of the banks and savings associations 

involved in the acquisition imposed no objections. 

It is important to emphasize that the Wells Fargo acquisition fully protects all creditors including 

depositors, insured and uninsured. All banking customers of the merged institutions will be fully 

covered with no disruption in service. The quick resolution of Wachovia should provide 

assurance to depositors at a time when public confidence in the safety of their money is critically 

important -~ 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-705S. 

Sincerely, · 

Erle J. Spitler 

Director 

OfficeofLegislativeAffairs 
VIRGINIA FOXX !mt lllmcT, _,,. ~ 

1000 MIADo. race« MAL&. Sl.STII: 3 

~NC27Dl2 

l33lil 771-Q11 

-~WOUSI Gt'N 

Eric Spitler 

Congress of tut Wnittb ~tatts 

J,oll5t of l\tprrsmtatibts 

1'111Qlng:tmt, :BC: 20515-3305 

October3,2008 

Director, Office of Legislative Affairs 

Federal Deposit Insurance Corporation 

550 Seventeenth Street, tffl, Room 6076 

Washington, DC 20429 

Dear Eric: . 

lAoi,4&5 

COM...-rrEE ON EDUCATION 

ANO LABOR 

COMMITTEE ON AGIUCUL TIJRE 

COMMrTTEE ON OVERSIGITT 

AND GOVERNMENT REFORM 

FDIC 

OCT 1 4 2008 

OFFICE OF L£GIS!.ATIV£ AFFAIRS 

During these uncertain economic times, all of us are distressed to learn of the failure of such a 

fine institution as Wachovia Bank that has served North Carolinians so well for so many years. 

It is my hope that the shareholders, customers and taxpayers will receive the best possible 

result from the negotiations over the future of the company. It is also very important to keep the 

public informed of any developments as this process moves forward. I request that you share 

with me any information regarding the FDIC's involvement or intervention in the proposed 

merger between Wachovia and Wens-Fargo. Best wishes. · 

Sincerely, 

Virg~ 

Member of Congress 
@ FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Sheldon Whitehouse 

United States Senate 

Washington, D.C. 20510 

Dear Senator.Whitehouse: 

October 16, 2008 

Thank you for your letter dated October 2, which I received on October 15, 

sharing your comments on the recent ~oil in the nation's economy. 

The core mission of the Federal Deposit Insurance Corporation is to maintain 

stability and public confidence in the nation's financial system by insuring deposits, 

supervising finan~al institutions, and resolving the failure of insured institutions. In 

these uncertain economic times, the FDIC's mission is more important than ever in 

ensuring that the insured deposits of consumers and small businesses arc protected in the 

event of a bank failure. In the 75 year history of the FDIC, no depositor has ever lost a 

penny of insured funds. 

The FDIC remains committed to our mission as we address the issues faced by 

insured banks and their custome~. Again, thank. you for your thoughts on these 

important issues. 

Sincerely, I 

Sheila C. Bair· 
SHELDON WHITEHOUSE 

RHODE ISLAND 

ti.nittd ~tatrs ~matt 

The :Honorable Sheila C. Bair 

r.bainnan 

WASHINGTON, DC 2i:,510-3905 

October 2, 2008 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Room6076 

Washington, DC 20429 

Dear Chairman Bair. 

~-

t:2112)22'49Z1 

T1Y 121121224-7741 

1TIIWEn-. Stwsff, sum 11011 

~IIIIIZI03 

1411'1) '53-5214 

My friends Chris Dodd and Jack Recd speak very highly of you, so I take the 

liberty to write. I would urge you to please consider this letter as you implement the 

extraordinary authority and discretion Congress bas given you. 

People across the country are hurting. In the Bush economy, average wages for a 

household under 55 are down $2,000, and expenses arc up $4,600 (not counting child 

care, another $1,500 increase), for a combined loss of$6,600 in spending power. For 

someone making $30-40,000 a year, that is a really big deal. 

•• • • • • • • • • ,,.. tl 1 • • • 

· · · ·P-eoplc across the· country have been hurting this way for a while, a'.nd nobody in 

authority bas'gfren a ¥ed liot dam1fabtiut th~ aruhhcy know it. Gas companies inade record pro'fits Wtiilc: _pntes at the pump broke their oudgets; credit card cbtnpanies found 

new 'and·&ore devfotis'ways to-jack effccfive interest rates over 30'1⁄4-and oeyohd:· . -

They've lost lioines. ~y•ve ldst jobs .. They've lo'st health insurance·.· It is not pretty. -~- . . ,,. . ... ,,• .... : . : . : _. .. , : .. 

And all the while, they were subjected to a grotesque spectacle oflavish 

compcnsatibii 'and' Gilded' 1\-g~ _excess, Qften taxed at rates below their own meager incomes. · ' · · · ·:-·· ·•:. :-- 1· · • • ,:_ · 

Now that rich and connected people ~ in trouble, it seems to them, suddenly 

Washington is inte,rested, and expecting them to pay for it Skeptical eyes from 

struggling families, whose plight is very real but has been widely ignored, now are 

watching_~t you~lf dci. · .. --:·-·-- ·:· ' ·:·• -· . ,, =~ · · ::- :_ - · .. . • • ' .i . . . , . . t • . . ,,, . ., ·: :1, . '. . 

It would be easy for you to implement your new authority in ways that 

.comfortably ~d~odate the financial world Since it is your world; you tnay even think 

you are alleviating pain overall i.( you go that road. The-banks and CEO~ and investment #•·~~ Iie~~~cis"~?u will.be.W?~kiii~-~~ will·oe P1:18hingbard fe>rytm to -. accoinmodalc:ftheir interests, arui you will be ·surrounded by them. and may yield to an· 

understandable 'inclination to znake "thein happy: Many-of them are'your friends. . 

·, . 

}. ', • I ,•· I .. ·• r .- ••. .. ( . • •, •• ••I 

• r : · :· • • • I: • • 
But you risk, in the lawful exercise of your discretion, so disillusioning and 

infuriating the long-suffering people, who missed the party but now haye to pay for the 

clean-up~ that lasting damage is done to our unity as a nation. You are in a position now 

to tear the very fabric of this country_ And I am afraid you will if you are not VERY 

attentive to this concern. 

When I spoke last week with Secretary Paulson and Chaitman Bemanke, I got the 

impression they saw this as a larger financial problem that contamed the smaller political 

problem of dealing with Congress. I think it is the other way around. We have a smaller 

financial problem within a larger political problem. 

That larger political problem is to maintain sufficient national unity, and sufficient 

confidence in democratic institutions, to be able to address the massive problems bearing 

down on us that require action in the near future. These include: 

The over $7 trillion of debt that George W. Bush has run up as President; 

Our $34 trillion Medicare liability- which is just one symptom of our bloated and 

unsustainable health care system; 

The $740 billion am1ual trade deficit the United States of America is running; 

The 1.2 billion American credit cards carrying one trillion dollars in debt at often 

abusive and totally uncontrolled interest rates; 

An energy policy that hemorrhages $600 billion a year to oil-producing countries 

and puts us on the losing end of the biggest wealth transfer in the history of 

humankind;and 

The tons of carbon and greenhouse g~es we are pumping into our thin and 

delicate atmosphere. 

These are eyen more serious problems than our present credit panic, and it will 

take a unified country to address them through our democratic institutions in a timely and 

responsible way. Thus my warning: the easy and painless way through this for you may 

sow the seeds of disaster for our country as these larger problems bear down on us; 

Sincerely, 

United States Senate 
As discussed in my answer to Question #2, I have suggested a number of other steps for 

Congress to consider that would provide additional protections to consumers. 

Opportunities exist to improve and expand the ability of the federal banking agencies to 

protect consumers. The FDIC stands wilJing to assist Congress and to join with our 

fellow regulators to explore ways to ensure a financial industry that is profitable for the 

institutions and fair to its customers. 
Q2. Do consumers have adequate protections against predatory lending practices, 

e.g., subprime credit cards? 

Al. While I support the operation of market forces. regulators need to set rules for 

market participation. Moreover. price competition does not work if conswncrs do not 

understand the tme cost of financial products. Through appropriate rulcmaking. 

regulators can establish strong pro~ections for consumers that consistently guard against 

abuse across industry and supervisory lines. Meaningful enforcement authority and 

sufficient resources should be devoted to that authority. 

With regard to credit cards, the Federal Reserve Board recently proposed amendments to 

Regulation Z. which implements the Truth in Lending AcL The notice of proposed 

rulemaking on Regulation Z contains significant advances in credit card disclosures. The 

proposed amendments would require important changes to the fonnat, timing, and 

content requirements in documents provided to consumers throughout the life of a credit 

card account, including changes in solicitations, applications, account opening 

documents. change-in-term notices, and periodic billing statements. These proposed 

amendments will assist consumers in better understanding key terms of their credit card 

agreements such as fees, effective interest rates, and the reasons penalty rates might be 

applied, such as for paying late. 

My written testimony describes additionaJ proposals for improving consumer protections 

regarding credit cards and mortgage lending. I suggest that Congress consider the 

following reforms: 

Create national standards for subprime mortgage lending by all lenders through either 

legislation or nilemaldng under the Home Ownership and Equity Protection A.ct of 1994 

(HOEPA.). A statutory approach could draw from the 36 state anti-predatory mortgage 

laws currently in effect At its core, however, a statutory framework should address two 

important areas: (1) the ability of the borrower to repay the loan; and (2) misleading 

marlceting and disclosures that ipake it unnecessarily difficult for borrowers to fully 

understand the terms of loan products. 

Expand rulemaldng authority under Section 5 of the Federal Trade Commission (FTC) 

Act to all federal banking regulators to address unfair and deceptive practices. Under 

the FTC Act, the Federal Reserve Board, Office of Thrift Supervision, and the National 

Credit Union Administration have authority to issue rules regarding unfair or deceptive 

acts or practices for the institutions under their supervision. But the FTC Act does not 

give the FDIC authority to write rules that apply to the 5200 state non member banks that 

it supervises - nor does it grant that authority to the OCC for its 1700 national banks. 

Although our examinations indicate that most FDIC-supervised banks are not engaging in 

predatory practices, the FDIC could more effectively address unfair and deceptive 

practices ifwe had rulemaking authority in this area. To effectively address predatory 
Thank you in advance for your assistance in this matter. 

Melvin L. Watt. Chanman· 

Subcommittee on Oversight & Investigations 

. House Fμwicial Services Committee 

•· 
The-Jt$~~ac.~ 

-Ctiairman 

Jr~dcml'~~~ 

· sso t7$Strect'NW· 

Washihgtun.»c ~'®00 

Dear Gliaitman Ban::. 

~-tts-~ tr ·-~ ~-QNtwflOHG.'~Nl3..c .AND 

~A:fFAJR$ 

WASl,IIN~ ~ 20510-607 5-· 

~ll,2008 

LAO ~-5, l 

FDIC 

OCT 2 2 2008 

OFFICE OF LEGISLATIVE AF1 AIRS 

.. 
' ,e"'((i'. ().~ !tJJf1'-~t~ 

~Q~ . fr~;<' (e"~ 

JI- 6~ \ (r ~211t .. YJ1tJRN HOUSE oi, .. tcduu.m,,a BOBFILNER 

51ST Dts11acr, CJ.:uFC>RNIA. 

CONGRESS OF THE UNITED STATES 

HOUSE OF REPRESENTATIVES 

October 27, 2008 

Sheila Bair 

Chairwoman 

Federal Deposit Insurance Corporation 

550 17th St NW 

Room 5046 

W.-sHINGTI:>lf, 1>C 20Sl.S 

n:t.: (202) 225-aOCS 

F.u::(2la)22S--91J13 

333 F Su.EEr, SUtn A 

ClfUU VJSTA. CAuP0JtN!A !11910 

Ta; (6151) -422-S!l!iJ 

F,-,:: (619)-422-7290 

1101 AuPOltT Ro.u>, Suma D 

1-EmAJ.., C..UFOR."IA 922Sl 

1n: (760) 355-l800 

F...x: (760) 3SS--U02 

webi.itc: -~/filner 

FDIC · 

NOV 5 2008 

Washington, DC 20429 OFFICE OF LEGISLATIVE AFFAIRS 

Dear Sheila: 

I write to invite you to address a group of mortgage lenders and community leaders 

in my district about the FDIC foreclosure prevention plan. 

As you know, the foreclosure issue and available responses to the situation are a 

major topic of speculation and discussion across the country .. In addition to bank 

failures; ~ere;are bank mergers, bank buyouts, the purchase of securities by · 

government agencies and the ongoing failure of small and large investment firms. 

Much of the discussion about these·circumsta:b.ces:occurs, as it should, in, 

Washington D.C. However, there is·a. strorrg "need to know'' in local communities 

undergoing the impacts. · ·· ·• · · · 

The San Diego region, a large portion of which I represent, has been dramatically 

impacted by foreclosures. In the last fiscal quarter alone there were over 13,000 

notices of default filed and over 5000 foreclosures. This rate has been repeated 

over the previous two· years. 

We have many agencies assisting homeowners to rewrite their loans. Their biggest 

problems are access and the lack ofany clear policy by the banks on:workouts. It is 

my understanding that the·FDIC has, in th"eir oversight of Indy Mac, developed a 

consistent apd pragmatic set of guidelines for other lenders. We know as well that 

Fannie Mae and Freddie Mac and now Treasury ·are in:·ovetsight of large numbers 

of bad loans and in need of'a workout plan. · · · 
Sheila Bair 

October 27, 2008 

Page2 

We are deeply concerned about the opportunity of our residents to access fair 

treatment in their financial duress. We w~t to support your efforts to standardize 

these practices. 

Accordingly, I, in conjunction with the City Club of San Diego, the Chamber of 

Commerce and the City/County Reinvestment Task Force, chaired by Councilman 

Tony Young and County Supervisor Ron Roberts, would like to invite you to come 

to San Diego and present your plan. W~ can also discuss with local partners a 

strategy to support your efforts. The dates for this event are flexible. I urge you to 

contact my scheduler Nora May, at (619)-422-5963 and Mr. Jim Bliesner, Director 

of the City/County Reinvestment Task Force at (858)-694-8771 to find a date that 

works on evezyone' s calendar. 

Cc: 

Member of Congress 

Mr·. George Mitrovich, CEO, The San Diego City Club 

·Mr. Anthony Young, Councilman 4th District, San Diego City Co~cil 

San Diego Chamber of Commerce 

BF/ek 

2499149 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Brad Sherman 

House of Representatives 

Wasbin'gton. D.C. 20515 

Dear Congressman Sherman: 

November 4, 2008 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

need for office space in Southern California. We arc in the process of acquiring leased 

space for a West Coast Temporary Satellite Office (WCTSO). This office wiII serve as a 

temporary satellite operation for our resolution and receivership function that is based in 

our Dallas Regional Office. 

The WCTSO will handle the management and liquidation of receivership assets 

from failed banks and will be staffed by approximately 300-600 non-permanent 

employees and contractors. The FDIC requires approximately 200,000 square feet of 

space for a lease term of three to five years. This temporary office will be closed when 

work is completed. 

The FDIC is conducting a lease competition in accordance with our leasing policy 

and we are nearing completion of the competitive process. Several landlords in the Los 

Angeles and Orange County areas identified by our national broker have submitted 

proposals. An evaluation team will recommend the offer that is determined to be the best 

value for the FDIC, considering mission objectives, price, and other qualitative factors. 

Subsequent to completion of the competition, a business case will be presented to 

the FDIC Board of Directors for site selection approval. After Board approval. the FDIC 

will announce the selection decision. 

I appreciate your interest in this matter. If you have further questions or concerns, 

please contact me at (202) 898-6794 or Eric Spitler, Director of the Office of Legislative 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila ·C. Bair 
2008-0ct-17 01:42 PM 8185011554 

VIA FACSIMILE 

The Honorable Sheila C. Bair 

Chairwoman 

Pederal Deposit Insurance ColJ)()raiion 

550 17v. Street, NW, MB-6020 

Washington, DC 20429 . 

.: 

•

. .,._ 

Odober 17, 2008 

Re: FDIC J..os Angeles Arca Office: In Support of Woodland Billo; Site 

Dear Chairwoman Bar. 

PH: (202) 225-5911 

r'AX: (201) 225-5679 

I am writing with regard to the Federal Deposit. Immrmce Corpon1tion' s (''FDJC") 

proposal to locate an office in the Los Angeles area. T urge you to establish an office in the 

Woodland Hills area of the San Fernando Valley, home to a number of important financial and 

insurance in&titutions, as weJ1 as the U.~. Bankruptcy Court. { understand that you are loolcing 

for a site with 200,000 square feet capable of housing approximately 600 employees, and arc 

c.onsidering a site in the Woodland Hills an:a. of the City ofLos Antcle£. 

The San Fernando Valley is home to nearly two million r:::sidcnts. According to the most 

te(."Cnt report prepared by the U.S. Census Bureau on the San Fernando Valley. 30 percent of the 

population age 25 und over ~ve received a ba.chelor's degree or higher. Califurnia State 

University, Nortbridge, located in the heart oftbe San Fcrn.ando Valley, has one of the region's 

largest and most respected progr.tm.'i ~ accounting, finance., and business. 

Ibe Warner Center area of Woodland Hills is easily accessible via freeway and public 

transit through the Metro Orange Line and Metro Rapid Bus semce. The Warner Center Transit 

Hub. which connects local and regional mac;s tnlnsit systems (including tl1e Metro Orange L.inc), 

is withln waJking distance o l'the Woodland Hills site the fl)lC is current~y evalualing. 

The City of Los Angeles, represented by Mayor Antonio lt Villaruigos-c1. and local City 

Councilmember Dennis P. Zine, 11-trungly supporl~ Lhe loca.tion of an FDIC office in Wooclland 

Hills. The City can meet the FDTC's requiremenl.s including occupancy of a site in Woodland 

Hills by lhe end oflhe year, and will be providing YoU with other importanl information about 

lhe henefils oflocating an office in the San Pcrnando Valley. ·Jn particular, ~a)'('r Villaraigosa's 

letter to youofOctober 16, 2008 (copy allached) says in part 

2/4 
2008-0ct-17 01:42 PM 8185011554 

FDl C Los Angdes Area O .ffice 

Oclober l 7, 2008 

Pagel 

"As Mayor. I am abo able Lo fast track our pi!nnilting proce$.}· to met!I your deadlines 

and. ta offer eco11omic; incentives such as ,.,ate, and power lliscounts .. J 'WOUid request 

that the City have an opportunity ID pruent its best case to you before an:y decision is 

reached" 

I am particularly interested in bringing the resources of the Federal government closer to 

our c:onstituents and businesst:S. Should the FDIC cstabbsh an office in Woodland Hills, you 

will find a well-educated, highly-motivated workforce in the San Fernando Valley eager to 

support the FDJC's core mission, vision, and values. 

Thank you for your consideration. I look forward to the FDJC's site selectron decision. 

Attachme,:rt 

cc: Mayor Antonio R. Villnraigosa 

Los Angele::s City Coimcil 

Member of Congress 

3/4 
2008-0ct-17 01:42 PM 8185011554 

ANTON IO 

• 

R. VILLA R A I G OS A 

MAYOR 

October 16, 2008 

The Honorable ShejJa C. Bair 

Chairwoman and Members of the Board of Dlractors 

Federal Deposit Insurance Corporation 

550 -17th St, 1-N/, Room MB-6020 

Washington, DC 20429 

Dear Chairwoman Bair and Members or the Board of Directors: 

J am writing to request your support for a decision to locate a new regional office of the Federal 

Deposit Insurance Corporation (FDIC) in 1he LNR property located In Woodland Hills, Califomia. 

It is my understanding you are looking for a site lhat has 2D0,000 square feet and is cap~le or 

housing approximately 600 employees. You also need tq fast track the permitting requirement 

in order to occupy the space by the end of this year. 

The LNR site is perfectly suited for the FDIC. It has the required space; is easily access'ble 

both by freeway and by pubfic transportation; is In the heart of the San Fernando Valley, with 

one of Southern califomia's most educ:a1ed workforces; is in close proximity to several financial 

and insurance institutions lnduding witt,in feet of the U.S. Bankruptcy Court 

A!£ Mayor, I am also -able to fast track our permitting process to meet your deadlines and to offer 

economic Incentives such as water and pov1er discounts. 

Unfortunately, I have only now been made aware or your pending decision. I would request that 

the City nave an opportunity to present its best case to you before any decision is reached. 

Thank you for yaur consideration. 

ARV:jbc 

Cc: Members of the Los Angeles Congressional Delegatton 

100 NOI.TK Sl'llN(; Srun • Lo, A.NC.lUS, C:ol.LIFOU!l,l 90Dll 

=-a= P1101n: (113) 971·0600 • Fu: {213) ns-o,so 

!:M.41L: MAYDIIJLACITY.ORC 

4/4 
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Jerry Moran 

Ranking Minority Member 

November 4, 2008 

Subcommittee on General Farm Commodities and Risk Management 

Committee on Agriculture 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Moran: 

Thank you for your letter inquiring about bilateral over-the-counter (OTC} interest 

n,te swaps and cleared futures contracts. 

. The Federal Deposit Insurance Corporation's risk-based capital requirements for the 

counterparty credit ris~ associated with OTC interest rate swaps and cleared futures contracts 

are consistent with the treatment of the Basel Committee on Banking Supervision's 

.. 1ntemational Convergence of Capital Measurement and Capital Standards" (Basel I) and 

.. Basel I[; International Convergence of Capital Measurement and Capital Standards: A 

R,:vised Framework,. (Basel IT). In conjunction with intcragency rulcmalcings with the other 

federal banking agencies, the FDIC's implementation of Basel I and the Basel II advanced 

approaches for risk-based capital rules are codified at 12 C.F.R Part 325, Appendices A and 

D, respectively. The FDIC also is involved in an interagency rulemaking that would 

implement the Basel II Standardized Approach. 

Enclosed are copies ofthe_fDIC's Financial Institution Letter (FIL) No. 59-95, 

mmouncing the implementation of Basel I for derivatives contracts and FIL No. 107-2007, 

announcing the implementation of the Basel IT advanced approaches risk-based capital rule 

for derivatives contracts. 

I also am enclosing data prepared by our Capital Markets staff regarding the positions 

in interest rate derivatives at FDIC-supervised institutions and an overview of the capital 

trc:atments for interest rate swaps and cleared futures contracts under both the Basel I-based 

and advanced approaches regulatory capital frameworks. 

I hope this information is helpful. To set up a meeting with our agency subject matter 

experts or if you have additional questions, please contact Eric Spitler, Director of Legislative 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 

Enclosure 
DATA REGARDING OUTSTANDING INTEREST RATE DERIVATIVES 

CONTRACTS AND RISK-BASED CAPITAL REQUIREMENTS FOR BILATERAL 

OTC INTEREST RATE SWAPS AND CLEARED FUTURES CONTRACTS 

I. Notional amount and maturity profile of interest rate derivatives at FDIC-supervised 

institutions 

Information on the outstanding notional amounts of interest rate derivatives for individual 

institutions can be found on Schedules RC-Land RC-R of the quarterly, publicly available 

Consolidated Reports of Condition and Income (Call Report) filed by all insured U.S. 

commercial banks and trust companies. 1 

In total as of June 30, 2008, institutions supervised by the FDIC reported interest rate swaps with 

notional amounts of $184.4 billion. The Call Report does not provide a maturity break dawn for 

interest rate swaps. However, it does provide maturity infonnation for all types of interest rate 

derivatives contracts excluding futures contracts. These institutions also reported interest rate 

derivatives contracts with a notional amount of $84.4 billion with maturity less than one year, 

$73.4 billion with a maturity between one and five years, and $54.4 billion with a maturity 

greater than five years. l 

Il. Capital Requirements 

Basel I 

Bilateral OTC interest rate swaps: 

Capital requirements for bilateral OTC interest rate swaps are calculated by multiplying a credit 

equivalent amount of the swap contract by the counterparty's risk weight The first step in this 

process is to determine the credit equivalent amount which is the sum of current expo'Sure (CE) 

and potential future exposure (PFE). 

To calculate the CE, a bank must first calculate the mark-to-market value of the underlying 

contract. The CE is the mark-to-market value if the value is positive (i.e. the bank is in-themoney); otherwise the CE is zero. 

The PFE is calculated by multiplying the notional amount of the contract by a credit conversion 

factor (CCF). 3 The CCFs for interest rate contracts arc based on ma,turity as follows: 

1 Call Reports arc available at https:!/cdr.ffiec.gov/public/SearchFacsimi)es.aspx. 

2 These numbers include swaps, forwards, and purchased options on interest rate contracts, but do not include 

notional amounts for single cuncncy interest rate swaps in which payments arc made based on two floating rate 

indices. · 3 No PFE is calculated for single currency interest rate swaps in which payments arc ~de based on two floating rate 

indices (so called floating/floating m basis swaps); the credit exposure on these contracts is evaluated solely on the 

basis of their mark-to-market values. 
Remaining 

maturity CCF 

One year or less 0.0% 

More than one year 0.5% to five years 

Greater than five 1.53⁄4 

years 

Once the credit equivalent amount is determined, that amount is then risk weighted based on the 

counterparty. Toe risk weights applied to various types of counterparties are listed in Table II of 

Appendix A to Part 325. For example, the risk weight for a depository institution in the United 

States is 20 percent. Risk weights applied to credit equivalent amounts for derivatives contracts 

are capped at 50 percent The final capital requirement is eight percent times the risk-weighted 

credit equivalent amount. 

If a bank has multiple interest rate derivatives contracts with the same counterparty, the bank 

may be allowed to net these exposures and calculate capital requirements on the netting set'' as 

opposed to calculating capital requirements separately for each position with the same 

countcrparty. Netting allows a bank to offset in-the-money positions with out-of-the-money 

positions with the same counterparty. 

Netting is inco:rporated by altering the calculation of the credit equivalent amount. In the case of 

netting, the CE is the sum of all positive and negative mark-to-market values of all contracts in 

the netting set (again. if this final number is negative, then the CE is zero). The PFE is the sum 

of the PFE calculations for all contracts in the netting set adjusted by a formula which gives 

partial recognition of offsetting contracts. 5 

Cleated futures contracts: 

Banlcs are not required to hold risk-based capital un~er Basel I for cleared futures contracts 

traded on an exchange. Specifically, the rule states: "Exchange rate contracts with an original 

maturity of 14 calendar days or less and derivatives contracts traded on exchanges that require 

daily receipt and payment of cash variation margin may be excluded from the risk-based ratio 

calculation." 

Basel II 

Bilateral OTC interest rate swaps: 

4 A netting set is the set of contracts eligible for netting. A netting set is denned by a Master Netting Agreement 

s !be :fommla dctcxmincs an adjusted add-on amount, or net PFE, (A,..J. The formula is: 

A_t=(0.4x~.6{NGR><A.,,..J 

NGR is the ratio ofnet cmn:nt exposure to gross current exposure. AfPISS is the sum of the PFE calculations. 
The Basel II advanced approaches rule allow banks to choose between two approaches for 

calculating capital requirements for bilateral OTC interest rate swaps. These approaches will 

calculate an exposure at default (EAD) for an OTC interest rate swap or a group of derivatives 

contracts in a netting set 

The first approach is similar to the method described a.pave for Basel I. Instead of applying a 

risk weight to that amount, the bank uses its own estimate of the probability of default (PD) and " 

loss given default (LGD) ofjts countczparty for the interest rate swap to calculate a risk weight. 

The 50 percent risk weight cap does not apply under the Basel II advanced approaches rule. 

The second approach allows a bank to develop its own internal models, after obtaining 

supervisory approval, to calculate required capital. Under this internal models methodology, a 

bank uses an internal model to estimate the expected exposure for a derivative or netting set, 

based on a bank's forecast of future interest rate paths. The average positive exposure resulting 

from these paths is then u.sedto calculate EAD based on a supervisory formula whic~ includes a 

scalar of 1.4, which could possibly be lowered based on approval from a bank's supervisor. 

We expect that the risk-based capital requirement could fall significantly for exposures to which 

the internal models method is applied. This reduction in risk-based capital requirements under 

the internal models methodology is a result of: 1) the use of the average positive exposure - as 

opposed to some more conservative value; 2) the incorporation of risk mitigation practices, e.g. 

collateral posting requirements, into the bank's internal model; and 3) a full recognition of 

netting. The internal models methodology in the Basel II advanced approaches rule provides an 

expanded recognition of netting, including cross-product netting, i.e. netting of all types of OTC 

derivatives with repo-style transactions and eligible margin loans. However, it should be noted 

that the Basel II advanced approaches rule has not yet been applied. 

Cleared futures contracts: 

Banks are not required to hold risk-.based capital under the Basel II advanced approaches rule for 

cleared futures contracts traded on an exchange. Specifically, the rule states: "A bank may 

attribute an EAD of zero to ... derivatives contracts that are publicly traded on an exchange that 

requires the daily receipt and payment of cash-variation margin." 
FDII 

Federal Deposit Insurance Corporation 

550 171h S1reet NW, Washinotm D.C. 20429-9990 

Financial Institution Letter 

FIL-107-2007 

December 7, 2007 

RISK-BASED CAPITAL RULES 

Final Rule on Advanced Capital Adequacy Framework - Basel II 

Summary: The federal bank and thrift regulatory agencies have jolnUy issued the attached 

final rule concerning the domestic appfication of selected elements of the Basel II capital 

framework. The final rule requires some banks, and permits other banks, to use an internal 

ratings-based approach to calculate regulatory capital requirements for credit risk and an 

advanced measurement approach to calculate regulatory capital requirements for operational 

risk. The final rule will take effect on April 1, 2008. 

Disb1bution: 

FDIC-Supervised Banks {Commerdal and Savings) 

Suggested Routing: 

Chief Executive Officer 

Chief Financial Offic.ar 

Chief Risk Officer 

Related Topics: 

Basal II 

Risk-Based Capllal Rules 

12 CFR Part 325 

Attachments: 

Key Aspects DI lhe Anal Rule on Rlslt·Basad 

Capital Standards: Advanced Capital Adequacy 

Framework - Bas.el II 

Pinal Rule on Risk-Based Capital Standards: 

Advanced Capital Adequacy Frarnewant - Basel II 

Contacts: 

Highlights: 

The attached final rule: 

• Applies to banking organizations that (1) have 

consolidated assets equal to $250 billion or 

more. (2) have consolidated to~I on-balance 

sheet foreign exposures of $10 billion or more, 

(3) elect to use the rule, or (4} are subsidiaries of 

a bank or bank holding company that uses the 

rule. 

• Provides that a banking organization may be 

exempt from applying the final rule if its primary 

federal supervisor determines that the application 

of the final rule is not appropriate in light of the 

banking organization's asset size, level of 

complexity, risk profile, or scope of operations. 

Jason C. Cave, Associate Diractar, Capital Mp11cets • 

Bl'illlCh, at jcave@fdli:.ggy or (202) 898-3548, Applies to the determination of risk-based capital 

requirements for wholesale, retail, equity and 

securitization exposures. The rule also requires a 

bank to determine risk-based capital 

requirements for operational risk. 

Bobby R. Bean, Chief, Capital Markets Polley 

Section, at bbeanQfdlc.OQV or (202) 898-3575 · 

Note: 

FDIC flnanclal nstilulion lellln (Fils) may be 

accessed from the FDIC'I Web lillll at 

www,fdlc.aov/news/news/ljnanclal/2007 Andex,html. 

To receive FILI electronlc:ally, please visit 

hl!D:llwww fdic.aovfaboutJsubscrjoli.html. 

Paper copies c:l FDIC financial institution letters 

may be obtained through the FDIC's Pubic 

Information Center, 3501 Fam: Driva, Room E 

1002, Mington, VA 22226 (1-8TT-275-3342 or 

703-562-2200). 

• lnductes prudential safeguards to maintain 

sufficient capital in the banking system such as 

(1) provicfu,g that no bank can exit the third 

transitional floor period until the agencies publish 

a study finding no material deficiencies with the 

advanced approaches that cannot be addressed 

by existing tools, (2) maintaining the transitional 

floor period of at least three years, and (3) 

retaining the leverage ratio and prompt corrective 

action standards. 
Key Aspects of the Final Rule on Risk-Based Capital Standards: Advanced Capital 

Adequacy Framework- Basel II 

L Introduction 

The final rule is generally consistent with the advanced approaches outlined in the 

Basel Committee on Banking Supervision document International Convergence of 

Capital Measurement and Capital Standards: A Revised Framework. Co_mprehensive 

Version, published in June 2006 (Basel II framework, or framework). The final rule 

requires certain banks (core banks), and permits other banks (opt-in banks), to use the 

advanced internal ratings-based approach (AJRB) to calculate regulatory credit risk 

capital requirements and the advanced measurement approach {AMA) to calculate 

regulatory operational risk capital requirements. Both core and opt-in banks wi11 remain 

subject to the present agency rules for Prompt Corrective Action and tl:i.e leverage ratio. 

Specifically, the final rule sets forth the U.S. banking and thrift regulatory 

agencies' (Agencies) requirements for the U.S. implementation of the AIRB for assessing 

creclit risk capital charges and the AMA for assessing operational risk capital charges. 

The use of the AIRB and AMA (collectively,.thc Advanced Approaches) will be required 

for a core group oflarge and intemationa11:y active.U.S. banking organiz.ations (core 

banks) and allowed for other banking organizations that, on an opt-in basis, are able to 

qualify for the framework (opt-in banks). Core banks are banking organiz.ations with 

consolidated total assets (excluding assets held by an insurance underwriting subsidiary 

of a bank holding company) of $250 billion or more, or with consolidated total onbalance sheet foreign exposure of $10 billion or more. A bank must also apply the 

Advanced Approaches if it is a subsidiary of another bank or bank holding company that 

uses the Advanced Approaches, unless it is exempted by its primary federal supervisor 

from being required to use the Advanced Approaches. 

Under the final rule, a bank's on- and off-balance sheet exposures will be divided 

into four categories: wholesale, retail, securitization and equity. A bank must calculate 

for each wholesale and retail credit exposure or pool of credit exposures certain key risk 
• 

2 

inputs, which are descdbed later in this document These inputs, in conjunction with 

supervisory formulas descnoed in the rule, determine the risk-based capital requirement 

The final rule also contains a regulatory capital charge for operational risk. 

Operational risk is the risk of Joss resulting from inadequate or failed internal processes, 

people, and systems or from cx:tcmal events . 

The Basel II framework allows three options for calculating capital requirements, 

which includes the AIRB that is adopted in the attached final rule, a Foundation 

Approach, and a Standardized Approach. The Agencies arc currently developing a 

Notice of Proposed R.ulemaking (NPR) that would provide banks that are not subject to 

the Advanced Approaches framework with the option of adopting the Standardized 

Approach of the Basel II framework (Basel II Standardized NPR). The Basel II 

Standardized NPR wm replace the Base) IA notice of proposed rulemaking that was 

issued on December 26, 2006. 1 The Agencies will pose a question in the Basel II 

Standardized NPR whether core banking organizations should be allowed to adopt the 

Standardized Approach as an alternative. 

Il. Basel Il Final Rule 

A comprehensive description of the final rule, or all the changes made in response 

to comments on the Agencies' 2006 Advanced Approaches NPR, is beyond the scope of 

this document 2 The interested reader is referred to the Federal Register notice. The 

remainder of this document provides only a few highlights of the final rule. 

Pillar 1: Mlnlmum Risk-Based Capital Requirements 

U.S. banks and banking organizations are subject to a dual framework of capital 

regulation. A set of leverage requirements specifies the minimum amount of tier 1 

1 71 FR 77446 (December 26, 2006). 2 71 FR 55830 (September 25, 2006). 
3 

capital that banks and banking organizations must hold as a percentage ofbalance sheet 

assets. For insured banks. the leverage requirements are an integral component of the 

statutory framework of Prompt Corrective Action (PCA) mandated in the Federal Deposit 

Insurance Corporation Improvement Act of 1991 (FDICIA). 3 The leverage and PCA 

requirements are unaffected by this final rule. 

Risk-based capital requircmCDts complement the leverage requirements by 

requiring capital for risks that arc either not reflected on the balance sheet, or that pose 

materially more risk than the leverage requirements were designed to address. Current 

risk-based capital rules involve converting the notional amounts of off-balance sheet risks 

to on-balance sheet equivalents using defined conversion factors, and then requiring 

capital for the resulting on-balance sheet equivalents. and for all other balance-sheet 

items, using predefined risk buckets. Current rules also prcscnbe separate capital 

requirements for market risk, which apply to a small number of U.S. banks. 

Other risks facing banks, such as interest rate risk on exposures held outside the 

trading accol.lllt, liquidity risk, strategic or business risk, and reputational risk associated 

with off-balance sheet activities (for example, with certain asset-backed commercial 

paper conduits) arc not explicitly addressed either by the Advanced Approaches or by the 

current risk-based capital requirements. These risks will be addressed under the second 

pillar of the Basel II :framewor~supervisory review (Pillar 2), which is described later in 

this document 

Credit Risk. The final rule requires core banks to use the AIRB approach for 

determining risk-based capital requirements for credit risks. The AIRB approach requires 

banks to estimate certain key risk parameters for each· credit exposure or pool of 

exposures. Banks must then feed these risk parameters into predefined formulas 

(supervisory formulas). The supervisory formulas identify the amount of risk-weighted 

assets that are required for each exposure or pool of exposures. The amount of riskweighted assets is a function of the risk parameters input by the bank into the supervisory 

' Statutory PCA requirements apply only to msurcd depository institutions, not their corporate owners. 
4 

formulas. The minimum capital requirement is then, by definition. eight percent of the 

risk-weighted asset amount (an adjustment to the capital requirement based upon the 

level of the institution's loan loss reserves is dcscnbed later). 

The AIRB framework is broadly similar to the credit value-at-risk (VaR) 

approaches used by some banks as the basis for their internal assessment of the economic 

capital necessary to cover credit risk. It is common for a bank's internal credit risk 

models to consider a one-year loss horizon, and to focus on a high loss threshold 

confidence level. As with the internal credit V aR models used by banks, the output of the 

risk-based capital formulas in the AIRB framework is an estimate of the amount of credit 

losses over a one-year horizon that would only be exceeded a small percentage of the 

time. The Agencies• use of a one-year loss horizon is intended to balance the fact that 

banking book positions likely could not be easily or rapidly exited, with the possibility 

that a bank could attempt to ·cover credit losses by raising additional capital should the 

underlying credit problems manifest themselves gradually. The nominal confidence level 

of the A.IRB risk-based capital formulas (99 .9 percent) means that if all the assumptions 

in the AIRB supcIVisory model for credit risk were correct for a bank, there would be less 

than a 0.1 percent probability that credit losses at the bank in any year would exceed the 

AIRB risk-based capital requirement" 

Exp-osure al default (EAD). To calculate capital requirements for credit risk 

using the supervisory formulas, banks must estimate certain key risk inputs for each 

credit exposure or pool of exposures. The first key risk parameter banks must estimate is 

the exposure at default, or EAD. This is a dollar amount, and it is important because it is 

the amount against which capital will be held. The EAD of a credit exposure must at 

least equal the amount of the exposure that is carried on th~ balance sheet. For portions 

of an exposure that reside off balance sheet, the EAD is the bank's own estimate of the 

amount of the exposure that would likely be owed the bank if there were a default This 

4 Banks' internal economic capital models typically focus on measures of equity capital, whereas.the total 

regulatory capital measure underlying this proposal includes not only equity capital, but also certain debt 

and hybrid instruments, such as subordinated dcbl Thus, the 99.9 percent nominal coofidc:na: level 

embodied in the IRB framework is not directJy comparable to the nominal solvency standards underpinning 

banks' economic capital models. 
5 

contrasts with current rules: Instead of converting off-balance sheet amounts using 

predefined regulatory conversion factors, these amounts are converted based on each 

bank's own estimate of the appropriate conversion factor. 

Probability of default (PD). The second key risk parameter determining the 

capital requirement for a credit exposure is the probability of default. or PD. The PD is 

the bank's estimate of the probability the borrower will default over the next 12 months. 

It is intended to be a conservatively estimated '"through the cycle" average of default rates 

the credit exposure would be likely to experience during both expansionary and 

recessionary periods of economic activity. The rule gives banks significant flexioility as 

to bow they will estimate their PDs, but these estimates arc expected to be supported by 

historical data including default data from recession periods. 

Capital requirements under the rule will depend importantly on banks' PDs. 

These PDs, in tum, will depend on the way defaults are defined in the banks' databases. 

Thus, the definition of default is of :fundamental importance to the operation of the rule. 

In the final rule, the Agencies have changed the definition of default for wholesale credit 

exposures from that proposed in the NPR. 

1he Agencies have adopted a definition of de.fault for wholesale exposures in the 

final rule that is consistent wi~·the Basel I1 framework. In particular, the final rule bas 

deleted the NPR's requirement that default is triggered by a bank incurring a creditrelated loss of 5 percent or more of the exposure's initial canying value in connection 

with the sale of the exposure or the transfer of the exposure to the held-for-sale, 

available-for-sale, trading account. or other reporting category. Under the final rule, a 

bank's wholesale obligor is in default if: 

• The bank determines that the obligor is unlikely to pay its credit 

obligations to the bank in full, without recourse by the bank to actions 

such as realizing collateral (if held); or 

• The obligor is past due more than 90 days on any material credit 

obligation(s) to the bank. 
6 

In the preamble to the final rule, the Agencies provide a discussion of what may 

constitute an indication of an obligor' s unlikeliness to pay its credit obligations in. full. 

For retail exposure~ the final rule retains the proposed definition of default, 

which is consistent with the Basel II framework. However, the Agencies clarified that, 

subject to certain considerations, a foreign subsidiary of a U.S. bank may, in its 

consolidated risk-based capital calculations, use the applicable host jurisdiction definition 

of default for retail exposures of the foreign subsidiaIY in that jurisdiction. 

Loss given default (LGD). The third determinant.of the capital requirement is the 

loss given default or LGD. LGD is the bank's estimate of the credit loss as a percentage 

of exposure in the event the borrower defaults. LGD is especially important because the 

capital requirement is a straight line multiple of the LGD. For example, required capital 

for an exposure whose LGD is 20 percent W111 be exactly one half the amount that would 

be required if the LGD were 40 percent. Similarly, required capital would be zero if the 

LGD were zero. The LGD is expected to· include all material credit related losses 

including indirect expenses and an appropriate risk-adjusted discount rate for defaulted 

assets held in a workout-mode. It is also expected to reflect the loss experience hlcely to 

be realized during economic downturn conditions. 

Maturity (M). A bank must also calculate a maturity adjustment, or M, for each 

wholesale exposure. For wholesale exposures, other than repo-style transactions. eligibie 

margin loans, and certain over the counter (OTC) derivative contracts, M is the weightedaverage remaining maturity of the expected contractual cash flows from the exposure, 

using uncliscounted cash flows as weights. For repo-style transactions, eligible margin 

loans and certain OTC derivative contracts, M is the weighted-average remaining 

maturity of the individual transactions subject to a qualifying master netting agreement, 

with the transaction weight based on the transaction's notional amount For most 

exposures, M may be no greater than five years and no less than one year, however, for 

certain transactions with an original maturity of less than one year, M may be set as low 

as one day. 
7 

Expected loss (EL). A final determinant of required capital for a credit exposure 

or pool of exposures is the expected loss. or EL, defined as the product of EAD, PD and 

LGD. For example, consider a pool ofsubprime credit card loans with an EAD ofSlOO. 

The PD is 10 percent - in other words, $10 of cards per year are expected to default. on 

average. Toe LGD is 90 percent, so that the loss on the $10 of defaults is expected to be 

$9. The EL is then $100 multiplied by 0.10 multiplied by 0.90, that is, $9. EL can be 

interpreted as the amount of credit losses the lender expects to experience in the normal 

course of business, year in and year out. If the total EL for the bank, on all its exposures, 

is Jess than its allowance for loan and lease losses (~L), the excess ALLL is included 

in the bank's tier 2 capital (this credit is capped at 0.6 percent of credit risk-weighted 

assets). Conversely, iftbe total EL exceeds the ALLL, the excess EL is deducted from 

capital. half from tier 1 and half from tier 2. In this example, the EL that would be 

compared to the ALLL was a very substantial 9 percent of the exposure. The example is 

intended to illustrate that for subprime lenders or other lenders involved in high chargcofl: high margin businesses, tbe EL capital adjustment may be significant 

Definition of Securitiz.ation Exposures and Hedge Funds. Under the final rule, 

a traditional securitization is a transaction in which: 

• All or a portion of the credit risk of one or more underlying exposures is 

transferred to one .Qr more third parties other than through the use of credit 

derivatives or guarantees; 

• The credit risk associated with the underlying exposures has been 

scp~ted into at least two tranches reflecting different levels of seniority; 

• Perfonnancc of the securitization exposures depends upon the 

perfonnance of the underlying exposures; 

• All or substmtially all of the underlying exposures are financial exposures 

(such as loans, commitments, credit derivatives, guarantees, receivables, 

asset-backed secmities, mortgage-backed securities, other debt securities, 

or equity securities); 

• The underlying exposures are not owned by an operating company; 
8 

• The underlying exposures are not owned by a small business investment 

company; and 

• The underlying exposures are not owned by a firm an investment in which 

qualifies as i community development investment. 

The final rule also provides the primary federal supervisor of a bank with 

discretion to exclude from the definition of a traditional securitization those investment 

firms that exercise substantially ~ettered control over the size and composition of their 

assets, liabilities, and off-balance sheet transactions. The Agencies will consider a . 

number of factors in the exercise of this discretion, including the assessment of the 

investment firm's leverage, risk profile, and economic substance. This supervisory 

exclusion is intended to provide discretion to the primary federal supervisor to distinguish 

structured finance transactions, to which the securitization framework was designed to 

apply, from more flexi'ble investment firms such as many hedge funds and private equity 

funds. If the primary federal supervisor excludes an investment that has greater than 

immaterial leverage, the exposure will be risk weighted at 600 percent. 

Securitization Exposures. Securitlzation exposures are instruments in which 

there is a tranching of credit risk. Securitization exposures may include mortgage-backed 

securities, collateralized debt obligations, asset-baclccd commercial paper, certain types 

of loan participations, structured investment vehic1cs and hedge fund exposures. 

The final ru]e provides a hierarchy of approaches that must be used to determine 

the risk-based capital requirement for a securitizatioo exposure: the ratings-based 

approach (RBA), the intcmal assessment approach (IAA), and the supervisory formula 

approach (SF A). Under the R,BA, banks determine risk weights for securitiz.ation 

exposures based on the external ratings assigned to each exposure by a nationally 

recognized statistical rating organization (NRSRO). The final ru]e provides a matrix that 

assigns a risk weight to each external rating depending upon the exposures' seniority and 

the amount of granularity in the securitization's llllderlying asset pool For the IAA, the 

bank will calculate its risk-based capital requirement for a securitization exposure to an 
9 

asset-backed commercial paper program by mapping the bank's internal credit 

assessment of the asset-backed commercial paper securitizat:ion· exposure to an equivalent 

NRSRO credit rating. · Under the SF A. the bank will apply a formula specified in the final 

rule for securitiz.ation exposures. 

Equity Exposures. Equity exposures include publicly traded and non-publicly 

traded stock as well as instruments (other than securitization exposures) in which the 

return on the instrument is based on the perfonnance of an instrument representing a 

direct or direct ownership interest in a company. 

The final rule provides two approaches to ca1culate risk-based capital for equity 

exposures: the simple risk-weight approach (SRWA) and the intcmal models approach 

(IMA). The SRWA generally applies a 300 percent risk weight to public1y traded equity 

exposures and a 400 percent risk weight to non-publicly traded equity exposures. The 

final rule also provides for risk weights between zero percent and 100 percent for certain 

equity exposures, such as equity exposures to a Federal Reserve Banlc. Federal Home 

Loan B~ or community development corporations. In addition, the SRW A allows a 

portion of"non-material" equity exposures, up to 10 percent of tier 1 capital plus tier 2 

capital, to receive a 100 percent risk weight 

The IMA allows a banlqo develop an internal model to produce an estimate of 

potential loss that is not less than an estimate produced by a Value at Risk methodology 

using specified parameters. However, a bank generally may not assign a risk weight of 

less than 200 percent to publicly traded equity exposures and 300 percent to non-publicly 

traded equity exposures; In addition, if the bank uses the IMA, it is not eligible to assign 

a preferential risk weight to any "non-material" JX)rtion of its equity exposure. A bank 

may not l!pply the IMA to equity exposures that receive a zero, 20, or 100 percent risk 

weight under the SRW A. 

Operational Risk. The final rule also provides for the use of the AMA for 

determining risk-based capital requirements for operational risk. Operational risk is 
10 

defined as the risk of ]oss resulting from inadequate or failed intema1 processes, people, 

and systems or from external events. This definition a1so includes legal risk - which is 

the risk ofloss (including litigation costs, settlements, and regulatory fines) resulting 

from the failure of the bank to comply with laws, regulations, prudent ethical standards, 

and contractua1 obligations in any aspect of the bank's business -but excludes strategic 

and reputational risks. 

Under the AMA, a bank will use its internal operational risk management systems 

and processes to assess its exposure to operational risk. Given the complexities involved 

in measuring operational risk, the AMA provides banks with substantial flexibility and, 

therefore, does not require a bank to use specific methodologies or distnbution 

assumptions. Nevertheless, a bank using the AMA must demonstrate to the satisfaction 

of its primaiy federal supervisor that its systems for managing and measuring operationa1 

risk meet established standards, including producing an estimate of operationatrisk 

exposure that meets a one-year, 99.91h percentile confidence interval. A bank's estimate 

of operational risk exposure includes both expected operational loss (EOL) and 

unexpected operational loss (UOL) and forms the basis of the bank's risk-based capital 

requirement for operational risk. 

The AMA allows a bank to base its risk-based capit.al requirement for operational 

risk on UOL alone if the bank can demonstrate to the satisfaction of its primary federal 

supervisor tnat the bank has eligi"ble operational risk offsets, such as certain operational 

risk reserves, that equal or exceed the bank's EOL. To the extent that eligible operational 

risk offsets are less than the EOL, the bank's risk-based capital requirement for 

operational risk must incorporate the shortfall. 

Markl!t Risk. The Agencies arc finalizing the ru]emaking that would change 

certain aspects of the Agencies' market risk capital rules. The proposal will improve risk 

sensitivity ·and enhance the disclosure of qualitative and quantitative factors. 
11 

Total Capital Requirement. The total capital requirement for a bank subject to 

this final rule includes the amount of capital determined by the application of the AIRB 

framework and the amount determined for operational risk under the AMA formulas 

(and. for banks subject to the market risk capital standards, a market risk capital charge). 

The formulas derive an actual dollar amount for a capital requirement 

Accordingly, in order to calculate capital ratios for regulatory pwposes, the Advanced 

Approaches transform this direct capital requirement into a risk-weighted assets 

equivalent This is done by multiplying the dollar amount of the calculated capital charge 

by a 12.5 conversion factor - the reciprocal of the 8 percent minimum capital 

requirement 

Pillar 2: Supervision 

The second pillar of the Basel II framework. supervisory review, outlines several 

principles highlighting the need for banks to assess their capital adequacy positions 

relative to risk, and the need for supervisors to review and take appropriate actions in 

response to those assessments, such as requiring additional buffer capital gjvcn the risk 

profile of the institution. While the final rule primarily focuses on the first pillar, 

minimum capital requirements, there are significant provisions within the rule that 

require supervisory review. 

The Agencies intend that banks adopting the Advanced Approaches possess the 

highest level and quality of internal risk measurement and management systems. Not 

only must these banks develop and maintain qualifying loss and default data for 

portfolios subject to the AIRB framework, but those measurement systems must be 

subject to strict internal control processes, stress testing and validation programs, 

independent review and oversight, and other qualitative standards. 
12 

Similar standards are required for the measurement and management of 

operational risk. Oearly, a capital standard is not the sole or complete solution to address 

operational risks. As descn"bed in the final rule, the AMA for determining a capital 

charge for operational risk will depend heavily upon supervisory judgment. Active 

federal supervision, independent auditors, effective internal controls and strong bank 

management are obvious key components. 

In February 2007, the Agencies issued proposed guidance for a bank"s internal 

capital adequacy assessment process {ICAAP) and the process for a comprehensive 

supervisory assessment of capital adequacy.5 A bank's primary federal supervisor will 

assess the bank's overall capital adequacy and will take into account a bank's ICAAP, its 

compliance with the minimum capital requir~ents set forth in this rule, and all other 

relevant information. The primary federal supervisor will require a bank under its 

jurisdiction to increase its capital levels if the supervisor determines that current levels 

are deficient or some element of the bank's business practices suggests the need for more 

capital. 1n addition, a primary federal supervisor may, under its enforcement authority, 

require a bank to modify or enhance risk management and internal control authority, or 

reduce risk exposures, or take any other action as deemed necessary to address identified 

supervisory concerns. 

Pillar 3: Disclosures 

Market discipline is a key component of the Basel II framework. Under the third 

pillar, disclosure requirements are established to allow market participants to assess key 

information about an institution's risk profile and its associated level of capital, provide 

for comparability of risk elements. and at the same time allow bank management 

adequate flexibility. Increased disclosures, especially regarding a bank's use of the AIRB 

approach for credit risk and the AMA for operational risk, are intended to allow an 

institution's private sector stakeholders to more fully evaluate the institution's financial 

5 72 FR 9189, February 28, 2007. 
13 

condition, including its capital adequacy. This greater transparency is critical in order to 

. foster the development of a significant amount of market discipline. 

The fina] rule requires the top-tier legal entity at the global, consolidated level -

either the top-tier banking holding company or deposit-Ory institution. if not under a 

holding company structure - to make certain mandatory disclosures on a quarterly basis. 

The final rule also requires one or more senior officers of the bank to attest that the 

disclosures meet the Agencies' requirements. 

In addition to disclosing risk-based capital ratios and their components, the 

reporting entity must also report other information that is designed to enable market 

participants to better evaluate the bank's capital structure, risk exposure, risk 

management performance, and capital adequacy. To further enhance transparency, the 

reporting entity is encouraged to place all disclosures made over the last three years in a 

single location on the bank's public Web site. 

the final rule requires each reporting entity to have a formal disclosure policy 

that is approved by the board of directors. This policy must provide for effective,internal 

controls and disclosure controls and procedures to ensure that appropriate verification of 

the disclosure takes place. 

Separately from this final rule, the Agencies will require insured depository 

institutions (IDls) and holding companies to report certain supporting details of their riskbased capital calculations on their quarterly reports of financial condition and income 

filed with the federal banking agencies. Finally, separately from this final rule, the 

Agencies will collect on a confidential basis from each IDI and holding company 

adopting the new framework, more detailed data supporting the capital calculations for 

each type of exposure. Such information wi11 be shared among the Agencies and used for 

purposes of benchmarking, analyzing trends and promoting consistency in the 

implementation of these proposals. 
14 

A bank's material noncompliance with the qualification requirements is an 

important factor in market participants' assessments of a bank's risk profile. Under the 

final rule, a primary federal supervisor may require public disclosure of material 

noncompliance with the qualification requirements. 

Domestic Implementation and Timeline 

Both core and opt-in banks will be required to comply with all qualification 

standards concerning the internal ratings systems used to measure credit and operational 

risk exposures and will be subject to supervisory requirements for risk management 

before being able to apply the final rule for regulatory capital calculation purposes. 

Also, under the final rule, all U.S. institutions will continue to calculate the numerator of 

the regulatory risk-based capital ratios in a manner substantially similar to the way it is 

currently calculated. Except for the adjustment based on the difference between EL and 

ALLL descnbed above, and a few new capital deductions required for advanced banks, 

the clements of capital will be unchanged under the final IU.le. 

In addition, notwithstanding the presumptive requirement that all IDI subsidiaries 

adopt the Advanced Approaches if their holding company is adopting the Advanced 

Approaches, an IDI may request an exemption from its primary federal supervisor from 

the requirement to adopt the Basel II framework. The primary federal supervisor may 

grant such a request based cin factors such as the size, complexity or risk profile of the 

IDI. Any such requests would be carefully considered to ensure that banking 

organizations are not .. cbeny picking" the frameworlc by requesting exemptions for the 

purpose of selectively applying capital regimes across ID!s in order to minimize 

regulatory capital requirements. 

As indicated earlier, all insured banks will continue to comply with the existing 

leverage ratio requirements under existing PCA legislation and implementing regulations. 

Specifically, to be considered well-capitalized under PCA, a bank must have at least a 10 

percent total risk-based capital ratio, a 6 percent tier l risk-based capital ratio, and a 5 
15 

percent ]evcragc ratio. The leverage ratio is the ratio of Tier 1 capital to average tota1 

assets. These and other PCA categories will not change. 

Under the final rule, all banks will need to submit an implementation plan for 

approval to their primary supervisors and successfully complete a parallel run of at least 

four consecutive quarters before they will be allowed to apply the final rule for purposes 

of determining minimum regu]atory capital requirements. During the parallel run. the 

bank will remain subject to the general risk-based capital rules, including ratios required 

for PCA, but will also be required to calculate its capital ratios using the advanced 

approaches included in the final rule. 

The bank's primary federal supervisor will have responsibility for determining the 

bank's readiness to apply an Advanced Approach and is ultimately responsible, after 

consultation with other relevant supervisors, for determining whether the institution 

satisfies the qualifying criteria (or the AIRB and AMA. The Ag.encies recognize that 

interagency consistency in implementing the Advanced Approaches will be important to 

the ultimate success of any final standards to be implemented and they arc developing a 

uniform set of validation standards and procedures that will ensure consistency~ 

The bank's primary federal supervisor will notify the bank of the date that it may 

begin using the Advanced Appro~es for determining risk-based capital requirements. 

However, the final rule imposes three transitional floor periods that limit the amount by 

which capital may decline under the Advanced Approaches of the final rule relative to the 

general risk-based capital rules. The bank's primary federal supervisor will inform the 

bank when it may move from one transitional floor period to the next, and, provided the 

Agencies release an interagency study finding no material deficiencies with the 

framework. that cannot be addressed with then-existing tools, when it may exit the final 

transitional floor period. 

During the initial transitional floor period for a core or opt-in bank, the bank will 

be required to calculate its risk-weighted assets under the general risk-based capital rules 
16 

and multiply by the appropriate transitional floor percentage provided in Table 1. The 

resulting .. floor-adjusted" risk-weighted assets will then be used as the denominator for 

purposes of determining risk-based capital ratios using the general risk-based capital 

rules. The resulting capital ratios will be compared against the capital ratios determined 

under the final rule, with the lower of the ratios binding for risk-based capital and PCA 

pm-poses. Banks that do not opt-in to the final rule at the earliest possible date may use 

the general risk-based capital rules or the Standardized Approach for their transitional 

floor calculations. 

Table l 

Transitional Floor Period Transitional Floor Percentaee 

First Floor Period 95 Percent 

Second Floor Period 90 Percent 

Third Floor Period 85 Percent 

For core banks, and banks that opt in to the final rule at the earliest possible date, 

the transitional floors will be determined using the general risk-based capital rules 

without consideration of any changes to the risk-based capital rules that may be enacted 

by the Standardized Approach. 

Interagency Study 

The Agencies ~ve implemented an important safeguard in the final rule. Under 

the final rule, the Agencies will jointly evaluate the eff cctiveness of the new capital 

framework. The Agencies will issue a series of annual reports during the transition 

period that will provide timely and relevant infonnation on the implementation of the 

Advanced Approaches. In addition, after the end of the second transition year (after 

2010), the Agencies will publish a study (interagency study) that will evaluate the 

Advanced Approaches to determine if there are any material deficiencies. For any 

primary federal supervisor to authorize any bank to exit the third transitional floor period, 

the interagency study must detennine that there are no such material deficiencies that 

cannot be addressed by then-existing tools, or, if such deficiencies are found. they must 

be first remedied by changes to regulation. Notwithstanding the preceding sentence, a 

primary federal supervisor that disagrees with the finding of material deficiency may not 
17 

authorize a bank under its jurisdiction to exit the third transitional floor period unless it 

first provides a public report explain.mg its reasoning. 
Friday, 

December 7, 2007 

Part II 

Department of the Treasury 

Office of the C.Omptrollcr of the 

Currency 

12 CFR Part 3 

Federal Reserve System 

12 CFR Parts 208 and 225 

Federal Deposit Insurance 

Corporation 

12 CFR Part 32.5 

Department of the Treasury 

Office of Thrift Supervision 

12 CFR Parts 559, 560, 563, and 567 

Risk-Based Capital Standards: Advanced 

Capital Adequacy Framework-Basel II; 

Final Rule 
Financial Institution Letters 

Risk-Based Capital 

TO: - CHIEF EXECUTIVE OFFICER 

SUBJECT: Calculation of the Potential Future Exposure of Derivatives 

FIL-59-95 

September 8, 1995 

The FOIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have jointly 

amended the risk-based capital calculations used to determine the potential future exposure of 

derivative contracts. The amendment (1) incorporates a broader range of off-balance-sheet contracts 

into the calculation; (2) reflects the higher risk exposure of certain types of derivative transactions and 

contracts with relatively long maturities; and (3) further encourages the use Of bilateral netting 

agreements, which reduce credit risk. Attached is a copy of the final rule, which is substantially the 

same as a proposaJ Issued for public comment last year. 

Under the final rule, the •conversion factors• used In calculating potential future exposure will be 

changed to reflect the higher risks of "long-dated• Interest rate and exchange rate contracts (i.e., those 

with remaining maturities of frve years or more). Conversion factors for derivative contracts related to 

equities, precious metals and other commodities will be revised to better reflect the volatility of the 

underlying indices or prices. Institutions also win be permitted to recognize a reduction In potential future 

credit exposure for this wider array of transactions now eligible for inclusion in quarifying bilateral netting 

arrangements. 

The final rule will become effective October 1, 1995, for use starting with the Calf Report (Report of 

Condition and Income) for the fourth quarter of the year. For more information, please contact one of 

the FDIC officials listed on Page 461]0 of the attached Federal Register notice. 

Nicholas J. Ketcha Jr. 

Acting Director 

Attachment: PDF Format (193 kb, PDF help or hard copy). HTML Format 

Distribution: FDIC-Supervised Banks (Commercial and Savings) 

Last Updated 07/16'1999 
----- --- ---- -- -

Tuesday 

Sep_tember 5, 1995 

Part IV 

Department of the Treasury 

Office of the Comptroller of the Currency 

12 CFR Part 3 

Federal Reserve System 

12 CFR Parts 208 and 225 

Federal- Deposit Insurance 

Corporation 

12 CFR Part 325 

Risk-Based Capital Standards: Derivative 

Transactions; Final Rule 

46169 
JERRY MORAN 

FIRST DISTRICT 

ICANSAS 

COMMITTEE ON 

AGRICULTURE 

SU8CCMWTTEE --ON GENERAL FARM 

COMMODITIES AND RISC MANAGEMENT 

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

COMMITTEE ON 

VETERANS' AFFAIRS 

SIGN \JP FOR EMAIL UPDATES: 

WWW.JERRYMORAN.HOUSE.GOV 

Ms. Shelia C. Bair 

Chairman 

~ongre5'.s of tfJt ltnittb ~tate5' 

~oust of lltpre.s'entatibts 

Rlasbm«ton, i&C 

September 19, 2008 

FDIC 

Federal Deposit Insurance Corporation 

550 17th Street. NW 

SEP 2 9 2008 

2202 RAYBURN HOUSE OFFICE 81JTLOING WASHINGTON, 0C 2051!>-1601 

12021 225--%715 

FAX C2D2l 225-5124 

IIISTNC'T Dl'l'ICES: 

1200 MAIN STREET 

SU!Tl:CIZ 

l'.O.II0X2G 

HAYS, KS 17101 020 

171151 ID-&01 FAX 1785112Pr.179l 

ONE NOlllll MAIN 

SUITE525 

P.O. BOX 1121 

HUTCHINSON. KS 1751>4-l 128 (l20) 11&-41131 

FAX(&21111&5-G&O . ..-

119WESTIROH 

surn:sm 

P .o. l0X 7118 

1NA. ltS 117402-o761 

(7851~2 

(785) 127-4957 

Washington. D.C. 20429 OFFICE OF LEGISLATIVE AFFAIRS 

Dear Ms. Bair: 

I am writing to inquire about the requirements under the Federal Deposit Insurance 

Corporation capital rules for bilateral over-the-counter (OTC) interest rate swaps versus a cleared 

futures contract. 

The recent financial market tunnoil related to the credit crisis has severely affected US 

financial institutions and their capital levels. Bilateral credit risk related to OTC swaps held by 

US financial institutions has also been an issue of increased concern. If available, please provide 

an estimate of the notional amount and maturity profile of bilateral OTC interest swaps held by 

the financial institutions subject to your jurisdiction as of the most recent reporting period. It 

would be helpful to know how your agency collects this information and whether sucq. 

information is readily available to the public. 

Your Agency has capital rules the financial institutions subject to your jurisdiction must 

follow. It is my understanding that under Basel I and II capital rules a bilateral OTC interest rate 

swap held by a financial institution is considered to be higher risk than a cleared futures contract. 

As such. financial institutions subject to Basel I and I1 capital rules are required to hold more 

capital against their bilateral OTC interest swaps than the institutions would be required to hold 

if their position were a futures contract which was cleared by a clearinghouse. 

1 would like to know whether your Agency's capital rules are consistent with the Basel I 

and 11 capital rules on the treatment of bilateral OTC interest rate swaps versus cleared futures 

contracts. Please describe how your Agency's capital rules address the counterparty credit risk 

for bilateral OTC interest rate swaps versus cleared futures contracts as well as how your capital 

rules distinguish between OTC swaps of different maturity profiles. In your response, please 

identify the specific regulation(s) that address this issue. 
In addition, please identify and attach to your response and official or informal guidance 

your Agency has issued addressing the capital treatment of bilateral OTC interest rate swaps and 

cleared futures contracts. Please discuss in your response what step~ your Agency has taken, or 

is in the process of taking, to make financial institutions aware of this capital treatment. Finally, 

I would like you to identify Agency staff members(s) who are subject matter experts for this area 

and their respective contact infonnation. 

Very Truly Y oui:s, 

Jeny Moran 

JM:int 
FEDERAL DEPOSTT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Henry A. Waxman 

HollSe ofRcpresentatives 

Washington, D.C. 20515 

Dear Congressman Waxman: 

November 4, 2008 

Thank you for your Jetter regarding the Federal Deposit Insurance Corporation's 

need for office space in Southern California We arc in the process of acquiring leased 

space for a West Coast Temporary Satellite Office {WCTSO). lbis office will serve as a 

temporary satellite operation for our resolution and receivership function that is based in 

our Dall~ Regional Office. 

The WCTSO will handle the management and liquidation of receivership assets 

from failed banks and will be staffed by approximately 300-600 non-permanent 

employees and contractors. The FDIC requires approximately 200,000 square feet of 

space for a lease term of three to five years. This temporary office will be closed when 

work is completed. 

The FDIC is conducting a lease competition in accordance with our leasing policy 

and we are nearing completion of the competitive process. Several landlords in the Los 

Angeles and Orange County areas identified by our national broker have submitted 

proposals. An evaluation team will recommend the offer that is determined to be the best 

value for the FDIC, considering mission objectives, price, and other qualitative factors. 

Subsequent to completion of the competition, a business case will be presented to 

the FDIC Board of Directors for site selection approval. After Board approval, the FDIC 

will announce the selection decision. 

I appreciate your interest in this matter. If you have further questions or concerns, 

please contact me at (202) 898-6794 or Eric Spitler, Director of the Office of Legislative 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
OCT 17 2e0a 17:15 FR CONGRESSMAN WAXMAN LA3236550502 TO 120299 .,... 83745 .... _, __ .,._ W-DCN~ ,r.,,Ja,,,#rl 

l.aJ-C9'Wf'f$"-

~ ...... ,....i=-,.,... S.,.,.11111 

1,..&...a&.&.CA......,.,~ 

IIZ>lll:1-1&'1 ..,.~- 1,1101....-

!ArA-~~ ~== 

Cougresg of tfJt llnittb ~tatrs 

J)ouie of ~rnrnt1tibt1 

&tls1,ington, JaC 20515--0530 

HENKY A. WAXMAN 

3l1rM Cll.'1 .. t:,. C/wfoflNIA 

Ocrober 17, lOOR 

FDIC 

P.02 

'Mr. faic Spitl•r 

Ilirector, Office of Legidative Affain 

Federal Deposit Insunnce CuT}IOTation 

si;o Seventeenth Street. NW, Room 607& 

Wa.-.hing1on, D.C. 20429-0002 

OCT 2 O 2008 

OFFICE OF LEGISLATIVE AFFAIRS 

Dear Mr. Spitler. 

l l1l1l writing on 1.ll".half of Los AnAeles May,:ir, Antonio Vill:a:aigosa and Ci.ty 

Couneilmember Dennis Z:inc. Both elected o.ffici.ds rontadcd my office regarili ng their strong 

support for tn FDIC p~~c of 11.pproximslely 600 t.mployccs in tht- Wll!Utt ('cokr Puk tn 

Woodland Hills., California. I hn,: cncl<1~d their lW~pondcnce f"or your n::vinv. 

1 would appreciate th~ FDIC ~'ring Mayor 'Villa1.l!igosa and Councihnt:1ubr:r 7-lnc •~ 

corrc-spondenc~ full 3u.l f..ir cons1der.i.tion cor:i.sistenl with applica.ble laws, rult$, and regulations. 

TbSJJk you £01 ynur time and usist:lllce in lht,; ,natter. J1!eose feel free 11.1 c:omactmy 

Dutnct Director, Lisa P;nto at (323_) 65 l-10,10 wi1~ ttny questions or conce,m 

With kind ?t:!!Blrl.o;, J am 

TIAW:mc 

r-.nclosures 

Silll.-cre1y, 

HENRY A. W,t,.XMAN 

Member ofCc.mgress 
OCT 17 2008 17:15 FR CONGR ESSMAN WAXMAN LA3236550502 TO 12028983745 

• 

. 

ANTON10 R. V11.tARAIGOSA 

J.(.,.vra. 

Octot..« 16. 2008 

Tl P:'I Honorable Shmla C. Bair 

Choilwoman and Member'$ of the i:«oard of Dires;mrs 

Fader-di OAposit Insurance COrpor-,:1liun 

!->!"i0-17th st, NW, Room MEH>020 

W;:izhlngton, DC ?0429 

Dear Chailwom:in Bait .;:,nd Membc~ of the Boarrl at Director~ 

I am writing to rcque&t your SUl'\port for a deccslon to lovtl~ a new te9ional offlCI! or lhe Federal 

Deposit Jni:urance Cnrporation (FDIC} in the I NR prol)erty loe:ited ln Woodland Hnls, C31ifomla. 

It is my underet:indlng yi;,11 are looking tor a sit!! !Ml has 200.000 squ31"9 feet crrid is capable r:I 

~ing appro)(imat&ly 600 employees. Yuu also need to fs&t track the permitfing raqulrem1ml 

In ordd tn Oc:a.JPY tna space by the and of tois year. 

)"he LNR sill! is perfectly suilad for II~ FOIC. ll h:is the raqutred i;pace: Is easily 3cce;sJ~ 

hnlh by freeway ::md by pubfic transpartation; le in the ~itft d the San F emando Vaftay, wi1h 

one at Southam Cc1llfnmia'~ ~ &ducaled worl--foroes: ~ In tlo~e proilmily lo several financial 

and lnsunmc!! institutions including within reet of the U.S. SankmJJtcy Court 

k. Mayor, I am also able to ~t trad( our μfl!l'Tnitting procse& to IT189t your deadlines .ind to offer 

economic incentlve!i suci, as w-c1ter and power discounts.. 

UnfOl'tlJnafAly, I have only now been made aWBre ot your pendiny decision. I woukI reqlJ9$t llli:lt 

the City hove an opponunily to ~~ef'lt ie b9it case to you befure ony daci~ion Is reached. 

T"'-trrlc you for your consideration. 

, ..... C 

ONIO 

Mayor 

AAV jhc 

Cc: Me1nhF:rs of this Lo= Angel&!: Co~•essional Deleg.:ilion 

~OD },loat11 ~•uur. l-iTREtT • L<,S A1<CH1:, c~l.lfOUII• '10()12 

~• rto1u1<c 12U) ?,S o,oo • Fu· i'-1.:1) 979•07H 

I.I.I~ II• \h ~OlQ'~,:.1,11 \ ,'.,t<, 

P.03 
OCT 17 2008 17:15 FR CONGRESSMAN WAXMAN LA3236550502 TO 12028993745 

- IJ)OSl:,t;. 

tfNlf,Al4, 

:IM• "-"""11'""' "-'"old 

t..--.....ic.CA!IIID'll 

a121..w,,a,; 

p11)--F111t 

,co u~ .,_, 

Oct0btr 8, lOOS 

(~~ 

.~ 

(;ongrec£mall HmryWitxman 

2204 Rnybum H.O.J3. 

Washington, DC 2051S 

Council:IIAI\. 

Dennu. P. 1in.e 

lhitd!Mtria 

,,..,,. ....... ,,,.... -•,Ql'l~I 

11'111'151Cld: 

!1'1-~ll!l•n 

'TCll (1111 -~ 

RECEIVED 

OCT I 4 2003 

HJ.1;y ~ W.QJMn. M.C. 

Di:llih.'l Olliul 

I am writill,g to c . ort ~ FnTC establishing a pre:.ence with 600 jobs in Warner Center Park xn 

Woodland · D.lifomia. This location is U! both of om distrlcti .we, Will benefit the economy 

and qu~ty of life for beth of ,.111r constihl.cnU. 

um.~ Corporation, 5700 C:an.oga Avenue Ul Woodl:md Hi.lll- ~ the 200.000 s4uare ftet 

of of.fie~ spao~ :lVllib.ble to llcc1.uM,nd1te the Y!J!C and it is fre~way dose with an a.bund:mce o! 

bow;ing aVDilAbla in the area. LNR has proposed to offer :a. generuui, ,.-.nt 1nd TI paclcnga. 

I will diligentlyworkwith your 11~1Tto keep thu unpottant ~c:onomic u1lera;t in our dlstrii;t 

rlltbu th.on :.ee it slip 2.w2.y to Onmge County or Burbank. PJ.eue contilct Mr. Ken O'Neil of 

T .NR. l'ropcrty Ccnporation u (818) 206-3013. For my a:iri!lcattce 1n>m my ufficc plca.,c contnct 

my Chief ofStD.ff. OiffRuffat {213} 473-?00J. 

TW7..cdma 

P.04 

** TOTAL PAGE.04 ** 
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Joe Baca 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Baca: 

November 6, 2008 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

need for office space in Southern California. We are in the process of acquiring leased 

space for a West Coast Temporary Satellite Office (WCTSO). This office will serve as a 

temporary satellite operation for our resolution and receivership function that is based in 

our Dallas Regional Office. 

The WCTSO will handle the management and liquidation ofreceivership assets 

from failed banks and will be staffed by approximately 300-600 non-permanent 

employees and contractors. The FDIC requires approximately 200,000 square feet of 

space for a lease term of three to five years. This temporary office will be closed when 

work is completed. 

The FDIC is conducting a lease competition in accordance with our leasing policy 

and we are nearing completion of the competitive process. Several landlords in the Los 

Angeles and Orange County areas identified by our national broker have submitted 

proposals. An evaluation team will recommend the offer that is determined to be the best 

value for the FDIC, considering mission objectives, price, and other qualitative•factors. 

Subsequent to completion of the competition, a business case will be presented to 

the FDIC Board of Directors for site selection approval. After Board approval, the FDIC 

will announce the selection decision. 

I appreciate your interest in this matter. If you have further questions or concerns, 

please contact me at (202) 898-6794 ·or Eric Spitler, Director of the Office of Legislative 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
. , 

10/29/2008 16:54 2022259671 BACA 

JOE BACA 

w..-.n,..., o,.r.,,. 

15.lTl,~~ftl ... - . ,...:,,MQfo,,. DC. .2Mt'i.()'IL1 

"'-cr.-: 00:, ,,s.,,n, i:..,,. 120:ll ~!I" I 

f. • ..u.-.te-«!Jo•.cl4'-.......,c:ro1.:.c.. 

1),:-,,cr Q,r,.( 

20: ~r,ils-i.i,:~, o; 

SM.. Iii--. CA. 9'All1 r......-•lfC.OIU~1U:;,:!l 

r,.x- l!!"J!t IIU-6!t!II: 

Cfut11grtss nf tqe l'lnift~ §fairs 

-iqnusJ? nf 1Rtprtsr11tatit1t5 

October 28. 2008 

Ms. Sheila Bair 

Cha;r, Board of Directors 

·r-cder.il Di:pt.-i.·it lnsurance Co:-pora.tion 

550 17111 Street, NW. Room 6028 

Washington, DC 20429 

Ms. Bttlr. 

PAGE e:ue2 

Lf\o&- 537 

r..-..:.~-~. 5.....- ...,.,.,., .. ,... [\,,""'..-... .,.. c,-.r...,,.,,.:. 

t>---..:,, .. ~..,,..fW\, ~J.llf"-& ..... 

htAII- S~ C'?v..,,.,..~ 

NAYl'"l.t .lt!~O-JOC:ft ~ 

CAUa>.U: 

~•-,r~11• . .,_,,,..,< CA:CuC 

. c. ..... 

r-.. ... fP. ,.-".__< F~F r-,111 \~~-'-': -'•lt!,..A 

? tr .. ••t, ....-:•. Ct~-,,:•."~-._,,~ 11 '"'-

r wri1e in regards to th~ FDlC's recent de-dsion lo place a new office in lrvine. Califo:-nia. 

rcsponsiblt! for the liquhlntion ,Jf lruubled !:,:mk and ihrift a..,;se1s. 

As you know. !hl· Jnland Empire, and in p:irticular San Bernnrdino C'ounty. which~ 

Tl!~sent in Congreu, has been ,me uf the har-Jr::s\ hit. :rrcas in th~ nation during lh: 

current foreclosure crisis. This past September. one out of every HJJ homci; ir. S:in 

Bernardino County was foc:ing fortclosure. In neighboring Rivcn.iC:c C0un~y, one out of 

t-v~ry 90 homes faced foreclosure. Currently thcs:: cllunties ra,,k- linh in tht- naLion in 

overall rate~ of fon:clu$1.m:. Given the devastating i.mpa.c1 thcs~ foroclo:mrcs nave hnd on 

the econonit well being of lnland families end communi1ics. J urge )Ou to rcvcr~c the 

FDIC-s recent decision to place a new office in Irvine . .1od inslc:.\d considc:-r San 

Bernardino County as :m altema1c Jncntion_. 

A.'J I.he Lr:msport!l.tion hub of Caliiornia. l an ccinlidenl )'l~U will find lhe Inland Empire 

has the airport and freeway ~pnbiliry necessary tr, incc:1 y1.,ur needs. Th,.:: ev::lildhtlity of 

skilled labor il!lU :ifforcl::iblc: office ~pace: sho11lcl a.l:;r.) :nuke S1m_.Bcmardi.?1n Cuunly an 

attr.ictive lu~ale for any r.ew FrnC: offic!:. But mns1 impNtan1ly, .as one 1,f the a.rt:is nf 

the nation mo~t dcva!itated by the: tt.l'!Tcnt foreclosure crisis, the Inland rtg.ion i!I in 

desper.,te need of this dir::ct assistsnci: in purchasing nnd mlillaging illiquid ,L--.'iClil • 

Thank you fot your at1cntior. to thi!; rcque!.l. PlcaSt: con!lJcl Mike Trujillo at rny S.m 

I3cm:irdino office 3.l 909-&85-2222 with auy further que~iiom; or concerns yo,J ~'Tl3Y hzvc. 

Sincerely. 

JOE BACA, Ccmgres:~man 

43"' Congress1on11I Districl 

,.....,,.IPC itA n,..,,:,cJa:i I flSAI' 

.... 9'-·• 

FDIC 

OCT 2 9 2008 

. OFFICE OF LEGISLATfVE AFFAIRS 
! ; ,,-· ,I""' JI. .... <!'.. •-:: , ... - . ,. - ~ ''1 -• ,-. ..a.;; : ... ~ ,.. 

8 FEDERAL DEPOSIT INSU~E CORPORATION, wastilngton, oc 20429 

SHEILA C. BAIR 

CHAIRMAN November 6, 2008 

Honorable Ken Calvert 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Calvert: 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

need for office space in Southern California. We are in the process of acquiring leased 

space for a West Coast Temporary Satellite Office (WCTSO). This office will serve as a 

temporary satellite operation for our resolution and receivership function that is based in 

our Dallas Regional Office. 

The WCTSO will handle the management and liquidation of receivership assets 

from failed banks and will be staffed by approximately 300-600 non-permanent 

employees and contractors. The FDIC reqttjres approximately 200,000 square feet of 

space for a lease tenn of three to five years. This temporary office will be closed when 

work is completed. 

The FDIC is conducting a lease competition in accordance with our leasing policy 

and we are' nearing completion of the competitive process. Several landlords in the Los 

Angeles and Orange County areas identified by our national broker have submitted 

proposals. An evaluation team will recommend the offer that is determined to be the best 

value for the FDIC. considering mission objectives, price, and other qualitative factors. 

Subsequent to completion of the competition, a business case will be presented to 

the FDIC Board of Directors for site selection approval. After Board approval. the FDIC 

will announce the selection decision. 

I appreciate your interest in this matter. If you have further questions or concerns, 

please contact me at (202) 898-6794 or Eric Spitler, Director of the Office of Legislative 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
'·QCongress of tbt 1Mnitt't1 ~tates 

DU'bington, ~c 20515 

The Honotable Sheila Bair 

Chainnan 

October 29, 2008 FDIC 

NOV - 4. 20JJ Federal Deposit Insurance Corporation 

550 11" Street, N.W. R.ootn MB-6028 

Washington. D.C. 20429 OFFICE OF lEG\SLA11Vf. AFFA\f.'~ 

Dear Chainnan Bair: 

It has been brought to our attention that the :f edcraJ Deposit Insurance Corporation (FDIC) is 

procccding with a site selection plan for a southern California office which will liquidate the 

assets of troubled banks and thri:fbi in the western United States. AB you may know. the Inland 

Empire in Califomia is widely known to b~ at the epicenter of tho mortgage crisis and is a logical 

location that should be considered as the site selection process continues. 

AftC' a sustained period of unprecedented growth in home sales. new home constmction and 

average home prices, housing ma:r.kets across ~e United States have experienced their most 

serious downturn of the past .60 years. As a result, there have been huge costs tD not only 

borrowers and lcnden, but also to entire communities. The high number of foreclosures have 

resulted in vacant homes that, in turn. may invite crime and create an appearance of market 

distress, diminishing the marlcct value of other nearby properties. 

As the FDIC continues through the selection process, we want to point out that 1hc Inlmd Empire 

has avera~ as.king rates for office space 1bat arc signifieantly less thm in surrounding areas. 

Additionally, it has higher market vacancy rate, lower lease rates, and has over one million square 

feet of new office space under construction. Within this ragio.n, there arc currently five buildings, 

four of which arc on the doorstep of Ontario International Airport (ON'l). that meet 1he FDIC's· . 

size and amenity needs. In addition to the a\'llilability and affordability of office space. the Jnland 

Empire is geographically relative to the housing crisis at hand. 

We support your mission to implement programs that result m mortgage·loans that can be 

sustained over time and to avoid unnecc:ssaiy foreclosures that harm individual borrowers and the 

economy. To that end, we encourage the FDIC ·to consider the Inland Empire as a viable 

alu:mative, as part of the selection process, and to ensure the location that is chosen best serves 

our nation during this housing crisis and difficult time. 

Member of Congress 

Member of Congress 

MARY BONO-MACK 

Member of Congress 

..-, 
FEDERAL DEPOSrT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Sheldon Whitehouse 

United States Senate 

Washington, D.C. _20510 

Dear Senator Whitehouse: 

November 7, 2008 

.Thank you for your letter discussing proposals for a loan modification program. 

Your interest in th.is vital issue is appreciated. 

Mortgage credit distress and falling home prices are at the heart of the uncertainty 

plaguing our financial markets. Two factors are driving down these prices. One is an 

"overhang" of excess vacant homes that is estimated to be approximately 1.1 to 1.3 

million units. The other factor is distress sales of foreclosed properties, which are 

occurr.ing in the hundreds of thousands per year. Loan modification on a large scale 

appears to be the most effective way to deal with these fundamental problems. 

Unfortunately, even though foreclosures are costly to lenders, borrowers, and 

communities, the pace ofloan modifications continues to be extremely slow. In order to 

counteract this trend, we believe it is imperative to provide incentives to achieve a 

sufficient scale in loan modifications to stem the rise in foreclosures that is helping to 

drive home prices downward. 

The FDIC's proposal is to ~ffer mortgage servicers who modify past due loans a 

credit guarantee of up to one halflhc losses they incur if the loan eventually redefaults. 

The modification process itself would work very much like the program the FDlC has 

already initiated at IndyMac Federal Bank to reduce first lien mortgage payments to as 

low as 31 percent of monthly income. Modifications are based on interest rate 

reductions, extension ofterm, and principal forbearance. We believe that modifying 

loans according to this standard will dramatically reduce their incidence· of redefault and 

foreclosure. Moreover, offering mortgage servicers a well-structured loss share 

guarantee will provide a decisive financial incentive for them to modify loans on a large 

scale, thereby limiting the supply of new foreclosed properties put on the market 

Modifying loans in place can help to achieve these goals without purchasing the assets 

outright and placing them under government management 

AB you outline in your letter, another approach to modifying past due loans would 

be to amend the Baruauptcy Code to authorize bankruptcy judges to modify defaulted 

mortgages on principal residences. While the FDIC has not taken a formal position 

regarding changes to the Bankruptcy Code, we continue to actively explore approaches to 
loan modificatio~ that would not result in the negative impact on a borrower's credit 

history caused by a bankruptcy filing. 

In summary, we believe that a loan modification program that provides incentives 

and/or loss sharing with loan scrvicers will rerult in urgently needed relief in the financial 

markets. In so doing. this program would benefit taxpayers, all of whom are adversely 

affected, directly or indirectly, by current instability in these markets. 

H you have further questions or comments, please do not hesitate to contact me at 

(202) 898-6974 or Eric Spitler, Director of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
OCT-30-2008 10: 16 703 562 6058 P.03 

SHEtDON WHITEHOUSE 

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The Honorable Sheila C. Bair 

Chahman 

WASMl).IGTON. DC 2051~& 

October 29, 2D08 

l,IIJ'l)A&J.-W4 

FDIC 

Oc-;- .., ,., •"11'\".> 

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Federal Depo.sitlnsuJ:mcc Corporation 

55017tb9treet,NW 

lloom.6076 . OFFICE OF THE CH:\IRi, "•\!! I 

Washington. DC 20429 

The Wall Street Joumal (WSJ) reported last week that the Bush Administra:tion is 

considering a number of proposals to help ste:m the for~losure wave. This is a positive., 

necessary. and overdue development. Toe :financial recovery plan passed. by Congress 

and signed into law an October 3, while critical to a.drlrcs! the stability of our :flirancial 

markets.:was clearly cmly a be.ginning. What m'11St be done now is to restore our 

underlying ecoD.0my. Citizens who were "trapped by the housing bubble in aver-priced 

homes and mortgages need to believe that 01lI government is not only conce:med with. 

!!Sistin: the big blllks. bet is also dedicated to helping homeowner!. The 

Adn:rinistration', mi1ial plan to have the mortgage industry vo]unwily reworl.:: mort,.a.lges 

to prop up the howmg market hu ~!early not worked - an4 won't.. I zm glad that you 

now agree that go~cnt action is ncces,uy and appropriate, for the salce of th.e · 

housing marbt and economy in general 

I am deeply concemed. bowev~. about some of the prop0$als under 

consideration, including the idca_s,f giv.ing banks, in w. WSJ's words, a "fuwlc;al 

incentive to turn troubled bans inm more-affordable mortgages." The price .tag to 

mxpayers for creating this :financial incenti'Vc, according to the WSJ article, could be in 

the 140 bi!Jion range. The taXpaycrs ha.ve already paid to shore up our ba.nking syst~'nMust every way to addresl the foreclosure problem involve p:.ying the banks with 

wcpayer dollars? 

There is a Il1D.I'C straightfOIW!td way to do this, in th~ form of proposed legislation 

that would give bankruptcy .couru the powc- to modify mongage teimJ 011 prm.cipal 

residences - in the same manner that they can modify most other kind of contracts. 

including moi:tgages on second and third homes. It strikes me as absurd that a 

billUI'Uptcy j~~ can modify ~e tenns of a mortgage 011 a. ski clulet or beach bungalow, 

. but not on a principal residence, and outra.geouJ that banks and lending institutions whose 

ov.n boirOwinas can be thus modified are objecting to the same rights for their customers. 

Lcgi$tion to fix this anomaly iJi the Baolaaptcy Code, introduced by Sena.tor Ditk 

Durbin a.s S. 2136, is viewed by many le.!!.ding economists as the .sjinplest. most 

straigh.tfanw.rd way to stern the foreclosure tide, giving lenders the ince,itive on a. case by 

-..J 
FD r·c ll'IB.JDSMAN 703 562 6058 P.04 

case basis to modify mortga.o-e t.ean.s. even before the mitiation of banhuptcy 

proceedinp. The bill would cost the taxpayer nothing aceording-to the Cangrewona.l 

Budget Office. and would keep an emrnated 631,000 Americans in their home.1. · 

Thu legislaiion bu been vigorously opposed by W: lending indusiry, and wu 

blocked from consideration in the Senate last !pmlg by the hpublioan minority, ~ow 

the Administra.tion bu aanowledged the need to address the fortclosun wave, Let's do 

it the best -way. at no taxpayer expmse, using farnrner institutions and powers, to provide 

needed relief to Amcric:ans suffering in this crisis. 

Sheldon Whitehouse 

United State& Senate 

CC: Henry M: Paulson, Jr., Secretary, Department of~ Trea.£l!I)' 

Ben S. Bemanke, O,airroan, Federal Rb&ei:ve Board· 

TOTFl. P.84 
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·-----

_,.,. _ _,._..___,_ JDNlR'lB.-~ 

President George W. Bush 

I 600 Pennsylvania Avenue, NW 

Washington, DC 20500 

Dear Ptesidcnt Bush: 

ti.nitro oStatt.s ~rnatr 

COMMITTEE ON BANKING, HOUSING, AND 

U~BAN AFFAIRS 

. WASHINGTON, DC 20510-6075 

October 30, 2008 

On October 23, the Senate Committee·on Banking, Housing, and Urban Affairs held an 

oversight hearing to review the Administratiop's progress in implementing the Economic 

Emergency Stabilimtion.A.ct of 1008. (EESA). EESA provided the Treaswy Department 

with broad and unprecedented authority and with $700 billion to address the key 

challenges facing our economy. 

While members of the Committee raised many issues at the bearing, of paramount 

concern was the dire need to ensure that all 1;he tools made available by EESA are 

'brought to bear to help famUics keep their homes by modifying mortgages in order to 

prc:vcnt foreclosures. 

In our view2 and in the view of many economists and experts from across the political 

spectrum, the key to the recoW!I)' of the economy is recovery of the housing market. and . 

the key ~ ~ recovery of the housing market is to reduce foreclosures. Al$ economist Mart Zandi ~ted in March of this year: . ·. . . . . . 

puiy· if mo~ homeowners .are able to remajn in th~ir bo~es will the negative 

cycle of foreclosures begetting house price declines begetting more foreclo~ 

be short.:circuitc4 This, in ~ is necessary to ending the downdraft in the . 

·housing market that is weighing so heavily on the et?,ODomy' and financial system. 

We are aware of recent news reports that progress is being made within yc;ru.r 

Administration to adopt a program to reduce foreclosures. While we certainly hope that 

these reports are true; they have been circulating fot over_ a week without confinnation. 

The fact remains that the Administration bas not dedicated the time, attt:ntion or 

rcsoarces needed to address the cause of the crisis - the historic levels of foreclosure. 

Rathcr,,it has focused.almost exclusively on the symptoms of the.crisis- financial 

arteries ·clogged with bad mortgag~backed debt and housing~~iated losses und~ing 

the capital ·positions of our financial institutions. While~ support the goals of restoring 

liquidity and bolsterin·g bank capital, th~ efforts. by thcmsclvi:s, will not end the current 

turmoil. For this reason, and to address the current policy imbalance, the Treasury 

Department must use its authority ~er EESA to act decisively. aggressively, and 

swiftly to JCduc~ foreclosures. 
October 30, 2008 

Page2 

Section 109 ofEESA authorizes the Sccrcwy of the Treasury to "use loan guarantees 

and credit cnhanccments to facilitate loan modifications to prevent avoidable 

foreclosures... We mge you to immediately duect the Treasury to create a program using 

this authority to comprehensively address the c,cploding forcclosme cri.sis. Such a 

program must encourage syst.cmatic modificanom designed to create long-tcm1. 

sustaiuable homeownership, based on transparent criteria. 

Further. we ask that you direct the Treasury Department to contract with lhc Fcdcru 

DCJX)sit lnsurancc Corporation (FDIC) to design and im.plc:mcm such a program. As you 

know, the FDIC has already developed such a program with loans it now owns or 

semccs as a result of its takeover of IndyMac Bank. FDIC Cbauman Sbcila Bair 

testified at our bearing that the FDIC was willing to take on this rcsponsi"bility. Further, 

given the FDIC's dcmonsfratcd cmmnitmcnt to the goal of foreclosure pn:vcnμon. and its 

proven track record in achieving results, the FDIC is clearly the federal agency best 

suited to implementing this program quick).y and efficiently. 

Mr. President. time is short. Every day we delay, thousands mote fiunilles face 1hc 

specter oflosing their homes. We cannot afford further delay. We ask that you move as 

quickly on 1his initiative. and that you ~ue to explore o1hcr options for addn:ssing 

this very serious pro'!>lcm. 

Thank you for considering these views.. 

Sincerely, 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

November 7, 2008 

Honorable Charles Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

Washington, D.C. 20510 

Dear Senator Grassley: 

Thank you for your letter regarding discussions between the Department of the 

Treasury and the Federal Deposit Insurance Corpordtion on a plan to assist distressed 

homeowners. In your letter, you ask that the Treasury and the FDIC ensure that no 

taxpayer dollars are used to assist homeowners who obtained their mortgages improperly. 

I strongly agree that any plan to assist distressed homeowners needs to focus on 

helping legitimate borrowers stay in their homes. As you are aware, mortgage credit 

distress and falling home prices are at the heart of the uncertainty plaguing our financial 

markets. Two factors are driving down U.S. home prices: 1) an "overhang" of excess 

vacant homes estimated at between 1.1 million and 1.3 million units, and 2) distress sales 

of foreclosed properties, which are talcing place at a rate·ofhundreds of thousands per 

year. There is no doubt the mortgage crisis is continuing to get bigger and costlier. Thus, 

the FDIC believes an essential public policy goal is to promote loan modifications to · 

prevent foreclosures. 

The FDIC has been advocating loan modifications for more than a year. 

Meanwhile, foreclosures in the first half of this year were 77 percent above the pace of a 

year ago. Problem loans 60 days or more past due are rising at a rate of more than 

700,000 per quarter, net of any existing problem loans that return to performing status. A 

· program that encourages mortgage lenders a,nd servicers to modify loans on a sustainable 

basis, and that does so efficiently on a large scale basis, will help us get ahead of this 

fundamental problem. If we can provide lenders and servicers with appropriate 

incentives to systematically modify their growing inventory of problem loans, there is 

hope that we will finally stop falling behind this problem and begin to stabilize our 

housing_markets and our financial system. 

You have asked some important questions related to how a loan modification 

process might be implemented under a federal program. The questions deal with whether 

the original loan documents will be reviewed, which criteria will be used to determine 

eligibility, whether fraudulent loans can be detected and excluded. and how covered loans 

would be managed. As the Treasury and the FDIC have not finalized the desi&n of a loan 
modification proposal, I will describe the FDIC's actions to modify loans at IndyMac 

Federal Bank to attempt to address your concerns. 

As you are aware, the FDIC has initiated a systematic loan modification program 

at IndyMac Federal Ban1c, where it is conservator. This program identifies loans with 

high monthly payments relative to income and makes offers to borrowers, who are living 

in their homes, to reduce the monthly payment to as low as 31 percent of monthly 

income. Modifications are undertaken according to a standard protocol based on interest 

rate reductions, extensions of term, and principal forbearance. Like any mortgage 

servicer, the FDIC must undertake a net present value (NPV) test for every modified loan 

to ensure that this strategy will maximize the value of that loan. One of the advantages of 

this approach is the ability to modify loans that have been securitized, leaving them in 

place under private management. The FDIC also requires confirmation of the occupancy 

status and verification of the current income of the borrower. 

Based on this experience, the FDIC has been working with the Treasury to 

develop a credit guaranty program, as authorized under the Emergency Economic 

Stabilization Act (EESA); wruch would provide financial incentives for a wide range of 

mortgage lenders and servicers to modify high-cost mortgage loans using streamlined 

protocols similar to those we are applying at IndyMac. The purpose of the proposed 

credit guaranty program would be to focus the NPV calculation away from immediate 

foreclosure and toward an analysis of whether a Joan modification is a less costly 

alternative. The credit guaranty would protect mortgage lenders and servicers for up to 

half of the downside risk of a redefault, a risk made less likely due to the requirement that 

mortgage payments under modified loans be affordable under a cJear, objective standard. 

As at IndyMac, the FDIC has proposed that loans modified under this process would be 

subject to verification of .borrower income and occupancy status, and the modification 

would be available only for loans on owner-occupied properties. · 

While we believe the controls in place at IndyMac are essential to ensure that 

program costs are contained and that homeowners are qualified to receive assistance, 

there are no plans to carry out an in-oepth analysis of the underwriting that took place at 

origination. Our goal is to deal with the current crisis by reducing the number of 

unnecessary foreclosures and maximizing the value of these troubled loans. While such a 

program can verify that the current homeowner is nor a speculator, the program is not 

designed to sort out the culpability of parties such as the broker and/or appraiser in 

originating the loan. However, where fraud or other irregularities appear to be issues, the 

matter would be referred to the appropriate state and federa] authorities. 

Finally, with ~gard to the possible purchase or management of problem loans by 

the federal government, the FDIC's experience has been that problem loans are generally 

best managed by the private sector as long as the lender or servicer retains the proper 

financial incentives. Accordingly, we believe that any proposal to systematically 

facilitate affordable and sustainable loan modifications need not involve government 

purchases of the underlying mortgage assets. Avoiding foreclosure through cost 

effective, fair, and sustainable loan modifications should be the goal of any proposal. 
Therefore, any new program should provide incentives for current mortgage lenders and 

servicers to modify loans under their management if this strategy can be shown to 

maximize the value of the loans. 

I hope this information is helpful. We would be happy to brief you on this matter 

at your convenience. Please contact me at (202) 898-6974, or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
~ -U,tts .. ~lll;e 

Via Electronic Transmission 

~qqll~ ~l'.le_,~ . . 

October 30, 2008 

FDIC 

OCT 3 0 2008 

The Honorable Hemy M Paulson, Jr. 

Secretaiy 

OFFICE OF LEGISLATIVE AFFAIRS Sheila C. Bair 

Chairman of the Board 

U.S. Department of the Treasury 

1500 PennsylvaruaAvenue. NW 

Washington, DC 20220 

Federal Deposit Insurance CoI])Oration 

550 17th Street, NW 

Washington. DC 20429 

Dear Secretaiy Paulson and Chairman Bair: 

This morning. I read with great interest the many articles noting that the 

Department of the Treasmy (Treasmy) and the Federal Deposit Insurance Corporation 

(FDIC) are giving serious consideration to covering as many as three million 

homeowners in danger of foreclosure· at a cost of almost $50 billion. While details on the 

plan are still being worked out, I am writing to strongly suggest that your agencies .find a 

wey to ensure that those who improperly and perhaps even fraudulently obtained 

mortgages are not rescued wi1h taxpayer dollars. 

I am troubled by the fact that I have yet to see any information addressing the 

underlying reason for the losses; namely the loans 'themselves. We cannot and should not 

rescue everyone for the sake of it; we need to understand 1he underlying loans and 

determine which are viable customers and which are fraudulent or "straw" buyers. There 

are far too many Americans legitimately struggling to stay in their homes for the Federal 

Government to ignore those who .. gamed" 1he system with knowledge and intent In 

light of this concern. I would ap~ciate a written response to the following questions by 

no later than November 5, 2008 as well as a briefing shortly thereafter: • 

1) Will the Treasury/FDIC conduct a review of the original loan documents to 

confum the legitimacy of the mortgage and the basis upon which it was 

approved? Ifnot, why not? 

2) What processes will Treasmy/FDIC implement to review the mortgages and 

what criteria will Treasury/FDIC employ to determine whicll mortgages are 

worthy of being guaranteed? Please respond in detail. 

3) If managed by 1he government, how will 1he Treasucy /FDIC determine, for 

example, who are 1he genuine credit customers; culpability of collusive 

customers; and outright fraud losses through broker/appraisal collusion.? 
4) Are the assets underlying each mortgage going to be purchased by the 

government, managed by the government or managed through identified 

banks? Please respond in detail 

In cooperating with the Committee's review, no documents, records, data, or 

other information related to these matters, either directly or indirectly, shall be destroyed, 

modified. removed. or otherwise made ina~sible to the Committee. 

All documents responsive to this request should be sent electronically, in 

searchable PDF format to Brian_Downey@finance-rep.senate.gov. If you have any 

questions, please do not hesitate to contact Emilia Disanto or Jason Foster at (202) 224-

4515. 

Sincerely, 

Charles E. Grassley 

Ranking Member 

2 
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. ·:=-r~.....t:., \:oP 

SHEILA C. BAJA 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

November 7, 2008 

Honorable Barney Frank 

Chainnan 

Committee on Financial Services 

House: of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

Thank you for your letter concerning the use and acceptance of demand drafts. 

The Federal Deposit Insurance Corporation recognizes that while most payment 

processors effect transactions that are legitimate payments for a variety of reputable 

merchants, telemarketing and online merchants, in the aggregate, have displayed a higher 

incidence of unauthorized charges and associated returns or charge backs, which is often 

indicative of .fraudulent activity. To address this emerging risk. the FDIC recently issued 

guidance regarding payment processors to the institutions we supervised to ensure that 

they take steps to protect customers in these transactions. The enclosed Guidance on 

Payme.nt Processor Relationships reminds institutions that to mitigate the risks, they mu.st 

assume: responsibility for implementing and maintaining an effective system of internal 

controls and ongoing account monitoring of demand drafts. 

In this Guidance, we require financial institutions to be alert to consumer 

complaints that suggest a payment processor's merchant clients are inappropriately 

obtaini:ng personal account information. Further, the guidance directs institutions to act 

promptly when they believe :fra~dulent or improper activities have occurred related to 

activiti,::s of a payment processor. Appropriate actions may include, but are not limited to 

filing a Suspicious Activity Report, requiring the payment processor to cease processing 

for that specific merchant, or tenninating the financial institution's relationship with the 

payment processor. 

W c also recognize that payment processors pose greater money laundering and 

fraud risk if they do not have an effective means of verifying their merchant clients' 

identiti1:s and business practices. In these cases, the Guidance requires financial 

institutions to perform enhanced due diligence and heightened account monitoring. 

Proper controls help detect fraudulent activity and mitigate losses to consumers 

and financial institutions. The FDIC works with financial institutions through the 

supervfaory process to ensure the effectiveness of anti-fraud practices and procedures and 

seeks tci educate consumers about the risks of fraud and their rights should they fall 

victim to fraud. The FDIC also continues to monitor developments in these payment 
mechanisms and will take appropriate actions to ensure consumers' rights are adequately 

protected. 

The FDIC investigates consumer complaints about specific financial institutions. 

Although we are aware of complaints against certain telemarketers, the FDIC has not 

received complaints of fraud associated with the use of demand drafts. However, the 

FDIC recognizes that some consumers may be encountering problems. Accordingly, we 

have developed programs to educate consumers about the warning signs of scams and. as~ 

part of these programs, we emphasize that consumers not disclose sensitive account or 

personal information to unfamiliar parties making unsolicited requests. We publish this 

information in a variety of venues, including on our website, in press releases, and in the 

FDIC Consumer News. 

To more effectively address the risks of fraud associated with demand drafts, the 

Federal Reserve Board amended Regulation CC in 2006 to place greater liability on 

financial institutions accepting those drafts for deposit. The amendments shifted liability 

for an unauthorized demand draft from the customer's bank to the institution that first 

received the draft for deposit (the depository financial institution). In addition, the 

interagency Identity Theft Red Flag (Red Flag) rule is another tool that will help banks 

identify the risk of fraud in certain types of accounts, and compliance with this rule is 

mandatory by November 1, 2008. The rule requires financial institutions to develop a 

written plan to detect, prevent, and mitigate identity theft that is appropriate to the size 

and complexity of the institution and the nature and scope of its activities. For example. 

the FDIC expects a bank that has a customer who issues demand drafts. either on behalf 

of the bank or its customers (e.g., telemarketers), to ensure that fraud detection and 

monitoring processes, such as those included in the Red Flag rule's written identity theft 

prevention program, are in place. 

If you have further questions or concerns, please contact me at (202) 898-6794 or 

Eric Spitler, Director of the Office of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 

Enclosure 
FDII 

Federal Deposit Insurance Corporation 

550 17th Street NW Washinatm. O.C. 20429-9900 

Financial Institution Letter 

FIL-127-2O08 

November 7, 2008 

GUIDANCE ON PAYMENT PROCESSOR RELATIONSHIPS 

Summary: The FDIC is issuing the attached guidance that describes potential risks 

associated with relationships with entities that process payments for telemarketers and other 

merchant clients. These types of relationships P!JSe a higher risk and require additional due 

diligence and close monitoring. This guidance outlines risk management principles for this type 

of higher-risk activity. 

Distribution: 

FDIC-supervised Institutions 

Suggested Routing: 

Chief Executive Officer 

ExeaJtive Officers 

BSA Camplanc:e Officer 

Related Topics: 

Risk Management 

FDIC Guidance for ManaQing Third-Party Risk 

(AL 44-2008, June 2008) 

FFIEC Handbook on Retal Payment Systems 

(Man::h 2004) 

FFIEC Handbook on OUtsourdng Technology 

Services (June 2004) 

FFIEC Bank Seaecy Ac:t/Anll-Money Laundering 

(BSA/AMI..) Examination Manual 

Attachment: 

Guidance on Payment Processor Relationships 

Contact: 

Michael Benardo, Chief, Cyber Fraud and Anandal 

Crimes Section. at mbenardo@fdic.gov or (202) 

898-7319 

Note: 

FDIC financial ins&hJtion letters (Fils) may be 

accessed from lhe FDIC's Web sile al 

Highlights: 

• Account relationships with entities that process 

payments for telemarketers and other merchant 

clients could expose financial institutions to 

increased strategic, credit, compliance, 

transaction, and reputation risks. 

• Account relationships with these higher-risk 

entitles require careful due dQigence and 

monitoring as well as prudent and effective 

underwriting. 

• Payment processors pose greater money 

laundering and fraud risk if they do not have an 

effective means of verifying their merchant 

clients' identities and business practices. 

• A financial institution should assess its risk . 

tolerance for this type of activity as part of iJ.s risk 

management program and develop policies and 

procedures that address due diligence, 

underwriting, and ongoing monitoring of high-risk 

payment processor relationships for suspicious 

activity. 

www.fdic.govlnews/news/llnandal/200811nde.x.html. • Flllancial institutions should be alert to consumer 

complaints that suggest a payment processor's 

merchant clients are Inappropriately obtaining 

personal account infonnation. 

To recelva Fils electronically, pleaSe visit 

http:/fwww.ftfic.qr:N/aboutlsubsqiptionslfil.hbnl. 

Paper copies cl FDIC llnanclal lnslllution letters 

. may be obtained through Iha FDIC's Public 

lnformaticn Center, 3501 Fairfax Drive, E-1002, 

Arlilgton, VA 22226 (1-877-275-3342 or 703-562-

2200). 

• Anancial institutions should act prompUy when 

they believe fraudulent or Improper activities 

have occurred related to a payment processor. 
GUIDANCE ON PAYMENT PROCESSOR RELA TIONSIIlPS 

The FDIC has seen an increase in the number of relationships between financial 

institutions and payment processo~ in which the payment processor is a deposit customer 

of the financial institution and uses its customer relationship to process payments for 

merchant clients._ Most payment processors effect transactions that are legitimate 

payments for a variety of reputable merchants. However, telemarketing and online 

merchants, in the aggregate, have displayed a higher incidence of unauthorized charges 

and associated returns or charge backs, which is often indicative of fraudulent activity. 

Payment processors pose greater money laundering and fraud risk if they do not have an 

effective means of verifying their merchant clients' identities and business practices. In 

these cases, financial institutions should perform enhanced due diligence and heightened 

account monitoring. 

Payment processors typically process payments by creating and depositing remotely 

created checks (RCCs)-ojlen referred to as "Demand Drafts"--0r by originating 

Automated Clearing House (ACH) debits on behalf of their merchant customers. The 

payment processor may use its own deposit account to process such transactions, or it 

may establish deposit accollllts for its merchant clients to process transactions. Although 

all the core clements of managing third-party risk are present in payment processor 

relationships (e.g., risk assessment, due diligence, and oversight), managing this risk 

. where there may not be a direct customer relationship with the merchant can present 

challenges for .financial institutions. Risks associated with this type of activity are 

heightened when neither the payment processor nor the financial institution pcrfonns 

adequate due diligence on the merchants for which payments are originated. 

Potential Risks Arising from Payment Processor Relationships 

Deposit relationships with payment processors expose financial institutions to risks that 

may not be present in relationships with other commercial customers, including increased 

strategic, credit, compliance, and,transaction risks. In addition, financial institutions also 

should consider the potential for legal, reputation, and other risks presented by 

relationships with payment processors, including those associated with customer 

complaints, returned items, and potential unfair or deceptive practices. Financial 

institutions that do not adequately manage these relationships may be viewed as 

facilitating fraudulent or unlawful activity by a payment processor or merchant client. 

Therefore, it is imperative that financial institutions recognize and understand the 

businesses with which they are involved. 

Financial institutions should be ~lert for payment processors that use more than one 

financial institution to process merchant client payments. Processors may use multiple 

financial institutions because they recognize that one or more of the relationships may be 

terminated as a result of suspicious activity. 

1 
Financial institutions also should be alert to consumer complaints that suggest a payment 

processor•~ merchant clients are inappropriately obtaining personal account information 

and using it to create unauthorized RCCs or ACH debits. 

Financial institutions should act promptly when they believe :fraudulent or improper 

activities have occurred related to activities of a payment processor. Appropriate actions 

may include, but are not limited to, filing a Suspicious Activity Report, requiring the 

payment processor to cease processing f~r that specific merchant, or terminating the ,. 

financial institution's relationship with the payment processor. 

Risk Management Controls 

Financial institutions should establish clear lines of responsibility for controlling risks 

associated with payment processor relationships. These include effective due diligence 

and underwriting, as well as ongoing monitoring of high-risk accounts for an increase in 

unauthorized returns and suspicious activity. Implementing appropriate controls over 

payment processors and their merchant clients will help identify those payment 

processors that process items for fraudulent telemarketers or other unscrupulous 

merchants and help ensure that the financial institution does not facilitate these 

transactions. Due diligence, underwriting, and account monitoring are especially 

important for financial institutions in which processors deposit RCCs and through which 

processors initiate ACH transactions for their merchant clients. 

Due Diligence and Underwriting 

Due diligence and effective underwriting are critical for an effective risk management 

program. Financial institutions should implement policies and procedures to reduce the 

likelihood of establishing or maintaining an inappropriate relationship with a payment 

processor through which unscrupulous merchants can access customers' deposit 

accounts. 

Financial institutions that initiate transactions for payment processors should develop a 

processor approval program that extends beyond credit risk management. This program 

should include a due diligence and underwriting policy that, among_other things, requires 

a background check of the payment processor and its merchant clients. This will help 

validate the activities, creditworthiness, and business practices of the payment processor. 

At a minimum, the policy should authenticate the processor's business operations and 

assess the entity's risk level. An assessment of the processor should include: 

• Reviewing the processor's promotional materials, including its Web site, to 

detennine the target clientele. 1 

1 Businesses with elevated risk may include offshore con;ianies, on-line gambling-related operations, and 

on-line payday lenders. For example. a processor whose customers are primarily offshore wouid be 

inherently riskier than a processor whose customers are primarily restaurants. 

2 
• Determining if the processor re-sells its services to a third party who may be 

referred to as an "agent or provider of Independent Sales Organization 

opportunities" or "gateway .. arrangements".2 

• Reviewing the processor's policies, procedures, and processes to determine 

the adequacy of due diligence standards for new merchants. 

• Identifying the major lines of business and volume for the processor's 

customers. 

~-

• Reviewing corporate documentation, including independent reporting services 

and, if applicable, documentation on principal owners. 

• Visiting the processor's business operations center. 

Financial institutions should require the payment processor to provide information on its 

merchant clients, such as the merchant's name, principal business activity, geographic 

location, and sales techniques. Fin~cial institutions should verify directly, or through 

the payment processor, that the originator of the payment (i.e., the merchant) is operating 

a legitimate business. Such verification could include comparing the identifying 

information with public record and fraud databases and a trusted third party, such as a 

credit report from a consumer reporting agency or the state Better Business Bureau, or 

checking references from other financial institutions. 

Ongoing Monitoring 

Financial institutions that initiate transactions for payment processors should implement 

systems to monitor for higher rates of returns or charge backs, which often are evidence 

of fraudulent activity. High levels ofRCCs or ACH debits returned as unauthorized or 

due to insufficient funds can be an indication of fraud. 

Financial institutions are required to have a Banlc Secrecy Act/Anti-Money Laundering 

(BSA/AMI.) compliance program and appropriate poJicies. procedures, and processes in 

place for monitoring, detecting, and reporting suspicious activity. Non-bank payment 

processors generally are not subject to BSNAML regulatory requirements, and therefore 

some payment processors may be vulnerable to money laundering, identity theft, fraud 

schemes, and illicit transactions. The FFIEC BSA/ AML Examination Manual urges 

financial institutions to effectively assess and manage risk with respect to third-party 

payment processors and. as a result, a financial institution's risk management program 

should include procedures for monitoring payment processor information, such as 

merchant data, transaction volume, and charge-back history. · 

2 An Independent Sales Organization is an outside company contracted to procure new merchant 

relation.ships. Gateway arrangements arc similar to Internet serYice providers that sell excess computer 

storage capacity to third parties, who in turn distribute computer services to other individuals unknown to 

the provider. The third party would make decisions about who would be receiving the sexvice, although the 

provider would be responsible for the ultimate storage capacity. 

3 
Evolving Legal Framework for Remotely Created Checks 

The laws and regu]ations governing the acceptance of RCCs are continually evolving in 

response to new fraud techniques, technological advancements, increased use of imagebased proc~sing, and other factors. M such, financial institutions should ensure that 

payment processors and their merchants arc aware of and comply with the 

legal/regulatory framework governing these payments and have in place a process to 

remain informed of changes to applicable laws and regulations, such as: 

• Changes to Federal Reserve Barne Operating Circular 3 that clarify 

electronically created images (including RCC items) that were not originally 

captured from paper are not eligible to be processed as Check 21 items 

(effective July 15, 2008).3 

• Changes to Regulation CC that establish transfer and presentment warranties 

for RCC items that effectively return the responsibility for ensuring a check is 

authorized by the account holder to the bank of first deposit (effective July 1, 

2006).4 

• Rules and regulations governing the applicable ACH payment transactions.5 

• Rules governing the use of telemarketing that require verifiable authorization 

of payment for services. 6 

Conclusion 

The FDIC supports financial institutions' participation in payment systems to serve the 

needs oflegitimate payment processors and their merchant clients. However, to limit 

potential risks, financial institutions should implement risk management policies and 

procedures that include appropriate oversight and controls commensurate with the risk 

and complexity of the activities. At a minimum, risk management programs should 

assess the financial institution's risk tolerance for this type of activity, verify the 

legitimacy of the payment processor's business operations, and monitor payment 

processor relationships for suspicious activity. Financial institutions should act promptly 

if they believe fraudulent or improper activities have occurred related to activities of a 

payment processor. 

'Fc:dc:nl Rcscm: Banks Oper.lling Cin:ular No. J - Collection ore~ Items :ind Rclumcd C1lccb. 

www.rrbscrvkcs.or&lfilcsmgulations/pdf/opcratinL circular _3.pdf. 

• Effective July 1, 2006 [70 Fed. Reg. 71218-71226 (November 28, 2005}). 1 NACHA [www.nacha.DrJP'ACH_lwk5'ach_rulcs.htmJ. 

'fc:dc:nl Trade Commission Tclcmarlccting Sales Ruic (16 CFR JIOJ. 

4 
atnn!}t!lls. nf ft,1? llbtifl?h ~faha 

Rht.s~ingtun, ·1« 20515 

August 13, 2008 

The Honorable Shella C. Bair 

Ownnan 

Fedetal Deposit Jnsunmcc Co:q,oration 

550 Seventeenth Street, NW 

Washington, DC 20429 

Dear Chsirotan Jlair. 

FDIC 

AUG l 3 tUOB 

OFACE OF LEGISlATIVE AFFAIRS ~· 

In June 2007, Representatives Frank and Marlccy wrote to the Federal Reserve, FDIC, OCC, 

ors, and NCUA with scvcrai questions regarding the use of and problems associated with 

demand drafts. While your responses stated that demand drafts can be a convenient and 

efficient payincot method, you and your fcllow federal banking regulators aclcnow]cdged their 

wlnerahility to abuse despite regulatory efforts to provide iinanciaJ institutions with guidance 

and enhance consumer protections. M9ffl>vct~ the: OCC noted that imposing wammty liability 

on the depository bank in accordance with existing regulations may not be sufficient to achieve 

appropriate levels of duo ~ regarding merchants and tfrlrd-party processors. As we have 

seen m. the "PYacl,uvia case, it is these intenncdiarics that arc most likely to pc:cpctra.te demand 

draft-related abUSC!I that victimize elderly, low-income, and mentally disabled individuals. 

In light of the teccmt settlement in the Wachavia case, and continued calls from state attorneys 

general to limit acceptance of demand drafts due to the high potential fur :fraud. it has become 

clear that we need stricter consumer protections in place. With the widespread availability of 

other direct payment options that ere less susceptible to abuse, it is increasingly difficalt to 

justify the continued use and accc:ptancc of these instruments. 

Please provide us with the specific plans your agency currently has fur the promulgation of new 

roles or the institution of other new safeguards relating to demand draft use and acceptance. 

We look forward to ,our replyby·Septmnber 1, 2008. 
e FEDERAL DEPOSIT INSURANCE CORPOMnON, Washington, DC 20429 

SHEILA C. BAIR November 7, 2008 

CHAIRMAN ,.-

Honorable Charles Grass]ey 

Ranking Member 

Committee on Finance 

United States Senate 

Washington, D.C. 20510 

Dear Senator Grassley: 

·Thank you for your letter regarding discussions between the Department of the 

Treasury and the Federal Deposit Insurance Corpondion on a plan to-assist distressed 

homeowners. In your letter, you ask that the Treasury and the FDIC ensure that no 

taxpayer dollars are used to assist home:o~crs who obtained their mortgages improperly. 

I strongly agree that any plan to assist distressed homeowner$ needs to focus on 

helping legitimate borrowers stay in their homes. As you arc aware, mortgage credit 

distress and falling home prices arc at the licart of the uncertainty plaguing our :financial 

markets. Two factors are driving down U.S, home prices: 1) an "overhang" of excess 

vacant homes estimated at between LI million and 1.3 million units, and 2) distress sales 

of foreclosed properties, which are taking place at a ratc·ofhundrcds of thousands per 

year. There is no doubt the mortgage crisis is continuing to get bigger and costlier. Thus, 

the FDIC believes an essential public policy goal is to promote loan modifications to · 

prevent foreclosures. 

The FDIC has been advocating loan modifications for more than a year. 

Meanwhile, foreclosw-es in the first half of this year were 77 percent above the pace of a 

year ago. Prol,lcm loans 60 days or m:ore past due are rising at a rate of more than 

700,000 per quarter, net of any existing problem loans that return to performing status. A 

program that encourages mortgage lenders a,nd servicers to modify loans on a sustainable 

basis, and that does so efficiently on a large scale basis, will help us get ahead of this 

fundamental problem. If we can provide lenders and servicers with appropriate 

incentives to systematically modify their growing inventory of problem loans, there is 

hope that we will finally stop fiilling behind this problem and begin to stabilize our 

hou.sing_markets and our financial system. 

You have asked some ~rtant questions related to how a loan modification 

process might be implemented under a federal program. The questions deal with whether 

the original loan docmnents will be reviewed, which criteria will be used to determine 

eligibility, whether fraudulent loans can be detected and excluded, and how covered loans 

would be managed. As tlie Treasury and the FDIC have not finalized the desi&n of a loan 
modification proposal. I will describe the FDIC's actions to modify loans at IndyMac 

Federal Bank to attempt to address your concerns. 

As you are aware, the FDIC has initiated a systematic Joan modification program 

at IndyMac Federal Bank, where it is conservator. Trus program identifies loans with 

high monthly payments relative to income and makes offers to borrowers,. who are living 

in their homes, to reduce the monthly payment to as low as 31 percent of monthly 

income. Modifications are undertaken according to a standard protocol based on interest 

rate reductions, extensions of term, and principal fqrbearance. Like any mortgage 

servicer, the FDIC must undertake a net present value (NPV) test for every modified loan 

to ensure that this strategy will maximize the value of that loan. One of the advantages of 

this approach is the ability to modify Joans that have been securi~ leaving them in 

place under private management The FDIC also requires confirmation of the occupancy 

status: and verification of the current income of the borrower. 

Based on this experience, the FDIC has been working with the Treasury to 

develop a credit guaranty program, as authorized under the.Emergency Economic 

Stabilization Act (EESA); which would provide financial incentives for a wide range of 

mortgage lenders and servicers to modify h.igh-wst mortgage loans using streamlined 

protocols similar to those we are applying at IndyMac. The purpose of the proposed 

credit guaranty program would be to focus the NPV calculation away from immediate 

forec,osu,re and toward an analysis of whether a loan modification is a less costly 

alternative. The credit guaranty would protect mortgage lenders and serviccrs· for up to 

half of the downside risk of a redcfault, a risk made less likely due to the requirement that 

mortgage payments tmder modified loans be affordable under a clear, objective standard. 

As at IndyMac, the FDIC bas proposed that loans modified under this process would be 

subject to verification of borrower income and occupancy status, and the modification 

would be available only for loans on owner-occupied properties .. 

While we believe the controls in place at IndyMac arc essential to ensure that 

program costs are contained and that homeowners are qualified to receive assistance, 

there are no plans to carry out an in-depth analysis of the underwriting that took place at 

origination. Our goal is to deal with the current crisis by reducing the number of 

unnecessary foreclosures and maximizing the value of these troubled loans. While such a 

program can verify that the current homeowner is not" a speculator, the program is not 

designed to sort out the culpability of parties such as the broker and/or appraiser in 

originating the loan. However, where fraud or other irregularities appear to be issues, the 

matter would be ref erred to the appropriate state and federal authorities. 

Finally, with ~gard to the possible purchase or management of problem loans by 

the federal government. the FDIC-s experience has been that problem loans are generally 

best managed by the private sector as Jong as the lender or servicer retains the proper 

:financial incentives. Accordingly, we believe that any proposal to systematically 

facilitate affordable and sustrinable loan modifications need not involve government 

purchases of the underlying mortgage assets. Avoiding foreclosure through cost 

effective, fair, and s~tainahle loan modifications should be the goal of any proposal. 
Therefore, any new program should provide incentives for current mortgage lenders and 

serviccrs to modify loans under their management if this strategy can be shown to 

maximize the value of the loans. 

I hope this information is helpful. We would be happy to brief you on this matter 

at your convenience. Please contact me at (202) 898-6974, or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
~~t\ltu.~~ 

-~--qll~ 

~ac~~ FDIC 

October 30, 2008 

OCT 3 0 2000 

Via Electronic Tnusmis.sion 

The Honorable Hcmy M Pauls~ Jr. 

Secrctmy 

Sheila c. Bair OFFICE OF LEGISLATIVE AFFAIRS 

U.S. Department of the Treasilly 

1500 Pennsylvania Avem.u; NW 

Wasbingto~ DC 20220 

Dear Seaetmy Paulson and Chmnnan Bair. 

Chairman of the Board 

Federal Deposit Insurance Corporation 

550 17th Street. NW 

Washington. DC 20429 

This moming, I read wi1h great interest the many articles noting that the 

Dcparfment of the Treasury (freasmy) and the Federal Deposit ~ce Corporation 

(FDIC) arc giving serious consideration to covering as many as three million 

ho~wners in danger of foreclosure· at a cost of almost SS0 billion. While detBils on the 

plan are still being worked out, I am writing to strongly suggest 1bat your agencies .find a 

wey to cosme that those who improperly and perhaps even fmudulcmtly obtained 

mortgages are no~ rescued 'With taxpayer dollsrs. · 

I am troubled by the fact that I hava yet 1o see any infonnatiai addressing the 

mderlying reason fur the losses; namely the loans 'themselves. We cam:tot and should not 

rescue evc:cyone for the sake of it; we need to understand the mdcrlying Joans and 

determine which are viable customeIS and which are .fraudulent or "straw" buyers.. There 

are far too many Americans legitimately struggling to s1ay in their homes for 1he FcderaJ 

Govermreot 1o ignore those who "gamed .. the system with knowledge and intent In 

light of this concem, I would ~aie a written response to the following questions by 

no later 1han November 5, 2008 as well as a briefing shortly thereafter. 

1) Will the Treasmy/FDIC conduct a review of the original Joan documents to 

confum the legitimacy of 1ho mortgage and the basis upon which it was 

approved? If not, why not? 

2) What processes will Treasuzy/FDIC implement to review the mortgages and 

what criteria will Treasury/FDIC employ to detf;rmine whicli mortgages are 

worthy of being guarmrteed? Please respond in detail. 

3) If managed by the govc:mment. how will the Treasmy/FDIC deteuninc, for 

example, who arc 1he genuine credit customers; culpability of collusive 

customms; and ou1right fraud losses through broker/appraisal collusion? 
4) Arc 'the assets underlying each mortgage gomg to be purcl:iased by the 

govcmment, managed by the government or managed through identified 

banb? Please respond in detail. 

In cooperating wi1h the Committee's review. no documents, records, data. or 

other information related to 1hcse matters. enhcr directly or indirectly. shall be destroyed. 

modified. removed. or otherwise made inacr;essiblc to the Committee. 

All docmnents responsive to this request should be sent electronically, in 

searchable PDF format to Brian_Downey@finmce-rep.seoate.gov. If you have any 

questions, please do not hesitate to contact Emilia DiSanto or Jason Foster at (202) 224-

4515. 

Sincerely, 

aw:ies E. Grassley 

Ran.king Member 

2 
MONROE COUNTY BAR ASSOCIATION 

9 t 3 MAIN STREET 

P.O. Box 786 

STROUDSBURG, PENNSYLVANIA 18360 

November 11, 2008 

The Honorable Paul E. Kanjorski 

United States House of Representatives 

2188 Rayburn House Office Building 

Washington, DC 20515 

Dear Congressman Kanjorski: 

MONROEBAR.ORG 

(570) 424-728B 

. "''"' : .-

FAX: (570) 424-8234 

I am writing to you on behalf of the Monroe County Bar Association. Supporters of funding for civil 

legal services for the poor in Pennsylvania and the United States require your support and assistance 

on an urgent matter. The Temporary Liquidity Guarantee Program, as it is currently structured by the 

FDIC regulators, does not cover IOL TA accounts. As a result, a vital source of funding for civil legal 

aid for the poor could .be dramatically reduced. Although this was not intended by the regulators. it 

may be an unfortunate consequence of the TLGP as currently designed. 

I request your immediate action to assure that full coverage, regardless of doOar amount. is provided 

for these unique and critically important interest-bearing deposit transaction accounts that provide 

critical funding for civil legal aid. To provide further background, I am enclosing a copy of a letter on 

this subject that was sent by the Governmental Affairs Office of the American Bar Association to the 

Chair of the FDIC on October 22. 2008. Comments have been requested by the FDIC for receipt by 

November 13, 2008 and should be sent to: 

Robert E. Feldman 

Executive Secretal)' 

Federal Deposit and Insurance Corporation 

550 17lh Street NW 

Washington, DC 20429 

Attention: Comments RIN #3064-AD37 

Thank you for your assistance and support in this important matter. 

Very truly yours, 

Gerard J. Geiger:, President 

Monroe County Bar Association 

cc: Susan Kenny, Executive Director 
FDl8 

Federal Deoosit Insurance Corooration 

55017th Street NW, Washington, DC 20429 

Honorable Paul E. Kanjorski 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Kanjorski: 

Office of Legislative Affairs 

December 17, 2008 

Thank you for your letter to Chairman Bair on behalf of Gerard Geiger, President of the Monroe 

County Bar Association, concerning the impact of providing unlimited insurance coverage to 

noninterest-bearing transaction accounts under the Federal Deposit Insurance Corporation's 

Temporary Liquidity Guarantee Program (TLGP). The FDIC received a number of similar 

comments during the rulemaking process. 

The Final Rule governing the TLGP, issued on November 20, 2008, provides that, assuming the 

other requirements of the Transaction Account Guarantee Program are met by a participating 

entity and irrespective of the standard maximum deposit insurance amount defined in the FDIC's 

regulations (presently $250,000), IOLTAs will be guaranteed by the FDIC in full as noninterestbearing transaction accounts. 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
PAULE. KANJORSKI 

11TH 0.STNCT, l'ENNSYI.VAHIA 

COMLIITTEE ON 

mlANl::W.SERVICl:S • COMMITTEE ON OVERSIGHT AND 

GOVEl'INMENT REFOflM 

WASHINGTON OFFICE: 

~ngrms of tht tinittd ~tatrs 

fl>ashington, B(t 20515-;sJJ 2111 

WRA...uioN llouR 0fflcz BIADIND DC 20515-lllli 

12D21 m-e.11 

Wobsh•: http::Mi-,jorsl:l.lio1111e.gov 

E-m•it p•lll.bnJonld•mall.ho....._ 

The Honorable Sheila C. Bair 

Chairman 

November 26, 2008 

Federal Deposit Insurance Corporation 

550 17th St., NW, MB-6028 

Washington, DC 20429 

Dear Chairman Bair: 

Ll/oi-7'13 

DISTRtCT OFFICES: 

T"" s-llulu>ll<a 

7 HOim< \Yu:Q-IIAMa llouuvAN> 

&urn..001,1 

Wlucn-8- ,.,. 111112-5211J 

IS7Dll2S-Z200 

5-WSNuaS'na!ET 

S0wrrDN, ,.,. 11503-1808 

1570) 4!11-1111 

102 POCONO llouLcv.uo 

MouNr F'ocaNo, PA 11DC4-1'12 

!5701 US-4176 

. Enclosed please find a letter from Gerard Geiger, a constituent of mine who is President of 

the Monroe County Bar Association. 

I share Mr. Geiger's concern regarding a potential reduction in funding for civil legal 

services for the indigent. 

Please direct your staff to promptly look into this matter. Thank y9u for your consideration. 

Pau~JOBki~ 

Member of Congress 

Enclosure 

THIS STATIONERY PRINTED ON PAPER MADE WITH RECYCLED FIBERS 
FDl8 

Federal Denosit Insurance Corooration 

550 171h Slreet NW, Washington, DC 20429 

Honorable Nick Lampson 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Lampson: 

Office of l.egislaive Affairs 

November 13, 2008 

Thank you for your letter to the Federal Deposit Insurance Corporation's Executive Secretary 

concerning the impact of providing unlimited insurance coverage to non-interest bearing 

transaction accounts under the FDIC's Temporary Liquidity Guarantee Program (TLGP). We 

are looking at the concerns you and others.have raised with respect to IOL TA accounts. 

We have heard from many parties on this issue. I assure you that all views will be carefully 

considered as we work to finalize the TLGP. 

Sin~erely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
J~~-05-1996 07: 47 

P.02/03 

NICK LAMPSON 

22ND Doer~., Tll<&I 

Gtnngtt55 uf tlJ2 Dnitth 3iau.s 

lltnui£ uf ittprurnhttiut11 

•~lfingf:mt, 11« 2DS15-4322 

COMMITTEE OM 

.-.GRICUL TVRE 

coMMITTee ON SCIENCE 

CHAIRMAN 

SUBCOMhlITTEE ON EHfRGY 

AND ENVII\OHMEHT 

November 12. 2008 

Mr. Robert E. Feldman 

Executive Secretary 

COMMITTEE OH 

TRANSPOIITATION AND 

INFRASTRUCTURE 

Federal Deposit Insurance Corporation 

SSO 17th Street, N.W. 

CO·CHAIRt,MN AND FOUNDER. 

CONGR!SSIONAL CAUCUS OM 

MISSING AND EXPLOITEt> 

Washington. DC 20429 

A TIN: Comments RlN #3064-AD37 

Dear Mr. Feldman: 

I am writing to provide comments on the October 23 Interim Rule establishing the 

Temporary Liquidity Guarantee Program (TLGP). I urge you to use your powers to 

ensure that the Transaction Account Guarantee Program (TAGP) also covers Interest on 

Lawyer Trust Accounts (IOLTAs). 

IOLT A accounts are essentially the same as covered transactions accounts, and act as 

clearing accountS for pooled funds from clients. Client funds in an IOLT A account are 

either in a very small amount or are held for too short a period to earn interest. These 

funds are typically are for routine actions like a.c; court filing fees. settlements and 

retainers. 

CHI.OREN 

Nearly thiny years ago, the FDIC and Federal Reserve implemented exceptions to permit 

banks to pay interest on IOLTA accounts, which encouraged the establishment of these 

accounts, now in all 50 states. JOLT As provide an indispensable public good without 

any cost to taxpayers. The remainder of the interest generated by IOLTA accounL-. is 

distributed through local grant pioccsses to wonhy not-for-profit organizations in each 

state, including funding legal aid services for foreclosure victimc;. the poor. legal 

education programs and victim" of domestic violence. According to the American Bar 

Association. IOL TA grants totaled $240 million last year. 

However, because IOLTAs do pay interest, the TLGP Interim Rule issued on October 23 

does not fully cover IOLTA accounts. Thus. it is a very real concern that if the interim 

rule is not be modified, lawyers would abandon IOLTAs :md place their client funds 

exceeding $250,000 in non-interest bearing deposit transaction accounts in order to 

secure FDIC insurance. and the vital public service activities funded by JOLt Agenerated interest would suffer immensely. 

W~ Orria: 43D Cwoi l-louu OF!'U Bua.DINI:, WASH1Nc:T0o1, D.C. 20515 12021 225-5951 

STAFFGIID OFRa: 10701 C011P011ATE 011., Si.m 118 Sr.an0AD, TX '77477 12811 240-3700 

HOUSTDlt OFIICI; 1020 BA, /UQ BLw •• SI.ITE 224 HOIISTOIII, TX nosa 12811 481-8300 

Fu.: (2021 225-5241 IW.il~J. 12811 2-40-2959 IST1to~1111l (2811 461-6301 fHol.lCTDfl) 

WWW.1811'1P80ll.hOUstl.lJOY 

-Dllllll:TCLIDPAII" 

.... ft 
would significantly impair the institution's liquidity or would otherwise create significant 

hardship. The FDIC would consider exemption requests on a case-by-case basis. 

The FDIC recognizes that we have access to a $100 billion credit line at Treasury, 

which, temporarily, can be expanded to $500 billion, as a result of the action taken by 

Congress in May 2009. But we believe that it is important for the industry to maintain 

public confidence by demonstrating that it will not reflexively fall back on the public 

safety net in a period of distress. Prepayment of assessments ensures that the deposit 

insurance system remains directly industry-funded and preserves Treasury or Federal 

Financing Bank borrowing for emergency situations. Nonetheless, the mechanics are 

already in place to implement this option quiclcly if that should become necessary. 

While the FDIC believes that our proposed solution is a reasoned approach to 

meeting the challenges we will soon face, we have requested comment on all aspects of 

the proposal and will seriously consider public comments before making a final decision. 

If you have further questions or comments, please do not hesitate to contact me at 

(202) 898-6974 or Paul Nash, Deputy for External Affairs, at (202) 898-6962. 

Sincerely, 

Sheila C. Bair 
JAN-05-1996 07:47 

Ac chis time of economic crisis and rising national foreclosures, it is clear that programs 

funded by IOLTA-gcneratcd income provide an indispensable public benefit to the poor. 

To preserve these t;,enefits, I strongly urge you to provide an exception in the Final Rule 

specifying that IOL TA accounts are guaranteed unlimited deposit insurance through · 

TLGP. 

Thank you for your comideration. 

Sincerely. 

NICK 

Member of Congress 

P.03/03 

TOTAL P.03 
FDII 

Federal DeDOsit Insurance Corooration 

550 17111 Street tNI, Washilglon, DC 20429 

Honorable Dave Loebsack 

House of Representatives 

Washington. D.C. 20515 

Dear Congressman Loebsack: 

Office of Leglslalive Affairs 

November 13, 2008 

Thank you for your letter to the Federal Deposit Insurance Corporation's Executive Secretary 

conceming the impact ofptoviding unlimited insurance coverage to non-interest bearing 

transaction accounts under the FDIC's Temporary Liquidity Guarantee Program (TLGP). We 

are looking at the concerns you and others have raised with respect to IOLTA accounts. 

We have heard from many parties on this issue. I assure you that all views will be carefully 

considered as we work to finalize the TLGP. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
11-1:l-Oi:I: s:39PM;ReP. 1..oeosac1< :2tJ2+2ZB+D757 # 2/ 3 

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November 12, 2008 

Mr. Robert E. Feldman 

Executive Secretary 

Federal Deposit Insurance Corporation 

ATTN: Comments RIN#3064-AD37 

550 17th Street. N.W. 

Washington, DC 20429 

Dear Mr. Feldman: 

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I am writing to urge you to ensure that the Temporary Liquidity Guarantee Program (1LGP)1 as 

established by the October 23, 2008 Interim Rule, includes Interest on Lawyer Trust Accounts 

(IOL T As) in the Transaction Account Guarantee Program. 

IOL TA programs provide an essential public service, strengthen our judicial system, and arc 

operated at no cost to taxpayers. They exist in all fifty states, the District of Columbia, and ibe 

Virgin Islands, and arc mandated in 3 7 states. Through this program, client :funds that are too 

small in amount or held for too brief a period to cam interest for the client arc placed in a pooled 

interest-bearing trust account Bank fees arc paid from the interest earned on these pooled 

·accounts, and the remainder of.the interest generated by IOLTA accounts is distributed through 

local grant processes to not-for-profit organizatio:ns to fund critical legal aid services for victims 

of domestic violence; families faci.gg foreclosure; those affected by consumer fraud; and to fund 

legal education programs. According to the American Bar Association. IOLT A grants totaled 

$240 million in 2007. · 

Currently, the TLGP Interim Rule would not extend unlimited FDIC insurance to IOLTA's 

because they pay interest. I am concerned that lawyers, working in the best interest of their 

clients, will choose to place their client funds exceeding $25O,Q0O in non-interest bearing deposit 

transaction accounts in order to secure FDIC insurance. The resulting loss of funding would 

have a severe impact.on the much-needed public service activities funded by IOLTA-ge.nerated 

interest 

To preserve the benefits of the IOLTA program, and because the interest they pay is dedicated 

only to third-party non-profit IOL TA programs, rather than to attorney account holders or their 

clients, I urge you to provide an exception in the Final Rule specifying that IOLT A accounts are 

guaranteed unlimited deposit insurance through TLGP. 
1,-,z-oe; o:39PM;ReP. LoeOSDCk 

Thank you for your consideration of this matter. 

Sincerely, 

Dave Locbsack 

Member of Congress 

CC: Eric Spitler, Director, Office of Legislative Affairs 

:Z02 .. 226 ... 07S7 • 3/ 3 
1:lnitcd ~tatts '!louse or 'Rr~rrJcntntlnes 

Q1Jmmittct on jino.nriof ~troirts 

The Honorable Sheila C. Bair 

Chairman 

2120 3111yhurn 1l,out 8iffu jlluflblna 

Wa.shin,Dtn, B€: 10515 

November 13, 2008 

Faderal Deposit Insarance Corporation 

550 Seventeent.h Street, NW 

Wasbingto11t DO 20429 

Dear Chairman Bair: 

Sl'ENCEII 840iUS, AL. RANKING MEM!IEII 

FD\C 

~av 1 7 200s 

0fflCE. Of lEGISLAT\VE AFFAIRS 

'llie Co:mmittae on Financial Services will hold . a hearing on •oversight of 

Implementation af the Emergency Economic St.abilization Act of 2008 and of Government 

Landing and Insurance Facilities: Impact on Econt>my and Credit Availability» on Tuesday, 

November 18, 2008, in room 2128 Rayburn House Office Jluilding. I am writing to confirm 

your invitation to testify at tJm hearing. 

Your testimony should address the following specific issues or questions: 

• With respect to the programs you have established under EESA or other preexisting authority to address the problema in the credit and financial markets, what 

impact a:re these measures having on the availability of credit and on the economy 

gena:rally? 

-• How are decision.a being made about the use of TARP funds? What input from 

ind11Btry or other experts are you getting in maldng these deciaiona? Wh11t 

conditions are you imposing or reports are you requiring to assure that institutions 

are using the money in a way that is consistent with the objectives of the program? 

What otJier mecharnams do you have to help you evaluate the impact or measure the 

soccesa of the step!! that havo been taken? 

• Has the authority been used for the rlght purposes? What additional measures or 

authority is needed? 

• What have been the unintended consequences of the facilities established to dat.e 

and how are those consequences being addressed? 

Please read the following material carefully. It is intended as a guide to your rights and 

obligation.a aa a witness und~r the rules of the Committee on Financial Services. 

The Form of your Teatimony, Under rule 3(d)(2) of the Rules of tbs Committee on 

Financial Services, each witness · who is to testify before the Committee or its 

subcommittees must file with. the Clerk of the Committee a written statement of proposed 

testimony of any reasonable length. This must be filed at least two business days befora 
Hon.orable Sheila 0. Bair 

Page2 

your appearance. Please noto that clumges t.o the written stat.e:rnent will not be permitted 

after tbs hearing begins. Fm1ure to comply with this requirement may result in the 

excmsion of your written testimony from the hearing recoxd. Your oral testimony should not 

exceed five minutes and should smmn.ari.ze your written remarks. The Chair reserves the 

right to exclude from the printed hearing record any supplemental materWs BUbm:itted 

with a written statement due In space limitations or printing expense. 

Bubmurion of :;our Teatimo~. Please submit at least 100 copies of yonr proposed 

written statement to th.a Clerk of the Committee not less than two business day11 in 

advance of your appearance. Theae copies ahould be delivered t.o: Clerk, Committee on 

Financial Services, 2129 Rayborn House Office Building, Washington, D.C. 20616. 

Dua t.o heightened security restrictions, many common forms of delivery experience 

significant delays in delivery to ths Committee. This includes packages sent via tha U.S. 

Postal Samce, Federal Express, UPS, and other similar cani.ers, which typically arrive 3 to 

· 6 dayu later than normal 'Iha United States Capitol Police have specifically requested that 

the Committee refuse deliveries by courier, The best method for delivery of your testimony 

is to have an employee from your organization deliver your testimony in an t1I1Sealed 

package to the address above. If you aro unable to comply with this procedure, please 

contact the Committee. to discoss alternative roathods for delivery of your testimony. 

'The Rules of tbs Committee require, to the ex.tent practirabl-,, that you also submit 

your writt.en testimony in electronic form. Too P!fITT9TM method of submistrion of testimony 

in electronic form is to send it via electronic mail to fsctAmmn:gy@mej].house.goy. The 

electronic copy of your t.estimony may be in e:ny major file ibnnat, including WordPerfect, 

Microsoft Word, or ASCll text for either Wmdowa or Macintosh. Your electromc mail. 

message should specify the date and which committee or subcommittee you are scheduled 

to testify before. You may also submit testimony in electronic farm on a dia:k. or CD-ROM at 

the time of delivery of the copies of your written testimony. Submission of testimony in 

electronic form facilitates the production of the printed hearing record and posting of your 

te.stimon.y on the Committea'a Internet site. . . 

Your Right. as a. Wimes'- Under clause 2(k) of rule XI of the Rules of the House, 

witnesses at hearings may be accompanied by their own counsel to advise them concerning 

their conatitutional rights. I reserve the right to place any witness under oath. Finally, a 

witness may obtain .a transcript copy of his testimony given in open, public session, or in a 

closed session only when authorized by the Committee or subcommittee. However, by 

appearing before the Committee or if:5 subcon;unittees, you authorize the Com:mjttee to 

make teclm:ical, grammatical, and typographical corrections to the transcript in accm:dsnce 

with the rules of the Committee ~d the House. 

The Rules 0£ the Committee on Financial Services, and the applicable rules of the 

. Hoose, are available on the Committee's website at http://financlalsezyices.honse.gpy. 

Copies can also be aent to you upon request. 

The Committee on Financial Services endeavors t.o make its facilities accessible to 

persons with disabilities. If you are in need of ~paci,al accommodations, or· have any 

questions regarding special accommodations generally, please contact tho Committee in 
Honorable Sheila C. Bair 

Page3 

advanca oC the acbednled event (4 business days notice is requested) at (202) 225-4247; 

Tl'Y: 202-226-1691; or write to the Committee at the address above. 

Please note that space in the Committ.ee's hearing room is exmnnely limited. 

Therefore, the Committee will only reserve 1 aaat for staff accompanymg you during yonr 

appearance (a total of .2 seats). In order to maintain our Qhligation tmder the Rules of the 

Ho'll.9B to ensure that Committee hearinga are open to the public, wa cannot deviate from 

Ima policy, 

Should you or your stiμf have ,my qaestiona or need additional information, please 

contact Deborah Silberman at (202) 225-4247. 

BF/d.a 

Enclorure 

cc: The Honorahle Spencer Bachns 

Barney Frank 

Chairman 
FDII 

Federal Deoosit Insurance CorDoratlon 

550 17111 Street NW, Washington, DC 20429 

Honorable Benjamin L. Cardin 

United States Senate 

. Washington, D.C. 20510 

Dear Senator Cardin: 

. D"(''-'t'.r~::... f~,i...,,.,~--_ ··•·r-r -1.. 

r1 i l ~, ..:~i- -: ,. c. 

November 14, 2008 

Thank you for your letter to the Federal Deposit Insurance Corporation's Executive Secretary 

concerning the impact of providing unlimited insurance coverage to non-interest bearing 

transaction accounts under the FDIC's Temporary Liquidity Guarantee Program (TLGP). We 

arc loolcing at the concerns you and others have raised with respect to IOLT A accounts. 

We have heard from many parties on this issue. I assure you that all views will be carefully 

considered as we work to finalize the TLGP. 

Sincerely, 

Eric I. Spitler 

Director 

Office of Legislative Affairs 
Nov-13-2008 ·15:55 Senator Benjamin L. Cardin 202-224-1651 

Mr. Robcrt:E. Feldman 

Executive Sccretmy 

tlnittd ~tatts ~tnatt 

WASHINGTON, DC 20610 

November 13, 2008 

Federal Deposit Jnsuran~ CDiporation 

55017th Street. N.W. 

Washing1on. DC 20429 

A TIN: Comments RlN #3064-AD3 7 

Dear Mr. Feldman: 

FDIC 

NOV 1 3 2008 

OFFICE OF LEGISLATIVE AFFAIRS 

We are writing to provide comments on the. October 23 Interim Rule establishing 

the Temporary LiquiQity Guarantee Program (TLGP). Specifically, we urge you to 

ensure that the Transaction Account Guarmtci, Pro~ through which the FDIC vrul 

guarantee certain no~--bearic.g accounts, also covers Intezest on Lawyer Trust 

AccOllilts (IOLTAs). 

Created by various sta~ supreme courts and state legiutares, and made possible 

by changes in federal benking and IRS laws, IOLTA programs provide an essential 

public good at no cost to taxpayers. These programs cUII"eiltl.y operate in all fifty states 

and in the District of Columbia and the Virgin Islands. and they are mandated in 37 

states. Client funds that Bl'C too small in amount or held for too brief a period to earn 

inteicst for the client, net of bank charges or admmistrative fees, axe placed in a pooled 

inteicst-bcaring trust account, tettned an IOLTA. 

Bank fees are paid from the interest earned on these pooled accounts, and the 

remainder oftbe int.crest generated by IOLTA accoUllts is distributed through local grant 

processes to no~-for-profit organi4ti.ons in each state, funding invaluable letal eid 

services for victims gf d.om~stic violence. families facing foreclosure, those affected by 

consumer fraud, and others, as well as legal cducatlon programs. According to the 

American Bar Association. IOLTA grants totaled S240 million in 2007. 

However, because IOLT As do pay interest. the Tl.GP Interim Rule as issued on 

Octobe.r 23 would not extend unlimited FDIC insurance to these accounts. We believe 

however, that the public b~fit generated by IOLTAs, and the fact that the interest they 

pay is dedicated only to thirr;l-party non-profit !OLIA programs. rather than to attorney 

., account holders or their clients, merits· an exception in the ~ rule. 

We ari; conceined tba.t should the interim fioal rule not be modified to guarantee 

IOLTAs under TLGP, lawyers would instead place their c:ient funds ex~eding $2.50,000 

in non-int.ciest bearing deposit transaction accounts in order to secure FDIC insurance, 

1/J 
Nov-13-2008 15:55 Senator Benjamin L. C~rdin 202-224-1651 

and tha,t the much-needed public service activities :funded by IOLTA-generated interest 

would sufi\u'. 

To preserve the benefits of the IOLTA program, we strongly urge you to provide 

an exi;eption in~ Fm.I Rllle specifying that IOL TA accounts are guatanteed unlimited 

· deposit insurance tbtough 1LGP. · 

Thank you for your cons!dmtion of this mimet. 

Benjamin L. Cardin 

United States Senator 

Bc:mard Sanders . 

United States Senator 

TomHarkin 

United States Senator 

Sincerely, 

Arlen Specter . 

United S~tes ~f9r 

r ('1~ CeMcOskill Patty Murray 

United States Senator United States S~tor 

Debbie ~_,.,. . Robert P. Casey, Jr. . 

United States Senator . United States Senator 

_.;____. _______ __,_ __ .... -----·- ··- -··- --- . ··-

2/3 
Nov-13-2008 15:55 Senator Benjamin L. Cardin 202-224-1651 

Russell b. Feingold . . 

United States Senator United Sta~ Senator 

United Stales Scn&.toz 

Hllla\y Rodham Clinton 

United S~s Sena1or 

United States Senato~ 

Rich~4 Durbin 

United S'tates Senator 

Charles E. Schumer 

United States Sc:nato_r 

3/3 
FDII 

Federal Oeoosit Insurance Corooratfon 

550 17th Snet mY, Washlnglcn, DC 20429 

Honorable John Conyers, Jr. 

Chairman 

Committee on the Judiciary 

House of Representatives 

Washington, D.C. 20515 

Deat Mr. Chairman: 

Lrt 08-(o J 3 ~ 

Office of Legislative Affair; 

November 14, 2008 .. · ,,. 

Thank you for your letter to the Federal Deposit-Insurance Corporation's Executive Secretary 

concerning the impact of providing unlimited .insurance coverage to non~intercst bearing 

transaction accounts under the FDIC's Temporary Liquidity Guarantee Program (TLGP). We 

are looking at the concerns you and others have raised with respect to IOL TA accounts. 

We have heard from many parties on this issue. I assure you that all views will be carefully 

considered as we work to finalize the TLGP. 

Sincerely, 

;,"---

Eric J. Spitler 

Director 

Office of Legislative Affairs 
l1-13-08;06:"2PM; .... L__.,. ··-·--... ----- IIOWNaJL-,C.-

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Mr. Robert E. Feldman 

Executive Secretary . 

212028287062 

ONE HUNDRED TeN'III CONGRESS 

~ongrrns of thr 'linittd ~tatts 

!toosr of lttprtstntatior.s 

COMMITTEE ON THE JUDICIARY 

213B RA.VIIURN Hour.e OFFC1i BUILDING 

WASHING"! 0N. DC 2051S-6116 

12D2) 225-3951 

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November 13, 2008 

Federal Deposit Tnsurance Corporation 

550 17th Street, N. W. 

FDIC 

NOV 1 3 2008 

Washington, DC 20429 OFFICE OF LEGISLATIVE AFFAIRS 

ATTN: Comments R1N #3064-AD37 

Dear Mr. rcldman: 

We write to comment on the October 23 Interim Ru.le establishing the Temporary 

Llqwdity Guarantee Program (TLGP). Specifically, we urge you to ensure that the 1LGP, 

through which the FDlC will fully guarantee certain non-interest be.uing transaction accounts, 

also covers Interest an lawyct Trust Accounts OOLTAs). 

Among its most critical responsibilities, the Judiciary Committee oversees matten. 

involving the administration of justice and access to the legal system, such as the .L.egal St:rvices 

Corporation. While IOLTA programs are created by st.ate Jaw or supreme court rule and not 

federal legida.Iion, we strongly support the unique and important role they serve in providing 

resource,; to allow the poor to rei:olve or prevent legal problems. IOLT A programs exist in ml 50 

states und the District of Columbia. In fact, 37 states require lawyen to deposit client funds that 

cannot earn net interest for the client in IOLTAs. Interest generated from IOL T As is paid to 

IOLTA programs that issue grants for the provision c,f civil legal aid to the poor, the 

administrttion of justice, and law-rclate<l education - programs that nre vital lo our democratic 

i;ystem 's guarantee of cql.131 a.cccss to juslice for all. 

JOLTAs act as clearing accounLc; for pooled client funds. From the peTSpectives of both 

the account holder and the beneficial owner of the funds, JOLT.As effectively urc the same as 

insured accounts. As a general matter, client funds pooled in an IOLTA are either nominal, or a 

significant amount held only long enough for a check to clear or for the attorney to disperse the 

funds. Funds placed in an TOLTA might include court filing fees, real estate escrows, sett!emcnls 
e 1102ae,,7oa~ 

and retainers. The real estate escrows are both most at risk·withoul full coverage, and of the 

greatest importance for IOL TA progr.uns because these short-term large funds generate a 

significant amow1t ofIOLTA revenue. 

I 

These lOLTAs generate interest to 1.hc third-party non-profit IOLTA progrdJils under an 

exception granted by the Federal Reserve and the FDIC. However, because IOLT As do generate 

interest, the TLGP Interim Rule as issued on October 23 would not extend unlimited FDIC : 

insurance to these accounts. Lawyers holding client funds in excess of $250,000 must now 

con.sider whether to move their clienl funds from IOLTAs to a fully imured, non-interest bearing 

deposit t.ranSaction account Under another option, lawyers in the 37 mandatory JOLTA states 

might move the substantial sums in their trust accounts from community banks to larger 

institutions view~d ns less lilcely lo fail. That option would be contrary to the FDIC's goal in 

creating the TLGP, which was lo ensure stability in the banking system. 

If lawyers move their IOLTA-eligible fllllds to non-inlercst bearing accounts. the: interes1 

income received by !OLTA programs in all of our states would be greatly reduced. IOLTA 

programs nationwide provided more than $212 million dollars in 2007 for the provision of civil 

legal services to the poor, making it the second largest source of such funding in the country. 

Without IOL TA funds, many low-income families who are being hit particularly hard by the 

current economic situation will not be: able to receive help with legal probfc:ms such as 

forecloSUICs, consumer problems, domestic violence, child support and other critical needs. We 

believe that the public benefits gei:icroted by IOL T As, nnd the fact lhat the interest they pay is 

dedicated only to third-party non-profit lOL TA programs, rather than to attorney account holders 

or their clients, merit inclusion of IOLTA.s in tltc unlimited insurance in the final rule. 

For reasons consistent with the FDIC's goals and for the public good, it is critical that the 

FDIC extend the unlimited insurance coverage of the TLGP to IOLT As. We request that the 

FDIC include JOLT As in the full insUIBnce available under the new TLGP. 

We thank you for your coIL!.ideration. 

Sincerely, 

John Conyer 

n, House Judiciary Committee 

Linda T. Sancbez 

Chair, Subcommillee on Commercial and 

Administrative Law 

# 3.· 4 
11-13-08;06:"lPM; 

~t V 

Chairman, Subcommittee on Crime, 

Terrorism. and Homeland Security 

Ch · , ubcommittee on Immigration, 

Citizenship. Refugees, Border Security, and ~:ron~~w 

Ri~~ 

William D. Delahunt 

Member, CommiUc:e on the Judiciary 

Debbie Wasserman Schul · 

Member, Committee on the Judiciary 

Member, Committee on the Judiciary 

212028987002 

,..-u,.-..... Subcommittee on the 

Constitution, Civil Rights, and Civil 

# 4, * 

/ 

Chairman 

Subcommittee on Courts, the Internet, and 

Intellectual Property 

Melvin L. Walt 

Mt:mbcr, Committee on the Judiciary 

- Steve Cohen 

Member, Committee on the Judiciary 

Brad Sherman 

Member, Committee on the Judiciary 

HenryC.ohnson, Jr. 

M~mbcr, Committee on the Judiciary 
- FEDERAL DEPOSIT INSURANCE CORPOR,4jJON, Washington, oc 20429 

SHEILA C. BAIR November 19, 2008 

CHAIRMAN 

Honorable Henry Cuellar 

House of Representatives 

Washingt~n. D.C. 20515 

Dear Congressman Cuellar: 

~ 

.. 

Thank you for writing to express your concerns regarding proposed changes to 

risk-based premiums, recent temporary changes to Federal Deposit Insurance Corporation 

insurance coverage limits, and other ir.itiatives to shore up liquidity in the financial 

system The FDIC believes that these actions will strengthen the deposit insurance fund 

and help to maintain stability and public confidence in the U.S. financial system. Your 

Jetter raised several issues, which this response discusses below. 

Higher deposit insurance premiums: As explained below, the temporary changes 

in the insurance coverage limits are not respoI1S1ole for the nc¢ to increase FDIC 

premium rates. Rather, recent banic•failurcs have significantly increased the insurance 

fund's losses, resulting in a decline in the reserve ratio (the fund balance as a percent of 

total estimated insured deposits}. A1J of June 30, 2008, the reserve ratio stood at 1.01 

percent. down from 1.19 percent at March 31. When the reserve ratio falls below 1.15 

percent, the FDIC is required by law to establish and implement a restoration plan in 

order to retmn the reserve ratio to at least 1. 15 percent within five years. On October 7, 

2008, the FDIC established a restoration plan and published a notice of proposed 

rulemaking that would raise assc~sment rates and make other changes to the risk-based 

assessment system. These changes are primarily to ensure that riskier institutions will 

bear a greater share of the proposed increase in assessments. · 

Changes to risk-based premiums for .secured liabilities: The FDIC proposes to 

increase assessment rates of institutions·with secured liabilities (including Federal Home 

Loan Bank advances and repurchase agreements, among other liabilities) exceeding 15 

percent of domestic deposits. Under the current rules, substituting secured liabilities for 

unsecured liabilities (including subordinated debt) generally raises the FDIC's loss in the 

event of failure without providing increased assessment revenue. An institution funded 

with secured liabilities, compared to an institution funded with deposits, pays a smaller 

deposit insurance assessment, even if both institutions pose the same risk of failure and 

would cause the same losses to the FDIC in the event of failure. _Substituting secured 

liabilities for deposits can also lower an institution's franchise value in the event of 

failure, which increases the FDIC's losses, all else being equal. 

Temporary increase of deposit insurance limit to $250,000: The Emergency 

Economic Stabilization Act of 2008 temporarily increased the coverage on deposit 
With an increasing number of insolvent banks, I believe, and in fact evidence 

demonstrates. that the public llUIIkcts will not be an adequate i1ourcc for the level of new capital 

that will be needed to shore up bank: balance sheets and provide money for new lending. 

Although several large banks have recently raised capi1al in the public markets, I doubt that the 

capacity exists to fimd the capital needs of the hundreds of small and mid-tier banks that will 

suffer losses. The Wall Street Journal recently concluded that losses from commercial real 

estate loans alone could generate losses of $100 bμIion by the end of next year at more than 900 

small and midsize banks. If the public markets arc not sufficient, the Treasury Department may 

choose to use odditio~ TARP funds-this is not ZlD appealing option, and one that I would 

strongly oppose given that there is a significant amount of existing and willing private capital on 

the sidelines. 

Among other private sources of capital, private equity firms have the resources and 

expertise to facilitate the recapitalization of many small and mid-tier banks. I am told private 

equity has over $450 billion in available capital to invest. and a number of firms have raised new 

funds to be dedicated exclusively to financial services. Private equity finns also have proven 

their ability to attract experienced CEOs, effectively ma.nage risk and improve the efficiency and 

profitability of the companies in which they invest They are exactly the kind of investors that 

should be encouraged to invest in the banking sector. 

I am concerned that the banking regulators are not taking appropriate action to facilitate 

the flow of private investment into the banking system. In fact, it seems that the regulators are 

actually taking steps to reduce the role of some spurces of private capital----a position that I find 

very troubling and co,;itradictory to the administration's broader efforts through programs like 

TALF and the public-private inve.mnent partnerships .. For example, the FDIC recently proposed 

guidelines to govctn private investments in failed banks that arc under FDIC receivership. These 

guidelines would apply exceptional rules to private investors, such as a "super capital" 

requirement, a broad "source of strength" requirement, and a "cross-guarantee•• rule. ·Each of 

these requirements would pose a substantial deterrent to pri,yate investors. Although I recognize 

that the FDIC is attempting to provide clarity for future acquisitiom and that the agency docs 

have justifiable concerns regarding the purchase.of a failed bank, the measures as currently 

proposed would significantly impede private investment According to the Congressional 

Budget Office, the FDIC is responsible for over Sl 00 billion in losses during the next few years. 

With this looming liability, I think it is in the interest of the FDIC and the taxpayers to attract 

additional sources of private capital to reduce these Josses. I do not think that the federal. 

government should bear these costs when private investors arc willing to step in and take the 

risk. 

l urge all of the federal regulators to adjust their current statutory interpretations where 

there is flexibility to allow additional private investment in bap.[cs and thrifts. I understand that 

many of the current investment limitations are rooted in concerns about the appropriate 

separation of banking and commerce. As you know, I have my own opiniom about this debate 

and the record of commercial and banking affiliations. I believe that these changes can be 

accomplished without rc--opcning this historical debate. 
insurance tQ $250,000 for all accounts in order to enhance depositor confidence and 

prevent bank: runs that could threaten failure of otherwise healthy institutions. The 

temporary increase expires on December 31, 2009. The legislation directs FDIC not to 

consider the temporary coverage increase to $250,000 in setting assessments. Therefore, 

the FDIC will not include the additional insured deposits in calculating the insurance 

fund reserve ratio, which guides our-assessment planning. 

The Temporary Liquidity Guarantee Program (TLGP): Under the TLGP, banks 

and thrifts may elect for a fee to have the FDIC guarantee the fuJI balance of their noninterest bearing transaction accounts through December 31, 2009. This part of the 

program is intended to help individuals and provide confidence to businesses that 

maintain large transaction account balances for payroll and other ongoing business 

expenses. We anticipate that the great majority of institutions will participate in this part 

of the TLGP because of the benefits it will provide. In order to instill confidence in 

credit markets during this period of financial turmoil, banks, thrifts, and most holding 

companies may also choose for a fee to have the FDIC temporarily guarantee certain 

newly_ issued senior unsecured debt. 

Mo,:,ey market fiends: The U.S Treasury Department's Money Market Guarantee 

Program, announced in September 2008, is intended to provide additional support and 

stability to the financial markets. The FDIC is not involved in this program. This 

program•s guarantee will only apply to shares of eligible money market funds held as of 

September 19, 2008. Eligi"ble funds must have had a policy of maintaining a stable net 

asset value or share price th.at is equal to or greater than $1.00 and must have had such a 

policy on September 19, 2008. Funds that successfuJiy applied by October IO, 2008 and 

have been accepted into the program will be covered. This program wi11 be in effect for 

an initial three month term. after which the Secretary of the Treasury has the option to 

extend the program up to the close of business on September 18, 2009. Since this 

government guarantee will only apply to a limited number of funds for a limited time 

period, this program will not serve as a Jong term attractive alternative to insured bank 

deposits. 

I hope that you find this information useful in responding to the concerns of some 

of the community banks in your District. We believe that all financial institutions, large 

and small, as well as their customers, will benefit from these efforts to stabilize financial 

markets, increase liquidity in the financial system, and maintain a strong deposit 

insurance fund that instills public confidence and protects taxpayers. 

If you have further questions or comments, please do not hesitate to contact me at 

(202) 898-6974 or Eric Spitler, Director ofLegislative Affairs, at (202) 898-3837. 

Sheila C. Bair 
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The Honorable Shelia C. Bair 

Oiairwom.an 

October 17, 2008 

Federal Depos-it Insurance Corporation 

SSO Seventeenth Street. NW, Room 6076 

Washington, DC 20429 

Dear Chairwoman Bair: 

FDIC 

I 

OCT 2 D 2008 

··-·------...J 

I write to request your assistance in addressing the concerns of some of the 

community banks in my Congressional District A provision in the recently enacted 

economic rescue package allows for the Federal Deposit Insurance Corporation (FD IC) 

to temporarily raise the insurance limits on deposits from $100,000 to $250,000. While 

CBO estimates that this provision would boost insured deposits by 15%, commmlity 

banks in my District have voiced the following concerns: 

• FDIC insurance premium increases will create disincentives to protect customers' 

funds with safe CD programs 

• FDIC ptemium increases will decrease the amount of funds that the bank. bas to 

lend to its customers in two ways: first. these funds would typically be leveraged 

at least six times, the belief exists that this cost would result in lost local loans; 

second. community banks allege that the adverse impact on Flll..B advances could 

mean that it would be harder, and more costly, to fund loans in a responsible way. 

• The expanded insurance facility will acate huge pressure on all banks to offer 

this feature to large commercial depositors thus increasing the cost of funds l!Dd 

affecting liquidity for banks 

• Insurance of Money Market Funds will make this product an attractive alternative 

to bank. deposits. 

I would like to respond to these concerns in the most adequate way possible. and I would 

appreciate any counsel or suggestions that you may have regarding the aforementioned 

issues. If my staff or I may be of any more assistance. please do not hesitate to contact us 

at (202)225-1640. 

HC:jbr 

~~ U.S. Congressman 2sa District of Texas 

,.,aml_snm -..-rEI aalll.'IX••· 

---- ---

I 
8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Barney Frank 

Chairman . 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chairman: 

November 19, 2008 

Thank you for your letter concerning the impact of providing unlimited 

insurance coverage to non-interest bearing transaction accounts under the Federal 

Deposit Insmance Corporation's Temporary Liquidity Guarantee Program (TLGP). 

We are looking at the concerns you and otheis_havc raised with respect to IOLTA 

accounts. · 

W c have heard from many parties on this issue. I assure you that all views 

will be carefully considered as we work to finalize the TLGP. 

Sincerely, 

Sheila C. Bair 
11/13/2008 10:33 FAX 2022264301 ll)OOl/001 

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cn.tittd ,Smtts !IOU5t Qf lltprorntatiocs 

©Jmmf mr: on jinancial ~mricm 

Sl"ENCE?I BA.CJiUS. -'l_ RAl,IXING MEM1£11 

VIA F f'\CSIMILE 

The Honorable Sheila C. Bair 

2129 Ju7fJum J,ollic emu JiMl.h1n11 

Wuldn1t11, B~ lDflf 

November 13, 2008 

Chair-~ Federal Deposit Insurance Corporation 

550 17th Street, NW 

Raom602S 

Washington. D.C. 20429 

Comments RIN #30H-AD37 

Dear Chairwoman Batt: 

We are writing to provide comments on the FDIC's Interim Rule published on October 23 

establishine the Temporary Liquidity Guarantee Program (TLGP). We believe that the FDIC's fin.ai :rule 

ahC?uld c_larify that the Corporation willfully guarantee, in addition to noninterest-bearing accollllb, 

In~i:eat on Lawyer Trust Accounta (IOLT.A:i). . 

The IOLTA program represents a aipifica.n.t source of financial support to civil lefal aid 

programJ for the poor. These programs operate in all 50 atatea, the Diatrict of Calumbia and. the Virgin 

Islands, and in 37 statea, they are mand.ato.ry. IOLT.As contain client funds held by a lawyer for a short 

period of time. Interest generated ~ these accounts is paid to charitable organizations, not the lawyer 

or the client.· When atata legislaturea and atate supreme courts created IOLTA. the FDIC carved out an 

exception to Regulation D that allowed the payment of interest on these demand accounts. 

Because IOLTAs pay in~rest, the TLGP Interim Rule would 1eemingly not cover them, thereby 

excluding IOLTA.9 from unlimited FDIC insurance coverage. Iho, then attorney• in the 37 states with 

IO~T#\,. mandates, actinr in a.ccoid~ce with their fiduciary duties to maintain the security of client 

fund.a, might transfer IOLTA accounts from local banh to larger "safer" institutions: and .attorney; in 

other jurisdictions might transf'e-r funds from IOLTA accounts to non-interest bearing accounts to qualify 

for unlimited FDIC coverage. If the final FDIC rules encourage lawyer& to disadvantage comm.unity 

b~ 9r reduce- or eliminate the interest income generated on IOLTAs, this critical source of civil legal 

aid will unne1:Cs.sarily and inappropriately shrixuc. 

It is our view that because of the public ~ood provided by IOLTA prop-am! - and because the 

inten:at on these accounta exclusively benefits third parties - the FDIC should ensure that IOLTAs are 

eligible for unlimited deposit insurance ·coverage through TLGP. · 

Thank you for your conairleration of our vi~s. 

Sincerely, 

. Ranking Member 
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November 20, ioog 

The Honorable, Sheila Ba:it 

Chairman of the Board 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Wasqiogton. DC 20429 

Dear Chairman Bair. 

I am '\.\.Titing to invite you or y91,1T d~f gn~ to t:¢ify before the $~ Appropriations 

Subcommittee on Fina,ncial Servic;.es ancl Gep.era} Govcnunent r-cg~g the jD~a,rtm.ent 0f 1he 

Treasury's inlp1ementatio;n of the R:merg~i;;y Econoro.ii;: Stabilization Ac-t. Iq. particwar1 ~e 

hearing will focus on the Deparfmenfseiforts lo uμtigate.morlga:ge foI1+1ostifes thtoughthe 

Blltborizatioos. provided under that Act The Su.bcon:unittee looks fo~-atd to hearing how yow 

eJ..-perience with mortgage forecfosures, especially y'Qut c:>..>perience ·with IndyMac,. can contno.uie 

to the pro,:npt resolutlon .ofthis nationwide msis. 

The hearing is. scb.ednled for Thursday, December 4,. WQ&, at 10:00 aμn. in the James 

Benton Parsoo.S Memorial C{)urtrc>otn, Courp:oo,m 2525-, EM, t>irksen Uni~ States Courthouse, 

219 South Doarbom Street, Chicago, Illinois. Please submit YO'Ui testimony ~lectroP-ically; no 

later than 5 p.ni. on Monday, December I. 2008, to micha:el_bain@appro.s~aie.gov. AU 

statements and a.ccompanyi.Qg m.aterials 1hat you wi'sh to nave printed In the \earing recbrd 

should be 1;yped sing~e-::;p~ce<l on one side.of the paper and in Word format. · · 

The Subcormnitteo wc;,uld lik,e to devote as much time ~ pQ$~i.ble to cμscw;s your vie~. 

\Ve ask tnat your or:al testimony be litnite4 ta no mo~ than five minutes t-0 aH.Qw-ample tittle fo:r 

dialogue. Y out wtitten testimony may contain additional details iμld 'Will be ~eluded in the 

hearing record in its entirety. 

If you have any questi'QO.S regs!rding. the hearin~, please contact Melis~a Petersen at (202) 

224"9722. We look forward to your participation in this beazfag. 

RJD:mcb 

Sincerely, 

Rfohwcl'J. Durbin 

Cb.airman 

Su.bcomniittee on FirumciaI Setv!ces and 

General Gov~ent 
APPROPRIATIONS COMMITTE: 

~ON. 

Sn.TE. f0RElc.N ~ Dn:lwl0ta, AND flE.ATEZ> 

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MeMCIS 

SUll(:ONMJTIS; ON ftNANaAl. SaM:a 

SEI.B:r bm:r.uBEHa Dvsistli!ff l'IWB. 

JUDICIARY COMMITTEE · 

S~ 011 C'.DIJlns,. nE INTE!INE'r AND 1Nl!Ll.l!C1'UAS. l"llonfflv 

PERMANENT SELECT 

COMMITTEE ON INlS.UGENCE 

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MIAL'l'SIS N-«> 

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OVEIWGIIT AND lwEsn:.,o.llDHS 

Sec:rebuy Hcmy Paulson 

ADAM B. SCHIFF 

29nl l:llmlll=T, CAufDlvM 

November ~l, 2008 

U.S. Department of the '.frcasury . 1500 PcmisylvaniaAvenue, NW, Room3134 

Washington, DC 20220 

Dear Secret.my Pimlsoo. 

'-:IJ08- &77 WASHINGTON OA'ICE:. 

Q l2S CAHl,loN lbmlE OFRa! Bt.a..cotQ 

W'Al.HING11)N, DC 211515 

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(2ll2J 225-4171 

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DSTRCr~. 

lf7 NOICT}I RAYMOND AvaN! 

Sine BOO 

PASADENA. CA 91103 

l6261304--Z7%7 

FAX: 18261~? 

With the collapse of ln.dyMac Bank, h.eadquartcred in Pasadc:aa.. California, and the 

median price of Southcm Califomia homes down almott thirty pcrcmt since last year, my 

constitncnts ~ being hard hit by the c:um:nt housing 8ll.d financial c.tisis. . . For the first time since the slm;np began, repossessed properties accoumcd for more than 

half of residea.ccs sold in Los Angeles County last month. For many rnontbs I have 

pushed for strong action to stcm·the tide of fureclosares and prevent :furfhcr decline in the 

housing market. I believe we can confront tbe epidemic of foicclosmcs by helping 

hom~wnas rcstro.cfu:rc their mortgages over longer or diffi:rent tcnns. 

I CQl]llllcnd the efforts of the FD~C as_fbe consczyator of IndyMac Federal Bank in 

reaclrln.g out to delinquent mortgagors and instituting a oomprdu:nsive syxtcm to convert 

distressed loans into sustamablc,..pcrforming loans. Focusing on practical measures such_ 

as intC'l'Cst rate reductions, extending amo~on and de~ po~ans of the principal 

have proycn to be~ effective way to ensure loans tcmam affordable for many struggling 

families. I am pleased that the FDIC has takca such initiative and is aggressively aiding 

families that live in my dis1rict, and strongly believe we must c:xtcn.d these benefits to 

homeowners throughout 1hc conntry. 

I believe Chairwoman. Sheila Beirs proposal to build on the model at IndyMac Federal 

and create anationw:idc program to help homeowners avoid :fureclOSlil'C is 11. step in the . 

right direction and deserves serious consideration. While her proposal is still in its 

DBSccnt stages. it has the promise of providing a real solution mi real relief to stmggling 

mortgageho1dcrs across the country while improving the value oflollDS fur banks and 

investors md preventing further degradation of ilia housing merlcet With a. systematic 

approacli using practical methods of reducing monthly payments, the FDIC will be able 

to help many mortgagors quickly and effectively. As the government would share in 

losses from modifications un&r 1hc program, I believe more :financial institutions would 
find it in their interest to cooperate. with the FDIC and homeowners to find solutions that 

wm:k for all parties. 

. . 

This ~ach--: mrting with the local community and working up. rather than helping 

the financial institntions and worldng dovin - farm.om directly addresses the UDdcrlying 

ilh and puts fin- fewer taxpa~ dollan at risk. I believe it would be evr::ry bit as 

reassuring to tho m.aiketr as ~el.ping banh, and do more to &al with the root problem.. If 

mare homcown::.rs stay om of .fimclosure and hs:vc more realistic mont:hlypaymmm, 

tberc will be more mant;y in their pockc:ts to help stimulate the~ of t1ic oconomy. It 

would also save com:dlcss billiDlIS of taxpayer dollars on the front end,, oo w~ have the · 

resotl:I'CrS we need to deal with the additional problems 1hat ere most certainly beading_ 

om-way. 

I :hope that any program· to help prevent foreclosure makes every effort to e:nsurc people 

do not take advantage of the system by in.1cntionally defmlting or scammmg the system. 

I also encourage you to look into proposals that would provide a rctm:n investment to the 

Treasury Department perhaps by requiring individuals share increased eqany with the . 

govcmmcai at time of sale. 

Congre.ss clearly provided the anth.onty to the Treasury Department to hclp homeowners 

prevent foreclosure when it passed the Em~cn.cy Economic Stabilization Act. and I 

believc·you have the duty to talcti action to help American families as you have the 

:financial ind:ust:J:y. fask thBt you.implement more aggressive foreclosure mitigation 

cffurts as qmckly as poSSlble and worlc with Chmwomsn·Bair OJI finslizjng and fi.mtjin.g 

her proposal. Families muggling to· pay their martgagcs cannot wait 

Cc: Chairwoman. Sheila Bair, FDIC 

-~ADAM B. SCHIFF 

Member of Congress. 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Carolyn McCarthy 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman McCarthy: 

November 25, 2008 

Thank you for the opportunity to respond to the questions you submitted 

subsequent to my testimony at the hearing on 'The Implementation of the HOPE for 

Homeowners Program and A Review of Foreclosure Mitigation Efforts" before the 

Financial Services Committee on September 17, 2008. 

Enclosed is my response. If you have further questions or comments, please do 

not hesitate to contact me at (202) 898-6974 or Eric Spitler, Director of Legislative_ 

Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 

Enclosure 
Response to questions from the Honorable Carolyn McCarthy 

from Sheila C. Bair, Chairman, 

Federal Deposit Insurance Corporation 

Qt: In the case of delinquent mortgages for multi-unit dwellings held by IndyMac 

that cannot be modified, bow does the FDIC deal with tenants? Bow much time do 

they have to vacate property once foreclosure proceedings have begun? Are they 

notified that they must vacate the property? When is notification given? 

Al: For loans that IndyMac services, IndyMac adheres to the criteria specified in the 

servicing agreement and provides the tenant with a 30-day eviction notice or the 

timeframe specified by state Jaw if it differs. 

For loans that IndyMac owns, IndyMac recently revised its processes for working with 

tenants, regardless of whether the property is a single unit or a multi-unit dwelling, as 

follows: 

• IndyMac does not initiate the eviction process until after it receives legal 

control of a property. 

• After the foreclosure sale is finalized, IndyMac sends tenants an informational 

Jetter informing them that the property has been foreclosed. The letter advises 

that IndyMac is providing lhe tenants with a 60-day holding period to arrange 

their relocation prior to initiating the eviction process, and IndyMac may be 

able to financially assist the tenants with their move. 

• Upon expiration of lhe 60-day holding period, IndyMac sends the tenants a 

second notice informing them that the eviction process will be initiated. 

Depending on where the property is located. the eviction process typically 

takes between 30 to 60 days. 

Q2. Is it time to increase the amount insured by the FDIC on individual and 

retirement accounts? 

Al. The Emergency Economic Stabilization Act (EESA} of 2008 has already 

temporarily raised the general coverage limit from $100,000 to $250,000, which is also 

the existing coverage limit for retirement accounts. The increase will last until the end of 

2009. The EESA directs us not to consider the temporary coverage increase to $250,000 

in setting assessments. Therefore, we do not include the additional insured deposits in 

calculating the fund reserve ratio, which guides our assessment planning. If Congress 

were to decide to leave the $250,000 coverage level in place indefinitely, however, it 

would be necessary to account for the increase in insured· deposits to determine the 

appropriate level of the fund. 
Q3. Of the 20,000 of IndyMac loans in delinquency that are not owned by IndyMac 

or with servicing agreements with[out) sufficient flexibility for modification, how do 

you expect to obtain approval to apply new modification programs to these Joans? 

A3. Since the streamlined loan modification program was launched on August 20th, 

IndyMac has been modifying securitized loans according to the servicing agreements• 

tenns. In general, modifications are pennitted by the servicing agreements so long as the 

borrower is delinquent and the mo~ification provides better value than foreclosure. 

Some of the loans that IndyMac services are not securitized, but owned as 'whole' loans 

by investors. The servicing agreements for these 'whole' loans do require consent before 

modifications can be implemented. IndyMac has obtained approval from the investors 

for the majority of the 'whole' loans and is implementing the modification approach for 

those loans. 

Q4. How many of the 60,000 delinquent IndyMac mortgages do you expect you will 

not be able to modify? 

A4. Of the more than 60,000 first lien mortgage loans that were delinquent when the 

FDIC became the conservator for IndyMac in July 2008, not all are eligible for 

modification. The total delinquent loans includes loans to borrowers who are less than 60 

days past due, in bankruptcy, whose foreclosure sale is imminent, or where there are 

various legal issues that preclude application of our modification approach. This total 

also includes borrowers who have a modification in process or recently completed a 

modification, but who IndyMac has to reflect as delinquent until the borrowers pay 

according to the modified terms for six months. Excluding these loans reduces the 

potential number ofloans eligible for modification by about a third. 

The remaining pool of approximately 40,000 loans must then be reviewed under the 

criteria for the loan modification program to determine if an affordable payment can be 

achieved for the borrower. IndyMac also must detennine that the proposed modification 

will achieve a better value than foreclosure. Once these criteria are applied, a substantial 

proportion (about 40 percent) cannot be modified under the streamlined approach. 

However, even if a loan cannot be modified under the streamlined approach, IndyMac 

will still review the loan to determine if some alternative to foreclosure is possible. To 

date, IndyMac has mailed more than 23,000 modification offers to borrowers. In the 

coming weeks, we anticipate mailing out thousands more modification offers. To date, 

more than 5,000 borrowers have completed all income verification requirements and 

thousands more are in process. While we cannot yet determine how many of the 

borrowers will accept the proposed modifications, we hope that many thousands of 

borrowers will avoid foreclosure while the FDIC maximizes its recoveries on the 

IndyMac loans and servicing rights. 
Q5 .. Beyond calls and mailers, what other outreach methods are used by the FDIC? 

Is the FDIC using in-person outreach methods? 

AS. IndyMac and the FDIC have proactively enlisted the help of community newspapers 

to reach borrowers in their local area. In addition to maintaining its relationship with the 

HOPE Now Alliance. IndyMac also partnered with local HUD-approved counseling 

agencies that are affiliated with 'NeighborWorks. These agencies were specifically 

chosen to obtain their assistance to contact borrowers in states (California, Florida, New 

York, and New Jersey) that have a majority of the past due loans. Southern California, 

and Los Angeles County in particular, represent the highest concentration of delinquent 

borrowers. As a result, the FDIC is partnering with Los Angeles Mayor Villaraigosa's 

office and certain local non-profit orpanizations to sponsor the IndyMac Loan 

Modification Day on November 22n. A similar event is planned for the Inland Empire 

(Riverside and San Bernardino Counties). IndyMac plans to use .. in-person" outreach 

methods at these functions, as our representatives will directly work with borrowers on 

loan modifications. 
Congresswoman McCarthy: 

Questions Submitted for the Record 

9.17.08 FSC Hearing: A Review of Mortgage Servicing Practices and Foreclosure 

Mitigation 

PANEL ONE 

1. Chairwoman Bair: In the case of delinquent mortgages for multi-unit dwelJings 

held by IndyMac that cannot be modified, how docs the FDIC deal with tenants? 

How much time do they have to vacate property once foreclosure proceedings 

have begun? Are they notified that they must vacate the property? When is 

notification given? 

2. Chairwoman Bair: Is it time to increase the amount insured by the FDIC on 

individual and retirement accounts? 

3. Chairwoman Bair: Of the 20,000 oflndyMac loans in delinquency that are not 

owned by IndyMac or with servicing agreements with sufficient flexibility for 

modification, how do you expect to obtain approval to apply new modification 

programs to these loans? 

4. Chairwoman Bair: How many of the 60,000 delinquent IndyMac mortgages do 

you expect you will not be able to modify? 

5. Chairwoman Bair: Beyond calls and mailers, what other outreach methods are 

· used by the FDIC? Is the FDIC using in-person outreach methods? 
BARNEY FRANK, MA. CliAIRMAN '11 • .6. AJousr of l\rprrsrntatibri 

e:ommittte on .:finantfal ss,erbirts 

2129 Bap&urn J{tou•t emu •uilllin1 

lillaQinllfon. JiC: 20515 

SPENCER BACHUS, >.I.. RANKING MEMBER 

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JEANNE M. IIO$LAHCIWICK $TAN o..om. AND 

o..cn.-, 

The Honorable Sheila C. Bair 

Chairman 

FDIC . 

I I OU i 7 2008 

I 

Federal Deposit Insurance Corporation 

550 17th Street, NW 

Washington, DC 20429 i OFFICE OF LEGISLATIVE AFFAIRS 

Dear Chairman Bair: 

Thank you for testifying at the Septell:lber 17, 2008, Committee on Financial 

Services hearing entitled, "The Implementation of the HOPE for Homeowners Program and 

a Review of Foreclosure Mitigation Efforts . ., 

A copy of your transcript has been provided should you wish to make any 

corrections. Please indicate these corrections directly on the transcript. Due to the 

disruption of mail service to the House of Representatives we ask that you fax the 

transcript in lieu of maiJing it. Please fax only the pages on which you have made 

corrections, within (15) business days upon receipt to: 

Committee on Financial Services 

AT.I'N: Terrie Allison 

Fax(202)225-4254 

Rule XI, clause 2(e)(1XA) of the Rules of the House and Rule B(a)(l) of the Rules of 

the Committee state that the transcript of any meeting or hearing shall be "a substantially 

verbatim account of the remarks actually made during the proceedings, subject only to 

technical, grammatical, and typographical corrections authorized by the person making the 

remarks involved.• We therefore ask that you keep your corrections to a minj.mum. 

Also included are questions submitted by Representative McCarthy. We ask that 

you respond to these questions in writing for the hearing record. Your responses may be 

faxed to the above number, along with your transcript corrections. 

Please contact Terrie Allison at (202) 225-4548 if there are no corrections to your 

transcript. 

If during the hearing you: (1) offered to submit additional material; or (2) were 

requested to submit additional material; please submit this material via electronic mail by 

sending it to fsctestimony@mail.house.gov. If you are unable to submit the material 

electronically, please contact the Committee staff to arrange· for submission. · 

I 
Page2 

Thank you for your cooperation, and again for your t.estimony. 

TGD/ta 

Enclosure 

Yours truly, 

Thomas G. Duncan 

General Counsel 
FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Hillary Rodham Clinton 

United States Senate 

Washington, D.C. 20510 

Dear Senator Clinton: 

November 26, 2008 

Thank you· for your kind words commending the Federal Deposit Insurance 

Corporation for our efforts to stabilize housing markets and for your interest in this 

shared goal through your support of the HOME initiative and other actions to prevent 

foreclosures. 

As part of our continuing work to address ongoing mortgage-related issues 

including foreclosure prevention, we have researched many potential solutions, including 

the Home Owners' Loan Corporation (HOLC) model, for ways to deal effectively with 

unaffordable loans and unnecessary foreclosures. Like you, we want to place responsible 

yet at-risk homeowners in sustainable. mortgages that are based on affordability. To that 

end, we recently proposed a loan modification program with a loss sharing component 

that establishes a consistent affordability standard for homeowners as well as incentives 

for banks and other lenders to participate in the program. I have enclosed a summary of 

our proposal for your information. In addition, the FDIC recently issued a loan 

modification guide we are calling .. Mod in a Box" to provide information that enables 

others to duplicate the FDIC's program at IndyMac Federal Bank. A copy of this guide 

also is enclosed. We share your goaJ of creating a uniform, systematic approach to reach 

a broad pool of at-risk homeowners. 

Thank you again for sharing your counsel on these important issues. I look 

forward to continuing to work with Congress to provide effective relief for homeowners, 

stabilize our communities, revitalize our financial markets, and improve our economy. ~l 0 ,..__J 

~ ~Jr_ r• ,- 1

• L,.:) r-, _..,...- v-f £a 

o~' 

of'- '1 

Sincerely, 

Sheila C. Bair 

Enclosures 
FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications Page 1 of 3 

tmme > Consumer pmtecfion > Loans & Mortgages > FDIC Loss Sharing Proposal to Promole Affordable Loan Modifications 

FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications 

Background 

Basic Structure and Scope of Proposal 

Details on Program Design L~Qfltm Promm 

Loan Modification Program Gulde - "'Mod in a Box .. 

Background 

Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications 

continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is 

imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions 

in housing prices and rising foreclosures. 

Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a 

systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments 

to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of 

tenn, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can 

provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available 

government funds to affect more mortgages than outright purchases or specific incentives for every 

modification. The FDIC would be prepared to serve as contractor for Treasury and already has 

extensive experience in the IndyMac modification process. 

Basic Structure and Scope of Proposal 

This proposal is designed to promote wider adoption of such a systematic loan modification program: 

1. by paying servicers $1,000 to cover expenses for each loan modified according to the required 

standards; and 

2. sharing up to 50% of losses incurred if a modified loan should subsequently re-default 

We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that 

were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are 

projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem 

loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under 

the plan. 

Details on Program Design 

• Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties. 

• Exclusion for Early Payment Default: To promote sustainable mortgages, government loss 

sharing would be available only after the borrower has made six payments on the modified 

mortgage. 

• Standard NPV Test In order to promote consistency and simplicity in implementation and audit, 

a standard test comparing the expected net present value (NPV) of modifying past due loans 

compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard 

assumptions will be used to ensure that a consistent standard for affordability is provided based 

on a 31% borrower mortgage debt-to-income ratio. 

• Systematic Loan Review by Participating Servicers: Participating servicers would be required 

to undertake a systematic review of all of the loans under their management, to subject each loan 

to a standard NPV test to determine whether it is a suitable candidate for modification, and to 

http://www.fdic.gov/consumers/loans/loanmod/index.html 11/26/2008 
FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications Page 2 of 3 

modify all loans that pass this tesl The penalty for failing to undertake such a systematic review 

and to carry out modifications where they are justified would be disqualification from further 

participation in the program until such a systematic program was introduced. 

• Reduced Loss Share Percentage for "'Underwater Loans": For L lVs above 100%, the 

government loss share will be progressively reduced from 50% to 20% as the current L lV rises.1 

If the L lV for the first lien exceeds 150%, no loss sharing would be provided. 

• Simplffled Loss Share Calculation: In order to ensure the administrative efficiency of this 

program, the calculation of loss share basis would be as simple as possible. In general terms, the 

calculation would be based on the difference between the net present value of the modified loan 

and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net 

of disposal costs as estimated according to industry standards. Interim modifications would be 

allowed. 

• l)e min/mis Test: To lower administrative costs, a de minimis test excludes from loss sharing 

any modification that did not lower the monthly payment at least 10 percent 

• Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of 

the modification. 

Impact of the Program 

The table below outlines some of the basic assumptions behind the scale of the plan and its expected 

costs. 2 To summarize, we expect that about half of the projected 4.4 million problem loans between now 

and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the 

number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 

billion. 

Projected Number and Cost of Loan Modifications Under FDIC Loss 

Sharino Prooosal 

1.6 million total loans 60+/90+ past due now 

GSE loans make up about 13% of problem loans at present 

Net 1.4 miDhn non-GSE problem loans at present 

3.8 million new total loans 60+/90+ past due byy.e. 2009 

Assume: GSE loans make up 20% of new prob_ loans through y_e_ 2009 

Net 3.04 million new non-GSE problem loans through y.e. 2009 

Total non-GSE problem loans through y.e. 2009: 4.44 million. 

Modify 112. or 2.22 million loans 

Avg. loan size $200,000 

Total book value of loans modified= $444 billion 

Avg_ program cost {FDIC assumptions)= 5.5•/o 

Est total program cost= $24.4 billion 

Assuming redefault rate of 33%, almost 1.5 million foreclosures avoided 

1 Current L lV can be demonstrated by a Broker Price opinion, or BPO. 

2 Note: These figures have been updated from previous summaries to reflect a narrower application of 

the program to non-GSE loans that become delinquent through year-end 2009. 

http://www.fdic.gov/consumersnoans/loanmod/index.html 11/26/2008 
-------FDII 

FDIC Loan. 

Modification Program 
-------------FDICI 

A message from FDIC Chairman Shella Bair 

I have long supported a systematic and streamlined approach 

to loari modifications that puts borrowers into affordable, longterm mortgages while achieving an improved return for 

bankers and investors cotnpared to foreclosure. Using this 

type of approach, we can help stabifize the U.S. financial 

markets by minimizing foreclosures on the 6.4 million loans 

that are currently past due or are projected to become 

delinquent by mid-2010. Avoiding foreclosure, when it is 

financially prudent to do so, reduces the downward pressure 

on the price of nearby homes and helps communities to 

maintain the services they provide to neighborhoods. 

Unnecessary foreclosures perpetuate the cycle of financial 

distress and risk aversion, which potentially could cause 

housing prices to overcorrect and create even larger losses for 

both borrowers and the financial industry. 

Chairnttut Slwifa C. Bair 

Fedual Dq,osir lns11TR11a Corparalion 

At IndyMac Federal Bank, the FDIC initiated a systematic and streamlined loan modification 

program for delinquent borrowers who occupy their home. These distressed mortgages are being 

rehabilitated into performing loans while avoiding unnecessary and costly foreclosures. By 

achieving mortgage payments for borrowers that are both affordable and sustainable. we expect 

to reduce future defaults, improve the value of the undertying mortgages, and cut servicing costs. 

This approach makes good business sense and creates a 'win-win' solution for everyone. I 

strongly encourage bankers, servicer.., and investors to Implement systematic and streamlined 

loan modifications that result in monthly mortgage payments that borrowers can afford over the 

long te011. 

To assist bankers, seivicers, and investors in this process, this. guide provides an overview of the 

FDIC's loan modification program. It outlines our program terms at IndyMac Federal Bank, offers 

insight into the specific portfolio characteristics that drive modification modeling at that bank, and 

provides a tramewor1< for developing and implementing a similar program al your institution. 

While the final program each of you implements will be based on the characteristics specific to 

your respective portfolios, I am confident that the value of such a program wUI benefit both your 

institution and your investors while helping many troubled borrowers remain in their homes. Your 

support in this industry-wide effort will help avoid unnecessary foreclosures and bring stability to 

the housing and mortgage markets during this time of unprecedented economic turmoil. 

Sincerely, 

Sheila Bair 
_L_oa_n_M_o_di_fi_c_at_io_n ___ ~FDICI 

As indicated in the summary table below, the FDIC's Loan Modification Program is primarily based on 

two principals: 

1) Determining a payment the borrower can afford by multiplying the borrower's gross monthly 

income times the appropriate housing-to-income (HT!) ratio, less taxes and insurance to achieve a 

minimum payment reduction of 10 percent, and 

2) Protecting investors' interests by requiring that the cost of the modification is less than the 

estimated cost of foreclosure {the Net Present Value (NPV) floor). 

FDIC Loan Modification Program 

Strategy Process 

• Offer proactive • Retum the loan to a current status. 

workout solutions • Capitalize delinquent interest and escrow. 

designed to address • Modify the loan terms based on waterfalls, starting at a 

borrowers who have front-end 38 percent HTI ratio down to a 31 percent 

the willingness but HTI ratio, subject to a formal NPV floor. 

limited capacity to • Reduce interest rate to as low as 3 percent. 

pay. • Extend, if necessary, the amortization and/or term of 

the loan to 40 years. 

Borrower • Forbear principal if necessary. 

Affordability 

Determination • Provide borrowers • Require the borrower to make one payment at the time 

the opportunity to of the modification. 

stay in their home • Cap the Interest rate at the Freddie Mac Weekly 

while making an Survey rate effective at the time of the modification. 

affordable payment • Lower the interest rate as required to meet the target 

for the life of the HTI ratio, fixing the adjusted rate and monthly payment 

loan. amount for 5 years. 

• Step up the initial interest rate gradually starting in year 

6 by increasing it one percentage point each year until 

reaching the Freddie Mac Weekly Survey rate cap. 

• Use a financial • Input borrower specific income information into the 

model with NPV Tool, which provides a real-time workout solution. 

supportable • Perform au\omated loan level underwriting across 

Investor assumptions to large segments of the portfolio to support pre-approved 

Protection ensure investor bulk mailings. 

Via interests are • Verify income information the borrower provided via 

NPVTool protected. check stubs, tax returns, and/or bank statements. 

• Col'l1)are the cost of the modified concessions to the 

estimated cost of foreclosure to mitigate losses. 

• Mandate that the cost of the modification must be less 

than the estimated foreclosure loss. 

FDIC Loa Modmcation Propun I Pap 3 
Overview ----------FDICI 

I. Philosophy 

Modification improves the value of distressed mortgages by achieving long-term sustainable 

cash flows for lenders and investors that exceed the value achievable through foreclosure. 

Modification provides an affordable payment and eliminates payment shock for the life of the 

loan. 

Modification minimizes loss to the investor. 

II. Program 

Affordable payment is achieved through interest rate reduction, amortization term extension, 

and/or principal forbearance. 

Net present value (NPV) test confirms modification minimizes loss to the investor. 

Ill. Process 

Program uses a scalable process which can be applied across a broad range of investors. 

Streamlined process provides custom modification offers and minimal borrower paperwork. 

IV. Promotion 

Inclusion of customized modified payment amounts in bulk mailings significantly increases 

customer response and completed modifications. For bulk modification offer mailings, the initial 

letter includes a pre-approved modification offer with the modified payment amount. 

The program uses a combination of existing origination/sates marketing to contact borrowers via 

direct mail and innovative point of sale approach via the call center. Call center staff have the 

capability to gather financial information and make a modification offer during the initial call. 

This document provides a framework for establishing and implementing these standards. 

FDIC Loan Modifiamon Prognm. I Pago 4 
_P_h_il_o_so_p_hy _______ FDII 

I. Philosophy 

Key objectives 

• Keep borrowers in their homes when the borrower is willing and has the capacity to make an 

affordable mortgage payment. 

• Provide borrowers with immediate payment refief and stable long term mortgage payments. 

• Modification must always result in a positive NPV outcome for the investor, i.e., the cost of the 

modification must be less than the estimated cost of foreclosure. 

Determine what type of modification is most appropriate 

The FDIC Loan Modification Program targets distressed borrowers who are currently having 

financial difficulty with the scheduled mortgage payment, but have the capacity to make a loan 

payment. It uses a streamlined approach to identify modification candidates and to provide a 

customized modification offer when the modification minimizes loss. If a borrower does not 

qualify for a streamlined modification, an individual loan review may result in a personalized 

modification that still maximizes value. 

This approach is just one of many loss mitigation strategies that a prudent servicer must consider 

when dealing with a distressed borrower. Refinance is an alternative as well as traditional loss 

mitigation practices such as repayment plans. However, many borrowers are unable to refinance 

their loans in the current economic environment and repayment plans typically do not provide 

long- term solutions to borrowers' financial problems. In cases where the borrower cannot afford 

the lowest payment allowed by the NPV Tool, a short sale or deed-in-fieu of foreclosure with 

·cash for keys" assistance are preferred methods to avoid foreclosure. 

Immediate relief and long tenn stability 

loan modification will result in a "life of ban" solution by capping interest rates at current market 

rates, requiring immediate principal amortization, and setting an initial interest rate subsidy to 

provide immediate relief. A predictable payment schedule after the frfth year will step the initial 

interest rate up to the market rate. Modification replaces adjustable-rate and interest-only 

mortgages with stable rate loans, and eliminates the possibility of future negative amortization. 

FDIC Loan Modification Program I Page 5 
_P_h_il_os_o_ph_y ______ FDICI 

Minimizes Losses on Distressed Mortgages 

Once the borrower-specific modification is determined, the servicer must perform a valuation test 

between the cost of modification and the estimated cost of foreclosure to ensure modification 

.results in a lower cost to the investor. By providing a transparent valuation comparing the cost of 

the modification and the estimated cost of foreclosure, the servicer fulfills the terms of most 

servicing agreements. 

FDIC Loan Modilicatian Progmn I Page 6 
_P_~-~gr-ram_am ______ ~FDICI 

Key objectives 

• Systematic determination of borrower specific modification terms using a standardized NPV test 

to minimize losses on distressed mortgages. 

• Target distressed borrowers. Modifications may be available for loans that are at least 60 days 

delinquent or where default is reasonably foreseeable.1 

• Implement modification program that can be used across a broad range of investors. 

Step 1: Determine Eligibility 

Servicers typically manage loans for other investors, including Government Sponsored Enterprises 

(GSEs}, private investors owning securities collateralized by the mortgages. and whole loan 

investors. Each investor type has different standards for approving loan modification. The GSEs 

have authorized loss mitigation programs for seriously delinquent loans, however some loans 

owned by the GSEs may be modified based on eligibility standards similar to those used for 

private investors. The GSEs recently announced the adoption of more streamlined modification 

plans that apply many of the features of the FDIC Loan Modification Program model. 

Loans serviced for private investors are governed by servicing contracts which often contain a 

standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages. or 

mortgages where default is ·reasonably foreseeable". 2 This even holds true for complex private 

label securitizations with many tranches and investors. 

Loans subject to these contracts are typically eligible for modification given: 

• The loan is at least 60 days delinquent where the loan is considered one day delinquent on the 

c::1y following the next payment due date. 

• Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been 

discharged from Chapter 7 bankruptcy since the loan was originated. 

• The loan was not originated as a second home or an Investment property. 

Loans sold whole to individual investors often require a case-by-case approach. These loans are 

subject to both servicing and securitization contracts. The Appendix contains guidelines on how to 

evaluate whole loan servicing agreements. 

, Due to contractual restrictions in lndyMac's pooling and servicing agreements, IndyMac Federal Bank has not 

modified securitized loans where default is reasonably foreseeable. Most other agreements do anow modification 

of such loans. 2 see the American Securiffzaoon Forum's Streamfined fo@closur, and Loss Avoidance Framework for 

Securittzed Mortgage Loan§. Issued Dec. 6, 2007 and revised July B, 2008. 

FDIC Lom Modi1ication Program j Pace 7 
Program (Continued) -------FDII 

Step 2: Calculate an "Affordable" Payment 

In order to calculate an affordable payment, recent financial income information must be available for 

the borrower. Efforts to contact the borrower via special mailings, calling campaigns, email, and other 

outreach methods are used. 

The FDIC Loan Modification Program calculates the modified principal, interest, taxes, and insurance 

{PITI) payment per a borrower specific HTI ratio of no more than 38 percent. Housing expenses on a 

PITI basis may include: 

• The modified principal and interest payment for the subject loan, as applicable, 

• Real estate taxes, 

• Property hazard, flood, and mortgage insurance premiums, 

• Leasehold estate payments, and 

• Homeowners' association (HOA) dues. 

lndusby standards set forth by certain FHA lending programs indicate a mortgage payment based on 

a 31 percent to 38 percent HTI ratio is affordable. The FDIC Loan Modification Program follows these 

origination standards as illustrated below. 

Example of HTI ratio calculation 

Monthly Gross Income 

$3,618 - Borrower 1 

$2,756 - Borrower 2 

$6,374- Total Monthly Gross Income 

PITI Payment Determination 

$6,374 X 38% = $2,422 

Monthly Housing Expense 

$2.422 - Maximum Total Monthly Housing Expense 

$ - 364 - Taxes, hazard, flood, and mortgage insurance, etc. 

$ - 85 - HOA dues 

$1,973 - Maximum modified principal and interest payment 

Total HTI Ratio 

$2,422 I $6,374 = 38% 

FDIC Loan Modifiamon Program I Page 8 
_P_r_o_g_r_a_m_cc_o_nt_in_ue_d) _____ --tF-DICI 

If the initial modification calculation at 38 percent does not decrease the borrower's payment by 10 

percent or more, the HTI ratio Is lowered to 35 percent and then lowered to 31 percent to achieve the 10 

percent savings. In cases where a 10 percent reduction can not be achieved, the 31 percent HTI ratio is 

used for affordability. 

Step 3: Determine the "Total Debt" by capitalizing certain costs in the unpaid principal balance 

• Delinquent interest. taxes, and insurance escrows and 

• Third party fees such as foreclosure attorney or trustee fees and property preservation costs. 

Step 4: Solve for "Affordable Payment" through a three step waterfall process 

1) Interest Rate Reduction: Cap the life-of-loan interest rate at the Freddie Mac Weekly Survey rate 

as of the week of the modification offer, then reduce the interest rate incrementally to as low as 3 

percent to achieve the "affordable" payment per the adjusted unpaid principal balance (UPB) and 

remaining amortization term. An interest rate floor of 3 percent will enable the borrower to maintain 

approximately a 38 percent HTI ratio throughout the life of the loan, assuming modest borrower 

earnings growth commensurate with the inflation rate. The reduced rate remains in effect for 5 years. 

After this period, the interest rate increases by not more than one percent annually until the Freddie 

Mac Weekly Survey rate is achieved. If the "affordable" modified PITI payment amount has not been 

achieved, proceed to the next step. 

2) Extend Amortization Term: For loans with an original term of 30 years, re-amortize the adjusted 

UPB at the reduced interest rate (3 percent floor) over an extended amortization term of 40 years 

from the original first payment date. For securitized loans, the amortizatio"l will be extended to 40 

· years from the original first payment date, but the maturity date will not change, resulting in a balloon 

payment. For loans with an original term of less than 30 years, extend the amortization period for 

only 1 0 years. If the modified PITI payment amount has not been achieved, proceed to the next step. 

3) Partial Principal Forbearance: Reduce the adjusted UPB for amortization purposes and amortize 

over a 40 year period at the reduced interest rate {3 percent floor). This process splits the debt into 

an interest-bearing, amortizing portion and a zero percent, zero payment portion of the loan. The 

repayment of the "postponed" principal will be due when the loan is paid in full. For loans within 

securitizations, this principal forbearance should be passed as a write-off of principal to the trust, with 

any Mure collections at time of pay-off submitted to the trust as a recovery. 

FDIC Loan Modification Program I Pap 9 
Program (Continued) ----------FDNI 

Step 5: Apply the NPV Tool 

Run the modified loans through the NPV Tool in order to ensure that the modified payment creates a 

positive economic scenario for the investor. 

Step 6: Market via systematic "bulk" approach 

A bulk modification model processes large segments of delinquent loans with recent borrower financial 

information on file. The model performs automated loan-level underwriting based on the existing loan 

terms and recent financial information obtained from the customer, which is verified prior to completing 

the modification. The bulk modification process establishes modification eligibility and modification terms 

as detailed in the previous steps, then uses a traditional marketing approach to provide the borrower 

with an easy to follow, pre-populated modification offer. The marketing materials also instruct the 

borrower to either contact the servicer with questions or just send in the signed documents and the first 

payment to complete the modification offer. The modification offer explicitly states the amount of the 

borrower's new monthly principal and interest payment as follows: 

Reduce your monthly payment of principal and 

interest to $x,xxx.xx and bring your loan currentt 

While some borrowers may appear to have the capacity to pay, their ability to do so may be inhibited by 

other debt obligations. Bankers and servicers should consider establishing relationships with community 

groups willing to contact and provide credit counseling to lhese borrowers. Entering into compensation 

agreements with local non-profit organizations with HUD-approved counselors also niay assist in 

contacting borrowers, obtaining the requisite financial information, and completing the modification. 

Compensation should be based on a borrower contact and modification completion. For example, 

IndyMac Federal Bank pays participating community groups $150 for borrower contact and counseling 

services, and an additional $350 once the loan modification is completed. A copy of a counseling 

compensation agreement is provided in the Appendix. 

FDIC Loan Modification l'roeram I Pqc I 0 
NPVTest ----------FDII 

l"<iPV Test 

Once the modification terms are established, the impact of the modification concessions to the investor are 

compared to the estimated loss given foreclosure. If the modification is less costly than foreclosure, it is 

apprc;>Ved. This test ensures that modifications mitigate the loss for investors. This diagram illustrates the NPV 

test: 

~Cure Rate x Par 

60+ DQLoana 

I 

Compa,. loss utim•t• for Mod va. Standard Foret:Josure 

St,ndardfC• 

REOINPV 

Qtfault 

(1-Cunt Rate) X 

&pecledREO 

Dispocilion Valua 

Modlftcatipn: 

NPVMod 

Borr,,_. can handle mod p,,yr,,.,,,. or re-defautt. 

Succ,uful Mod; 

(1 - RIM!efault Ralll) JC NPV 

ol Discounted Payments 

(incWng Forbearance. if 

applicable) 

BHl•flvlt 

Redefault Rat. JC Expeclad 

REO Disposition Value 

findud'ing additional inlelast 

advances) 

FDIC Loan Modification Program I Pa&C 11 
NPV Test ----------FDII 

The fonnula used to estimate the cost of foreclosure is: 

Loan Value= Cure Rate • Par+ 

(l - Cure Rate)* Expected REO Disposition Value 

Description of the formula terms: 

• Cure rate is based on recent industry or servicer data. It is based on a combination of 

delinquency status, combined loan-to-value (LTV). FICO and original income documentation. A 

12 month cure period is used. 

;., Expected REO Disposition Value: 

LlquldaUon value - Interest Adv/Accrual - Corporate Advances - Escrow 

Advances - Future Cost to Collect+ Ml Recovery 

• Liquidation Value: 

Forecasted Liquidation Value of property at REO = 

Current Property Value* (1- Forecasted Depreciation - "REO Stigma" DiscountSelling Costs) 

• Forecasted Depreciation is based on an industry standard such as Moody's 

Economy.com metropolitan statistical area (MSA) level data. Depreciation tlmeline is 

one year in the future or case-specific. 

• Current Property Value is determined by an interior appraisal, Broker Price Opinion 

(BPO), Automated Valuation Model (AVM), or original appraisal value adjusted by 

MSA level home price change to date. This value is then adjusted by forecasted MSA 

level home price changes. 

;.. REO Stigma Discount reflects differences in experienced liquidation values versus 

estimated property values. 

• Selling Costs include 1 O percent for broker commission, potential repairs and 

maintenance costs. 

• Interest Advances/Accruals includes delinquent interest advanced (securitized/sold 

loans) or accrued (owned loans). 

,, Corporate Advances include non-escrow advances already made on the borrowers 

behalf. 

• Escrow Advances already made on the borrowers behalf. 

• Future Cost to Collect is an estimate of future interest accruals, T&I payments, and FC 

expenses. 

• Ml Recovery (If appllcable) is estimated based on Ml coverage percentage adjusted for 

possible Ml claim denial. 

FDIC Loan Modification Program I Page 12 
_NP __ V_T_es_t_(c_om_~_ed) _____ FDICI 

The formula used to estimate the cost of modification is: 

Loan Value= (1 - Redefault Rate} x NPV of Discounted Payments + Redefault Rate x (REO 

Disposition Value + Additional Accrued Costs) 

Description of the formula terms: 

:;,.. Re-default rate is estimated per historical re-default experience for other modification programs and 

a program specific projection. 

),.- NPV of discounted payments is the net present value of the adjusted UPB (cash outflow) and the 

modified payment stream (cash inflow) discounted at the Freddie Mac Weekly Survey rate as of the 

week of the modification offer. An NPV example is provided in the Appendix. 

),.- REO disposition value (see above). 

• Additional costs include 9 additional months of accrued interest, taxes, and insurance payments 

plus additional forecasted home price depreciation, as applicable.3 

3 Currently, the Case-Shiller forecast provided by Moody's Economy.com projects that home prices 

will reach their trough in about one year from today, which also is equivalent to the base case 

timetable for REO disposition in the NPV Tool. This means that delaying foreclosure will not lead to 

further home price declines at REO disposition for most geographical areas. 

FDICLomModificationP,oeram I Pa,c 13 
NPV Test (Continued) ----------FDICI 

In Addition to Updated Liquidation Value, a Servicer must Formally Backtest Servicer and/or 

Portfolio Specific Assumptions and Regularly Update Assumptions Based on Industry 

Standards 

1. Forecasted Depreciation {industry standard) 

• Updated monthly to incorporate latest home price data. 

2. Cure Rates (servicer and/or portfolio specific) 

• Updated quarterly and based on 12 month history (to adjust for current credit environment). 

Suggested cure factors include the current delinquency status of the loan, combined LTV, 

borrower FICO, and original income documentation. 

3. REO Stigma (servicer and/or portfolio specific) 

• Updated monthly to incorporate latest experience by region. 

4. Re-default Rate (servicer and/or portfolio specific) 

• Based on past re-default experience for other modification programs and a program specific 

projection. The servicer should carefully monitor and incorporate the program's actual 

re-default rate. 

5. Discount Rate (both industry standard and servicer and/or portfolio specific) 

• Freddie Mac Weekly Survey rate as of the week of the modification offer is used lo ·discount the 

modified payment cashflow. A required return methodology is used to discount the estimated 

foreclosure value. 

6. Prepayment rate (servicer and/or portfolio specific) 

• The model ·assumes a voluntary prepayment rate of zero. 

FDlCLomModifkationPrognan ,I Page 14 
_P_r_o_ce_ss ________ FDICI 

Ill. Process 

Key Objectives 

• Leverage large scale modification offer/delivery process. 

• Give collections and loss mitigation staff the ability to offer tailored solutions based on borrower 

need, willingness and ability to pay, balanced with investor guidelines and a formal NPV test. 

• Streamline paperwork and income verification process. 

• Establish a protocol for community group referrals. 

Once eligibility is established, the loan modification offer is based on the borrowers income 

information. For borrowers with recent income information on file, a firm offer may be extended, 

contingent on income verification. However, verified income may be different from that on file and 

tolerance for some variation should be established. For borrowers with no recent income information 

on file, a conditional offer may be extended, contingent on income verification. This type of offer 

should use a more rigorous verification process requiring both tax returns and recent pay stub 

information. 

For both firm and conditional modification offers, the key to program success is a scalable offer 

delivery process, which immediately provides the borrower with modification terms and instructions. 

FDIC Loan Modification Program I Page JS 
_P_r_o_c_e_s_S_(C_o_nti_nu_ed_) ______ FDII 

Offer/Delivery process - Two-Tiered Approach: 

1. Bulk Approach: Loans processed through the bulk modification process are sent a pre-approved 

offer with pre-populated modification documents, income verification forms and informational 

material. This modification package provides the borrower with a custom modification offer and 

instructions to complete the modification with a quick one-touch close. Modification paperwork is 

handled via an automated process. The modification agreement is pre-populated and the loans are 

pre-qualified; as a result. the operations process is simplified to collecting the modification 

agreements, verifying income documentation, and completing system updates to ensure the 

borrower receives modified terms on the next statement 

2. Point of Sale Approach: Use of traditional inbound and outbound customer service and collection 

staff should allow borrowers lo obtain fast and customized solutions. Loss mitigation staff require 

access to a modification tool which allows the collector to discuss all viable workout options before 

proceeding with an offer. For example, a delinquent borrower calls collections and is unable to 

afford the current mortgage payment The collector enters the borrower's information into a desktop 

tool which immediately provides the collector with possible workout solutions such as modification, 

short sale, and cash for keys programs. If the modification is NPV positive, the collector informs the 

borrower of modification eligibility, collects the first modified payment, updates the system, and 

either generates the modification documents from the system, or includes borrower in the next bulk 

mailing. 

One of the Benefits: Saying "Yes• to the borrower and providing the reduced modified payment 

amount motivates the borrower to finish submitting the final documentation needed to complete the 

modification. Once the borrower verbally accepts the modified payment, the collector initiates a 60-

day payment plan at the new amount and takes the paperwork off the foreclosure path. 'Mien the 

documents are received and income is verified, modification changes are processed permanently in 

the system. 

Community group referrals should be prioritized through a dedicated hotline and email address. 

Groups with a relationship with the servicer should be trained on the specific information required to 

complete the modification. This provides another venue to streamline the paperwork processing. 

FDICLoanModificationl'ropam I 1'a&e 16 
_P_r_o_c_es_S_(c_on_tm_ue_d) _____ ~F-DICI 

Income Verification 

Income verification minimizes re-default and ensures the affordability standard is uniformly implemented. 

The gross monthly income for all borrowers who have signed the mortgage note must be supported by 

either last years tax returns or recent pay stubs. A dedicated underwriting group reconciles verbal 

financial information on file to documented income. 

FDIC Loan Modification ProgJui I Page 17 
_P_r_o_m_o~ti_on ________ FDII 

IV. Promotion 

Key objectives 

• Stimulate response and acceptance rates for all borrowers, including those who have not made 

recent contact with the servicing group. 

• Leverage community group resources to contact unresponsive borrowers and to provide financial 

counseling. 

• Establish reporting procedures to track program effectiveness. 

The modification offer is sent to borrowers using either priority or overnight mail to stimulate open 

rates for all borrowers, particularly those who have not made recent contact with the servicing group. 

The offer is designed to have the look and feel of a traditional origination/sales marketing letter with 

the additional aspect of a pre-approved modification offer and a simple pre-populated agreement 

This allows the borrower to complete the agreement without having to call the servicing group. See 

the Appendix for examples of marketing materials and the simplified loan modifJCation documents. 

Inbound and outbound call efforts are designed around a sales approach, not a traditional collections 

approach, to ease borrowers' concerns about foreclosure. The servicer should promote a "No 

borrower left behind" mentality, which gives even no contact customers an offer that can be 

completed without needing to call. Campaigns are supported by a dedicated "direct to consumer" 

marketing team. 

Community groups are a valuable resource and the servicer should integrate national and local 

groups into the modification process. These groups can be contracted for outbound calling to 

unresponsive modification candidates and financial counseling for distressed borrowers. The 

modification offer may also offer an incentive for borrowers to seek financial counseling through these 

groups. A sample contract and compensation structure is included in the Appendix. 

FDIC Loan Modification Program I Page 18 
_P_r_o_m_o_ti_o_ll_(_Co_n_tin_ue_d) ______ FDNI 

. .., Opntions 

. ,,.,, , __ 1 oa,u.,» l ; ,,., • 

... :· ··j :_ -:.· ,·t 

Modification Reporting 

Accurate and up to date data on the loan modification program requires an integrated servicing 

platform and business unit. Internal and external reporting needs include: 

Internal 

• Responsiveness to modification campaigns: establish specific phone lines for each modification 

campaign, track inbound and outbound calling and contact rates. 

• Process effectiveness: create one servicing template for all modifications which requires the loss 

mitigation staff to track all contact made with the borrower. The servicer should analyze timelines 

for mailing to borrower contact, contact to document return, and document return to modification 

completion. 

• Delinquency and re-default rate: success is measured by performance following modification. 

These metrics are also important to the NPV Tool model. 

External 

• Investors require detailed modification tracking. This enhances program credibility and proves 

that modification is the least cost strategy. A sample investor reporting template is found in the 

Appendix. 

FDIC Loan Medificalion ProgBm I Pace 19 
HILLARY RODHAM CLINTON 

Nl:WVOlll 

SEN.a.TOR 

RUSSELL 5£NA.'1£ OFRCE IUIIJJIHG 

sumcn WASHINGTON. PC 2115,C>-3'04 

202-220-4451 

Ms. Sheila Bair 

Chairman 

tinittd i,tatm ~mate 

WASHINGTON, DC 20510-3204 

November 6, 2008 

Federal Deposit Insurance Corporation 

550 17th St, NW 

Washington, D.C. 20429 

Dear Ch:linnan Bair: 

COMMITTEES: 

AlllolEDSEIMCES 

-ENT AND l"ll&JC WOIIICS HEALTH. EDUCA TIOIC, I.AllDll. ,._ l'ENSIONS 

S1'£CW.~E ON AGING 

fD\G 

. I would like to commend you for your efforts at addressing what I believe to be the 

underlying challenge in ~ current market and economic turmoil, the foreclosure crisis and its 

dramatic impact on the value of residential homes. You have been a consistent and prescient 

voice in sounding the alarm over the consequences of inaction and have led the way for other 

federal agencies in responding to this crisis. 

As your testimony to my colleagues in the Senate Banking Committee outlined, we have 

been behind the curve for too long in addressing this mortgage crisis, the progress made thus far 

has not been enough, and time is of the essence if we ere going to prevent a new wave of 

mortgage defaults and foreclosures from deepening our current economic troubles even further. 

I am encouraged by your efforts thus far and I urge you to remain vigilant in putting forth a 

responsible and effective plan that will meet the scale of the mortgage and housing market 

challenges ahead of us. 

For nearly two years, I have been sounding the alarm bell about the housing crisis and the 

need to tackle the problem immediately. Urgent action was and is needed given the dire 

consequences that waves of foreclosures would have not only on our markets 81\d our economy 

but also on the families who would be displaced from their homes while having their most 

valuable asset wiped out. As one of the first to support a temporary foreclosure moratorium to 

stabilize the housing market, I appreciate your commitment to this issue. Additionally, I 

proposed allowing mortgage workouts to take hold and introduced legislation two years ago to 

promote the role of the Federal Housing Administration in offering alternatives to subprime 

mortgages. I have also voiced my skepticism about the effectiveness of the Administration's 

response to crisis. I agree with you that at this stage our response to the current crisis needs to be 

"dnunatic" or at least proportional to the significant risks that a further depression in housing 

. prices and waves of new defaults and foreclosures would pose to the economy. 

We both see the benefit of creating a unifoqn standard for safe, fair and stable mortgages. 

I recently unveiled my support for a new federal initiative called the Home Owners' Mortgage 

Enteiprise (HOME) with a mandate similar to that of the Home Owners~ Loan Corporation 

created by President R!X)sevelt during the Great Depression. It would identify the non-
Page2 

performing mortgages within mortgage pools and purchase them directly with bonds, direct cash 

or insure them at a level that would provide a greater retwn for banks and investors than 

foreclosure. A HOLC could rewrite the terms of the mortgage and provide at-risk homeowners a 

fixed monthly payment not subject to change based on their ability to pay. Additionally, my 

proposal would provide flexibility to accotmt for any unforeseen event, such as job Joss or a 

health emergency by enabling the extension of the loan terms which would in effect ensure that 

the mortgage is self-amortizing. Ultimately, a program like the one I am proposing would 

provide the homeowner with the certainty of knowing precisely how much their monthly liability 

is. I urge you to look at the model of the HOLC as a way to ensure that O'QI' foreclosure 

prevention efforts are effective. 

As you finalize your plans, I hope that you will io continue to push for a fair plan that 

offers effective relief to homeowners and places accountability on banks and other lenders 

participating in the program. Restoring value to distressed mortgage assets and non-performing 

mortgage through the workout and modification of unreasonable terms will prove to be a 

significant incentive for them to work with you and the FDIC. You and the FDIC have 

demonstrated your ability to create a framework for mortgage Jl.:lodifications as evidenced by 

your efforts to rework the mortgages held by IndyMac, and I hope that you will continue to be 

successful as you move towards.this larger challenge. Indeed, preventing the next foreclosure 

crisis is one of the most critical components of addressing this current economic turmoil. 

Thank you for your attention to my concerns, and please do not hesitate to contact me if I 

can be helpful to the FDIC's ongoing efforts. 

Sincerely, 

Hillary Rodham Clinton 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, _ Washington, DC 20429 

November 26, 2008 

Honorable Dianne Feinstein 

United States Senate 

Washington, D.C. 20510 

Dear Senator Feinstein: 

Thank you for your Jetter expressing support for the Federal Deposit Insurance 

Corporation's efforts to promote a more systematic approach to modifying problem mortgage 

loans. 

As you point out in ·your letter, foreclosure represents an increasingly self-defeating 

response to the problem of delinquent mortgage Joans. In the present environment, this approach 

only adds to an overhang of excess vacant homes that has been estimated to exceed one million 

units nationally. To help us get ahead of this problem. we need a program that encourages 

mortgage lenders and servicers to modify loans on a sustainable basis, and that does so 

efficiently on a large scale. 

As you are aware, the FDIC has initiated a systematic loan modification program at 

IndyMac Federal Bank, where it is conservator. This program identifies Joans with high monthly 

payments relative to income- and makes offers to borrowers to reduce the monthly payment to as 

low as 31 percent of monthly income. Modifications are undertaken according to a standard 

protocol based on interest rate reductions, extensions of term, and principal forbearance. Like 

any mortgage servicer, the FDIC must undertake a net present value, or NPV, test for every 

modified loan to ensure that this strategy will maximize the returns for the Deposit Insurance 

Fund or the investors that own the troubled mortgages. The FDIC also takes steps to verify the 

occupancy status and current income of the borrower. 

Based on th.is experience, the FDIC discussed with the Treasury Department 

implementation of a partial loss guaranty program, as authorized under the Emergency Economic 

Stabilization A.ct (EESA), that would provide financial incentives for a wide range of mortgage 

servicers to modify high-cost mortgage loans according to the IndyMac standard. One of the 

advantages of this approach is the ability to modify loans that have been securitized, leaving 

them in place under private management. While those discussions have not led to adoption of 

the program by Tre~ury under the authority provided by the EESA, we believe that the rapid 

implementation of such a guaranty pro.gram would be the best way to achieve a significant 

impact on the distressed housing market. 

I believe that this approach offers a way forward to improve the affo~dability of mortgage 

loans for distressed households, reducing the number of unnecessary foreclosures, and helping to 

stabilize U.S. housing markets. But given the immense scale of the challenge before us, our 
approach can make a dent in the problem only ifit is implemented in a comprehensive manner. 

It will not be without costs. But we feel that to the extent that declining home prices and 

mortgage credit distress are at the heart of the present crisis, this program wilJ more directly 

address it. Under this proposal, there is hope that we will finally stop falling behind this problem 

and begin to stabilize our housing markets and our financial system. 

I appreciate your interest in this issue and support of our efforts to address it If you have 

further questions or comments, please do not hesitate to contact me at (202) 898-6974 or Eric 

Spitler, Director of Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
F.N:r l ·r#' }.'• a ~ m r .. · . .. :~ .. =r I ..:;.::;: 

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FEDERAL DEPOSIT INSURANCE CORPORAJlON, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Hillary Rodham-Clinton 

United States Senate 

Washington, D.C. 20510 

Dear Senator Clinton: 

November 26, 2008 

Thank you for your kind words commending the Federal Deposit Insurance 

Corporation for our efforts to stabilize housing markets and for your interest in this 

shared goal through your support of the HOME initiative and other: actions _to prevent 

foreclosures. 

As part of our continuing work to address ongoing mortgage-related issues 

including foreclosure prevention, we have· researched many potential solutions. including 

the Home Owners' Loan Corporation (HOLC) model. for ways to deal effectively with 

unaffordable Joans and unnecessary foreclosures. Like you, we want to place responsible 

yet at-risk homeowners in sustainable.mortgages that are based on affordability. To that 

end, we recently proposed a loan modiμcation program with a loss sharing component 

that establishes a consistent affordability standard for homeownrn as well as incentives 

for banks and other lenders to participate in the program. I have enclosed a summary of 

our proposal for your information. In addition, the FDIC recently issued a loan 

modification guide we are calling •"Mod in a Box" to provide infonnation that enables 

others to duplicate the FDIC's program at IndyMac Federal Bank. A copy of this guide 

also is enclosed._ We share your goal of creating a uniform, systematic approach to reach 

a broad pi:>ol of at-risk homeowners. 

Than~ you again for sharing your counsel on these important issues. I look 

forward to continuing to worlc with Congress to provide effective relief for homeowners. 

stabilize our communities, revitalize our financial markets, and improve our economy. .\-t 

• '-/• 

r_~,r• i.: Sincerely, 

t-:J _,,- 0 CA,f ""' 

0~ '1 

Sheila C. Bair 

Enclosures 
FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications Page 1 of 3 

Hlm» > Con$UIOCC Pmlec1ion > Loans & Mortnaw:s > FDIC Loss Sharing Proposal lo Promote Affordable Loan Modifications 

FDIC ~oss Sharing Proposal to Promote Affordable Loan Modifications 

Background 

Basic Structure and Scope of Proposal Details on Program Design 

Impact 9f.th1Pmsmm 

loan Modification Program Guide - "Mod in a Box" 

Background 

Although foreclosures are costly to lenders, borrowers and conmunities, the pace of ban m>difications 

continues to be extremely slOIN (around 4 percent of seriously delinquent loans ea·ch month). It is 

imperative to provide incentives to achieve a sufficient scale in loan modifications fo stem the reductions 

in housing prices and rising foreclosures. 

Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a . 

systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments 

to as low as 31 % of monthly income. Modifications are based on interest rate reductions, extension of 

term. and principal forbearance. A loss shl;lre guarantee on redefaults of modified mortgages can 

provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available 

government funds to affect more mortgages than oubight purchases or specific incentives for every 

modification. The FDIC would be prepared to seive as contractor for Treasury and already has 

extensive experience in the IndyMac moalfication process. 

Basic structure and Scope of Proposal 

This proposal is designed to promote wider adoption of such a systematic loan modification program; 

1. by paying servicers $1,000 to cover expenses for each loan modified according to the required 

standards; and 

2. sharing up to 50% of losses incurred if a modified loan should subsequently re-default 

We envision that the program can be applied to the estimated 1.4 milf10n non-GSE mortgage loans that 

were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are 

projected to become deHnquent by year-end 2009. Of this total of approximately 4.4 million problem 

loans, we expect that about half can be modifi~. resulting in some 2.2 miRion loan modifications under 

the plan. 

Details on Program Design 

• Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties. 

• Exclusion for Earfy Payment Default: To promote sustainable mortgages, government loss 

sharing would be available only aft:~r the borrower has made six payments on the modified 

mortgage. 

• Standard NPV Test In order to promote consistency and simplicity in implementation and audit, 

a standard test comparing the expected net present value (NPV) of modifying past due loans 

compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard 

assumptions will be used to ensure that a consistent standard for affordability is provided based 

on a 31 % borrower mortgage debt-to-tncome ratio. 

• Systematic Loan Review by Participating Servicers: Participating servicers would be required 

to underta~ a systematic review of an of the loans under their management, to subject each loan 

to a standard NPV test to detennine whether it is a suitable candidate for modification, and to 

· ----.. ~/loans/Joanmodfmdex.html l 1126/200 
FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications Pagc2of3 

modify an loans that pass this tesl The penalty for failing to undertake such a systematic review 

and to cany out modifications where they are justified would be disqualification from further 

participation in the program until such a systematic program was introduced. 

• Reduced Loss Share Percentage for "'Underwater Loans": For L lVs above 100%, the 

government Joss share will be progressively reduced from 50% to 20% as the current L 1V rises.1 

If the L 1V for the first Hen exceeds 150%, no loss sharing would be provided. 

• SimpUfted Loss Share Calculation: In order to ensure the adminis1rative efficiency of this 

program, the calculation of loss share basis would be as simple as possible. In general tenns, the 

calculation would be based on the cflfference between the net present value of the moamed loan 

and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net 

of disposal costs as estimated according to industry sta11dards. Interim modifications would be 

allowed. 

• Qe mlnimls Test To lower administrative costs, a de minimis test excludes from loss sharing 

any modification that did not lower the monthly payment at least 10 percent 

• Bght--year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of 

the modification. 

Impact of the Program 

The table below outlines some of the basic assumptions behind the scale of the plan and its expected 

costs. 2 To summarize, we expect that about half of the projected 4.4 million problem loans between now 

and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the 

number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 

bil6on. · 

Projected Number and Cost of Loan Modifications Under FDIC Loss 

Sharina Prooosal 

1.6 million total loans 60+19o+ past due now 

GSE loans make up about 13% of problem loans at present 

Net 1.4 mil on non-GSE problem loans at present 

3.8 million new total loans 60+/90+ past due byy.e. 2009 

Assume: GSE loans make up 20% of new prob. loans through y.e. 2009 

Net 3.04 mi16on new non-GSE problem loans through y.e. 2009 

Total non-GSE problem bans through y.e. 2009: 4.44 milfion. 

Modify 112, or 2.22 million loans 

Avg. loan siz:e $200,000 

Total book value of loans IT!odified = $444 billion 

Avg_ program cost (FDIC assumptions)= 5.5% 

Esl total program cost= $24.4 billion 

Assuming re default rate of 3 3%, almost 1.5 million foreclosures avoided 

1 Current LTV can be demonstrated by a Broker Price opinion, or BPO. 

? Note: These figures have been updated from previous summaries to reflect a narrower application of 

the program to non-GSE loans that become delinquent through year-end 2009. 

-- r..i:ft ,,.,w/~onsumers/lo~oanmodfmdex.html I 1/26/2008 
----~-~---1 DICI 

FDIC Loan. 

Modification Program 
--------FDICI 

A message from FDIC Chainnan Shena ~Ir 

I have long supported a systematic and streamlined approach 

to loari modifications that puts borrowers into affordable, longterm mortgages while achieving an improved return for 

bankers and Investors colnpared to foreclosure. Using this 

type of approach. we can help stabirlze the U.S. financial 

markets by minimizing foreclosures on the 6.4 million loans 

that are currently past due or are projected to become 

deDnquent by mid-2010. Awiding foreclosure, when it is 

financially prudent to do so, reduces the downward pressure 

on the price of nearby homes and helps communities to 

maintain the services they provide 1o neighborhoods. · 

Unnecessary foreclosures perpetuate the cycle of financial 

distress and risk aversion, which potentially could cause 

housing prices to overc:c>rrect and create even larger losses for a.a.-s..n. c Bair 

both borrowers and the financial industry. Fnkrt:tl Dq,odt Tnn,n;,,,a Corporation 

At IndyMac Federal Banlc., the FDIC initiated a systematic and streamlined loan modification 

program for delilquent borrowers who occupy their home. These cfrstressed mortgages are beng 

rehabilitated into perfonning loans while avoicfing unnecessary and costly foreclosures. By 

achieving mortgage payments for borrowers that are both affordable and sustainable, we expect 

to reduce future defaults, improve the value of the under1ying mortgages, and cut servicing costs. 

This approach makes good business sense and creates a 'win-win' solution for everyone. I 

strongly encourage bankers, servicers, and investors to implement systematic and streamlined 

loan modifi::alions that result in monthly mortgage payments that borrowers can afford over the 

long term. 

To assist bankers, servicers, and ~vestors in this process, this. guide provides an overview of the 

FOIC's loan mocflfication program. It outfnes our program terms at IndyMac Federal BanJc, offers 

insight into the specific portfor10 characteristics that drive modification modefng at that bank, and 

provides a framework for developing and implementing a simlar program at your institution.. 

While fhe final program each of you implements will be based on the characteristics specific to 

your respedfva portfoflOS, I am confident that the value of such a program wDI benefit both your 

institution and your investOfS while helpng many troubled borrowers remain in their homes. Your 

support in this intfustry--wide effort wiU help avoid unnecessary foreclosures and bring stability to 

the housing and mortgage markets during this time of unprecedented economic turmoil 

Sincerely, 

Sheila Bair 

FDIC Loan Modificatioa Pqram I Pap: 2 
_L_oa_n_M_o_d1_· fi_c_at_io_n ______ FDICI 

I 

As Indicated in the summary 1able below, the FDIC's loan Modification Program is primanly based on 

two principals: 

1) Determining a payment the borrower can afford by multiplying the bom,we(s gross monthly 

income times the appropriate housing-to-income {HTI) ratio, less taxes and insurance to achieve a 

minimum payment reduction of 10 percent, and 

2) Protecting investors' interests by requiring that the cost of the modification is less than the 

estimated cost of foreclosure {the Net Present Value (NPV) floor). 

FDIC Loan Modification ~ram 

Strategy Process 

• Offer proactive • Return the loan to a current status. 

workout solutions • Capitalize definquent interest and escrow. 

designed to address • Modify the loan lenns based on waterfalls, starting at a 

borrowers who have front-end 38 percent Hl1 ratio down to a 31 percent 

the willingness but HTI ratio, subject to a fonnal NPV floor. 

limited capacity to • Reduce interest rate to as low as 3 percent 

pay. • Extend, if necessary, the amortization and/or term of 

the loan to 40 years. 

Borrower • Forbear principal if necessary. 

Affordability 

Determination • Provi:ie borrowers • Require the borrower to make one payment at the time 

the opportunity to of the mocflfication. 

stay in their home • Cap the Interest rat!! at the Freddie Mac Weekly 

whiJe making an Survey rate effective at the time of the modification. 

affordable payment • lower the interest rate as required to meet the target 

for the rite of the HTI ratio, fixing the adjusted rate and monthly payment 

loan. amount for 5 years. 

• Step up the initial interest rate gradually starting in year 

6 by increasing It one percentage point each year until 

reaching the Freddie Mac Weekly Survey rate cap. 

• Use a financial • Input borrower specific income information into the 

model with NPV Too~ which provides a real-time workout solution. 

supportable • Perform au~mated loan level underwriting across 

Investor assumptions to large segments of the portfoflo 10 support pre-approv_ed 

Protection ensure investor bulk maffings. 

Via interests are • Veriff income information the borrower provided via 

NPVTool protected. check stubs, 1ax returns, and/or bank statements. 

• CorT4)8re the cost of the modified concessions to the 

estinated cost of foreclosure to mitigate losses. 

• Mandate that the cost of the modification must be Jess 

than the estimated foreclosure loss. 
Overview ----------~FDII 

I. Philosophy 

Modification improves the value of distressed mortgages by achieving long-term sustainable 

cash flows for lenders and Investors that exceed the value achievable through foreclosure. 

Modification provides an affordable payment and eruninates payment shock for the fife of the 

loan. 

Modification minimizes loss to the Investor. 

II. Program 

Affordable payment is achieved through interest rate reduction, amortization term extension, 

and/or principal forbearance. 

Net present value {NPV) test confirms modification minimizes loss to the investor. 

Ill. Proc-ess 

Program uses a scalable process which can be appfled across a broad range of investors. 

Streamlined process provides custom modification offers and minimal borrower paperwork. 

IV. Promotion 

Inclusion of customized modified payment amounts in bulk: mailings significantly increases 

customer response and completed modifications. For bulk f'l'.lOdification offer maifings, the initial 

letter includes a pre-approved modification offer with the modified payment amount 

The program uses a combination of existing origination/sa(es marketing to contact borrowers via 

direct mail and innovative· point of sale approach via the call center. Call center staff have the 

capability to gather financial infonnation and make a modification offer during the initial call. 

This document provides a framework for estabfishing and implementing these standatds. 

FDIC Loan Modi6adion Prc,gnm. I Page 4 
_P_h_il_os_o_ph_y _______ FDII 

I. Philosophy 

Key objectives 

• Keep borrowers in their homes when the borrower is willing and has the capacity to make an 

affordable mortgage payment. 

• Provide borrowers with Immediate payment relief and stable long term mortgage payments. 

• Modification must always result in a positive NPV outcome for the investor, i.e., the cost of the 

modification must be less than the estimated cost of foreclosure. 

Determine what type of modification ls most appropriate 

1he FDIC Loan Modification Program targets distressed borrowers who are currently having 

financial difficulty with the scheduled mortgage payment, but have the capacity to make a loan 

payment It uses a streamlined approach to Identify modification candidates and to provide a 

customized modification offer when the ll)odifi::ation minimizes loss. If a borrower does not 

quaflfy for a streamlined modification, an individual loan review may result in a personalized 

modification that still maximizes value. 

This approach is just one of many loss mitigation strategies that a prudent servicer must consider 

when dealing with a distressed borrower. Refinance is an alternative as wen as tratflf1011al loss 

mitigation practices such as repayment plans. However, mariy borrowers are unable to refinance 

their loans in the current economic environment and repayment plans typlcany do not provide 

long- term solutions to borrowers' financial problems. In cases where the borrower cannot afford 

the lowest payment allqwed by the NPV Tool, a short sale or deed-in-fieu of foreclosure with 

·cash for keys· assistance are preferred methods to avoid ft>reclosure. 

Immediate relief and long term stability 

Loan motfrfcation will result in a "life of loan• solution by capping interest rates at curreni market 

rates, requiring immediate principal arriortlzatlon, and setting an initial interest rate subsidy to 

provide immediate relief, A preaictable payment schedule after the fifth year will step the initial 

interest rate up to the market rate. Mocfrfication replaces adjustable-rate and interest-only 

mortgage~ with stable rate loans, and eliminates the possibility of Mure negative amortization. 

FDrC Loam Modification 'Prognim I Pap s 
_P_hi_·1_0s_o_ph_y ________ FDII 

Minimizes losses on Distressed Mortgages 

Once the borrower-specific modification is determined, the servicer must perform a valuation test 

between th~ cost of modification and the estimated cost of foreclosure to ensure modification 

results in a lower cost to the investor. By providing a transparent valuation comparing the cost of 

the modification and the estimated cost of foreclosure, the servicer fulfills the terms of most 

servicing agreements. 

FDIC Loan Modilicatian Prognm I Page 6 
_P_~-~-!-am ________ FDII 

Key objectives 

• Systematic determination cl borrower specific modification terrns using a standardized NPV test 

to minimize losses on distressed mortgages. 

• Target distressed borrowers. Modifications may be available for loans that are at least 60 days 

delinquent or where default is reasonably foreseeable.1 

• Implement modification program that can be used across a broad range of investors. 

Step 1: Determine Eligibility 

Servicers typically manage loans for other investors, including Government Sponsored Enterprises 

(GSEs), private investors owning securities coliaterafized by the mortgages, and whole loan 

investors. Each investor type has different standards for approving loan modification. The GSEs 

have authorized loss mitigation programs for seriously delinquent loans, however some loans 

owned by the GSEs may be modified based on eligibility standards similar to those used for 

private investors. The GSEs recently announced the adoption of more streamlined mocfrfication 

plans that apply many of the features of the FDIC Loan Modificatbn Program model. 

Loans serviced for priva~ investors are governed by servicing contracts which oflen contain a 

standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages, or 

mortgages where default is ·reasonably foreseeable •• 2 This even holds true for complex prtvate 

label securitizations with many tranches and investors. 

Loans subject to these contracts are typically eligible for modification given: 

• Toe loan is at least 60 days delinquent where the loan is considered one day delinquent on the 

cay following the next payment due da~e. 

• Foreclosure sale is not imminent and the borrower is currently not in bankruptcy, or has not been 

discharged from Chapter 7 bankruptcy since the loan was originated. 

• The loan was not originated as a second home or an investment property. 

Loans sold whole to individual investors often require a case-by-case approach. These loans are 

subject to both servicing and securitization contracts. The Appendix contains guidelines on how to 

evaluate whole loan servicing agreements. 

, Due to contraclUaJ restrk:::tions in lndyMac's pooling and servicing agreements, IndyMac Federal Bank has not 

moodied securitized loans where default is reasonably foreseeable. Most o1her agreements do aDow mocflfication 

of such loans. 2 See the &,Jerican Securifira6on Forom's StreamflQfJd Fpr,closur, and Loss AIIQidance Framewprk for 

Seg.rifizfdl.forlrlaqe loan£. lccued Dec. 6, 2007 and revised JLlly 8, 2008. · 

FDIC Loan Modi5catxm Progmn f Pace 7 
_Pr_o_gr_a_m_~o_noo_·u_~> ______ FDII 

Step 2: Calculate an "Affordable• Payment 

In order to calculate an affordable payment. recent financial income information must be available for 

the porrower. Efforts to contact the borrower via special mailings, calling campaigns, email, and other 

outreach methods are used. 

The FDIC Loan Modificalion Program calculates the modified principal, interest. taxes, and insurance 

{Pill) payment per ·a borrower specific HTI ratb of no more than 38 percent Housing expenses on a 

PITI basis may include: 

• The modified principal and interest payment for the subject loan, as applicable, 

• Real estate taxes, 

• Property hazard, flood, arnj mortgage insurance premiums, 

• Leasehold estate payments, and 

• Homeowners' associatbn {HOA) dues. 

Industry stardards set forth by certain FHA lending programs indicate a mortgage payment based on 

a 31 percent to 38 percent HTI ratio is affotdable. The FDIC Loan Modification Program follows these 

origination standards as illustrated below. 

Example of HTl ratio calculatlon 

Monthtv Gross Income 

$3,61 B - Borrower 1 

$2.756- Borrower 2 

$6,374 - Total Monthly Gross Income 

Pm Payment Determination 

$6,374 X 38% = $2,422 

Monthly Housing Expense 

$2.422 - Maximrm Total Monthly Housing Expense 

$ - 364 - Taxes, hazard, flood, and mortgage insurance, etc. 

$ - 85 - HOA dues 

$1,973 - Maximum modified principal and interest payment 

Total HTI Ratio 

$2,422 / $6,374 = 38% 

FDICLom Modffication Program I Page 8 
Program (Continued) -----------FDNI 

If the inifial modificati:>n calculation at 3B percent does not decrease the borrower's payment by 1 O 

percent or more, the HTI ratio Is lowered to 35 percent and then lo\Nered to 31 percent to achie\le the 1 o 

percent savings. In cases where a 10 percent reduction can not be achieved, the 31 percent HTI ratio is 

used for affordability. 

Step 3: Determine the "Total Del>t" by capltafazing certain costs in the unpaid principal balance 

• Delinquent interest, taxes, and insurance escra.vs and 

• Third party fees such as foreclosure attorney or trustee fees and property preservation costs. 

Step 4: Solve for "Affordable Payment" through a three step waterfall process 

1) Interest Rate Reduction: Cap the life--0f-loan interest rate at the Freddie Mac Weekly Survey rate 

as of the week of the mocflfication offer. then reduce the interest rate incrementafty to as low as 3 

percent to achieve the •affordable• payment per the adjusted unpaid principal balance (UPB) and 

remaining amortization term. An interest rate floor of 3 percent will ~ble the borrower to maintain 

approximately a 3B percent HTI ratio throughout the life of the loan, assuming modest borrower 

earnings growth commensurate with the inflation rate. The reduced rate remains in effect for ~ years. 

After this perod, the interest rate increases by not more than one pen:ent annuaDy until the Freddie 

Mac Weekly Survey rate Is achieved. If the •affordable" modified Pm payment amount has not been 

achieved, proceed to the next step. 

2) Extend Amortization Tenn: For loans with an original term of 30 years, re-amortize the adjusted 

UPB at the reduced interest rate {3 percent floor) over an extended amortization term of 40 years 

from the original first payment date. For securitized loans, the amortizatio'l will be ~xtended to 40 

· years from the original first payment date, but the maturity date will not change, resulting in a balloon 

payment For loans with an original term of less than 30 years, extend the amortization period for 

only 10 years. If the modified Pm payment amount has not been achieved, proceed to the next step. 

3) Partial Principal Forbearance: Reduce the adjusted UPB for amortization purposes and amortize 

over a 40 year period at the reduced Interest rate {3 percent floor). This process splits the debt into 

an interest-bearing, amortizing portion and a zero percen~ zero payment portion of the loan. The 

repayment of the •postponed" principal will be due when the loan is paid in full For loans within 

securitizations, this principal forbearance should be passed as a write-off of principal to the trust, with 

any Mure col~ons at time of pay-off submitted to the trust as a ~very. 

FDIC Loan Modificatwn Progmn I Page 9 
Program (Contin~ed) ---------FDII 

Step 5: Apply the NPV Tool 

Run the modified loans through the NPV Tool in order to ensure that the mocfrfied payment creates a 

positive economic scenario for the investor. 

Step 6: Market via systematic "bulk" approach 

A bulk modification model processes large segments of delinquent loans with recent borrower financial 

information on file. The model perfonns automated loan-level underwriting based on the existing loan 

terms and recent financial information obtained from the customer, which is verified prior to completing 

the modification. The bulk modification process establishes modification eligibility and modification terms 

as detailed in the previous steps, then uses a tralfitional ma~eting approach to provide the borrower 

with an easy to foDDW', pre-populated modification offer. The marketing material~ also instruct the 

borrower to either contact the servicer with questions or just send ~ the signed documents and the first 

payment to complete the modification offer. The modification offer expficffly states the amount of the 

borrower's new monthly principal and interest payment as follows: 

Reduce your monthly payment of principal and 

interest to $x,xxx.xx and bring your loan currenH 

While some borrowers may appear to have the capacity to pay, their abir,ty to do so may be inhibited by 

other debt obflgafions. Bankers and servicers should consider establishing relationships with community 

groups wilHng to contact and provide credit counsermg to fhese borrowers. Entering into compensation 

agreements with local non-profit organizations with HUD-approved coun~lors also may assist in 

contacting borrowers, obtaining the requisite financial infonnation, and completing the modification. 

C001)ensafion should be based on a borrower con1act and mocfdication completion. For example. 

IndyMac Federal Banlc pays participating community groups $150 for borrower contact arid counseling 

services, and an additional $350 once the loan modification is completed. A copy of a counseling· 

. compensation agreement is provided in the Appendix. 

FDIC Loan Modification l'roemn I Paic 10 
NPVTest --~-------FDII 

f'il'VTcst 

Once the modification tcnns arc established. the impact of the modification concessions to the investor arc 

compared to the estimated loss given foreclosure. If the modification is less costly than foreclosure. it is 

appr9ved. This test ensures that modifications mitigate the loss for investors. This diagram illustrates the NPV . . 

test:· 

&04' DQ Loans 

l 

Com,,,..-. loss ufirute for Mt>tl va. Slan*nl Fon"'-un 

[..,,_.pqs ofhr d•fa7 

._________ ~Cure Rata x Par f R:lfult (1-Cura Ride) X 

&p.ctlldREO 

~ltion\lalua 

Bt:dmvtt. 

Radefaull Raa x Expected 

REO Dicpocllion Value 

[indudlng addilianal inlelest 

advancas) 

FDIC Loan Modification Program I Paic 11 
NPVTest -----------FDICI 

The formula used to estimate the cost of foreclosure ls: 

Loan Value= Cure Rate * Par + 

(1 - Cure Rate)* Expected REO Disposition Value 

Description of the formula terms: • Cure rate is based on recent industry or servicer data. It is based on a combination of 

delinquency status, combined loan-to-value (l lV), FICO and original income documentation. A 

12 month cure period is used. 

,. Expected REO Disposition Value: 

Liquidation value - Interest Adv/Accrual - Corporate Advances - Escrow 

Advances - Future Cost to Coflect + Ml Recovery 

• Liquidation Value: 

Forecasted Liquidation Value of property at REO = 

current Property Value• (1- forer;asted Depreciation - •REO Stigma• DiscountSelling Costs} 

• Forecasted Depreciation is based on ai:i industry standard such as Moody's 

· Economy.com metropolitan statistical area (MSA) level data. Depreclatlon tlmeline is 

one year in the Mure. or case-specific. 

• Current Property Value is determined by an interior appraisal, Broker Price Opinion 

(BPO), Automated Valuation Model (AVM), or original appraisal value adjusted by 

MSA level home price change to date. This value is then adjusted by forecasted MSA 

level home price changes. 

,. REO Stigma Discount reflects differences in experienced liquk1ation values versus 

estimated property values. 

:.: Selllng Costs include 1 O pen::enl for broker commission, potential repairs and 

. maintenance costs. 

;;.. Interest Advances/Accruals Includes delinquent interest advanced (sec.uritlzed/sold 

loans) or acaued (owned loans). 

• Corporate Advances include non-escrow advances already made on the borrowers 

behalf. 

• Escrow Advances already made on the borrowers behalf. 

• Future Cost to Collect is an estimate of future interest accruals, T&I payments, and FC 

expenses. 

• Ml Recovery (if applicable) is estimated based on Ml coverage percentage adjusted for 

possible Ml claim denial. 

FDIC Loan Modification Program f hgc 12 
_NP __ V_T_e_s_t(_Co_nfu_ued_) _____ FDICI 

The fonnula used to estimate the cost of modification is: 

Loan Value= (1 - Redefault Rate) x NPV of Discounted Payments+ Redefault Rate x (REO 

Disposition Value + Additional Accrued Costs) 

Description of the formula terms: 

;- Re-default rate is estimated per hi~torical re-defauR experience for other modification programs and 

a program specific projection. 

• NPV of discounted payments is the net present value of the adjusted UPB {cash outflow) and the 

modified payment stream {cash inflow) discounted al the Freddie Mac Weekly Survey rate as of the 

week of the modification offer. An NPV example is provided in the Appendix. 

,- REO disposition value (see above). 

• Additional costs include 9 additional months of accrued interest, taxes, and insurance payments 

plus additional forecasted home price depreciation, as applicable.3 

3 Currently, the Case-Shiller forecast provided by Moody's Economy.com projects that home prices 

wil reach their trough in about one year from today, which also is equivalent to the base case 

timetable for REO disposition in the NPV Tool. This means that delaying foreclosure wiD not lead to 

further home price declines at REO disposition for most geographical areas. 

FDIC Loan M.odificamn ~ j race 13 
NPV Test (Con~inued) -------,-------FDII 

In Addition to Updated Liquidation Value, a Servicer must Formally Backtest Servicer andfor 

Portfolio Specific Assumptions and Regularly Update Assumptions Based on Industry 

Standards 

1. Forecasted Depreciation (industry standard) 

• Updated monthly to incorporate latest home price data. 

2. Cure Rates (servicer and/or portfolio specific) 

• Updated quarterly and based on 12 month history (lo adjust for current credit environment). 

Suggested cure factors include the current delinquency status of the loan, combined LlV, 

borrower FICO, and original income documentation. 

3. RED Stigma (servicer and/or portfolio specific) 

• Updated monthly to incorporate latest experience by region. 

4. Re-default Rate (servicer and/or portfolio specific) 

• Based on past re-default experience for other modification programs and a program specific 

projection. The servicer should carefully monitor and incorporate the program's actual 

re-default rate. 

5. Discount Rate (both industry standard and servicer and/or portfolio specific) 

• Freddie Mac Weekly Survey rate as of the week of the modification offer is used lo "discount the 

modified payment cashflow. A required return methodology is used to discount the estimated 

foreclosure value. 

6. Prepayment rate (servicer and/or portfolio specific) 

• The model ·assumes a voluntary prepayment rate of zero. 
_P_r_o_ce_ss _________ FDII 

Ill. Process 

Key Objectives 

• Leverage large scale modification offer/delivery process. 

• Give collections and loss mitigation staff the abifrty to offer tailored solutions based on borrower 

need, wilfingness and ability to pay. balanced with investor guidelines and a formal NPV test. 

• Streamline paperwork and income verificatioh process. 

• Establish a protocol for community group referrals. 

Once eligibility is established, the loan modification offer is based on the borrowers income 

information. For borrowers with recent income information on file, a firm offer may be extended. 

contingent on income verification. However, verified income may be different from that on file and 

tolerance for some variation should be established. For borrowers with no recent income Information 

on file, a conditional offer may be extended, contingent on income verification. This type of offer 

should use a more rigorous verification process requiring both tax returns and recent pay stub 

information. 

For both firm and conditional modification offers, the key to program success is a scalable offer 

delivery process, which immediately provides the borrower with modification terms and instructions. 

FDIC Loan Modi6catian Program I Page 15 
_._P_r_o_c_e_s_S_(_C_on_tin_u_ed_) ________ F-Dkl 

Offer/Delivery process - Two-Tiered Approach: 

1. Bulk Approach: Loans processed through the bulk modification process are sent a pre-approved 

offer with pre-populated modification documents, income verification forms and informational 

material. This modification package provides the borrower with a custom modification offer and 

instructions to complete the modification with a quick one-touch close. Modification paperwork is 

handled via an automated process. The modification agreement Is pre-populated and the loans are 

pre-quarlfied; as a result, the operations process is simplified to coUec:ting the modification 

agreements, verifying income documentation, and completing system updates to ensure the 

borrower receives modified terms on the next statement 

2. Point of Sale Approach: Use of traditional inbound and outbound customer service and collection 

staff should albw borrowers to obtain fast and customized solutions. Loss mitigation staff require 

access to a ,:nodification tool which allows the collector to discuss an viable workout options before 

proceeding with an offer. For example, a delinquent borrower calls collections and is unable to 

afford the current mortgage payment The collector enters the borrower's information into a desktop 

tool which immediately provides the collector with possible workout solutions such as modification. 

short sale, and cash for keys programs. If the mocflfication is NPV positive, the collector Informs the 

borrower of mocfmcation eligibility. collects the first modified payment, updates the system, and 

either generates the modification documents from the system, or includes borrower in the next bulk 

mailing. 

One of the Benefits: Saying "Yes" to the borrower and providing the reduced modified payment 

amount motivates the borrower to finish submitting the final documentation needed to complete the 

modification. Once the borrower verbally accepts the molftfied payment, the coDector initiates a 60-

day payment plan at the new amount and takes the paperwork off the foreclosure path. When the 

documents are received and income is verified, modification changes are processed permanently in 

the system. 

Commu~ity group referrals should be prioritized through a dedicated hotline and email address. 

Groups with a relationship with the servicer should be trained on the specific information required to 

complete the modification. This provides another venue to streamline the paperwork processing. 

FDIC Loan Modific:atjon l'rognmi I Paec l 6 
_P_ro_c_e_SS_(co_noo_·u_ed_) _______ FDNI 

Income Verification 

Income verification minimizes re-default and ensures the affordability standard is uniformly implemented. 

The gross monthly income for au borrowers who have signed the mortgage note must be supported by 

either last years tax: returns or recent pay stubs. A dedicated underwriting group reconciles verbal 

financial infonnation on file to documented income. 

FDICl.oan~Prognm I Pato17 
_P_r_om_ot __ io_n ________ FDNI 

rl. Promotion 

Key objectives 

• Stimulate response and acceptance rates for all borrowers, including those who have not made 

recent contact with the servicing group. 

• leverage community group resources to contact unresponsive borrowers and to provide financial 

counseling. 

• Establish reporting procedures to track program effectivene&S. 

The mocfrfication offer is sent to borrowers using either priority or overnight mail to stimulate open 

rates for all borrowers, particular1y those who have not made recent contact with the servicing group. 

The offer is designed to have the look and feel of a traditional origination/sales marketing letter with 

the additional aspect of a pre-approved modification offer and a simple pre-populated agreement 

This allows th~ borrower to complete the agreement without having to call the servicing_group. See 

the Appendix for examples of marketing materials and the simpflfied loan modification documents. 

Inbound and outbound call efforts are designed around a sales approach, not a traditional collections 

approach, to ease borrowers' concerns about foreclosure. lne servicer should promote a "No 

borrower left behind" mentality, which gives even no contact customers an offer that can be 

completed without needing to call. Campaigns are supported by a dedicated "direct to consumer· 

marketing team. 

Community groups are a valuable resource and the servicer sho':'ld integrate national and local 

groups into the modification process. These groups can be contracted for outbound catnng to 

unresponsive modification candidates and financial counseling for distressed borrowers. The 

modification offer may also offer an incentive for borrowers to seek financial counseling through these 

groups. A sample contract and compensation structure is included In the Appencfoc 

FDIC Loan Modification Prognan I Page 1 g 
_P_r_o_m_o_ti_o_ll_(_co_n_tin_ue_d) ______ FDII 

.,, ~~' Ope,16ons 

1.-1•:1--··11 - 2 11--·Dtti I - - lo,,u,,,»1-. -'--o.,-»-

Modification Reporting 

,,....., 

~ 

....... 

nldal 

....... 

..... I 

Cllllilll4 .' 

Accurate and up to date data on the loan modification program requires an integrated servicing 

platform and business unil Internal and ell:temal reporting needs include: 

Internal 

• Responsiveness to modification campaigns: establish specific phone lines for each modification 

campaign, track inbound and outbound calling and contact rates. 

• Process effectiveness: create one servicing template for all modifications which requires the loss 

mitigation staff to track an contact made with the borrower. The servicer should analyze timelines 

for mailing to borrower contact, ·contact 1o document return. and document return to modification 

completion. 

• Delinquency and re-default rate: success is measured by perfonnance foDowing modification. 

These metrics are also important to the NPV Tool model 

External 

• Investors require detailed modification tracking. This enhances program credibility and proves 

that modification is the least cost strategy. A sample investor reporting template is found in the 

Appendix. 

FDIC Loan Mfldificaoon Prognim j Paec 19 
HIUARY RODHAM CLINTON 

-YDIIIC 

5:ENATDR 

MSAUSEMA-1£-IIUIU>INli 

SUIIEOS ""'5HNG1DN,DC~ _, 

Ms. Sheila Bair 

Ch.airman 

ilnitnl ~tatts ~matt 

WASHINGTON, DC ~10-3204 

November 6, 2008 

Federal Deposit Insurance Corporation 

550 17th St., NW 

Washington, D.C. 204i9 

DearCh:rlnnanBair. 

..__ 

HEAUH.EDLCI._LUDII, l!!IIIVIIIDfMEIAHOl'UII.IC~ __ 

Sl'B:SAl.~ON-C 

fD\C 

I would like to commend you for your efforts at addressing what I believe to be the 

underlying challenge in ~ current market and economic turmoil, the foreclosure crisis and its 

dramatic impact on the value of residential homes. You have bcc::n a consistent and prcscicnt 

voice in sounding the alBim over the conscq~s of inaction and have led the way for other 

federal agencies in responding to this crisis. 

As your testimony to my colleagues in the Senate Banking Committee outlin~ we have 

been behind 1he curve for too long in addressing this mortgage crisis, the progress made thus far 

has not been enough, and time is of the essence if we me going to prevent a new~ of 

mortgage dcfault3 and foreclosures from deepening our current economic troubles even further. 

I am.encouraged by your efforts thus far and I urge you to remain vigilant in putting forth a 

responsible and effective plan that will meet the scale of the mortgage and housing market 

challenges ahead of us. 

For nearly two yea.rs, I have been sounding the alarm bell about the housing crisis and the 

need to tackle the problem immediately. Urgent action was and is needed given the dire 

consequences that waves of foreclosures wollld have not only on oμr markets and our economy 

but also on the families who would be displaced from their homes while having their most 

valuable asset wiped out. As one of the first to support a temporary foreclosure moratorium to 

stabilize the housing market, I appreciate your commitment to this issue. Additionally, I 

proposed allowing mortgage wo:drouts to Wee hold and introduced legislation two years ago to 

promote the role of the Federal Housing Administration in offering alternatives to subprime 

mortgages. I have also voiced my skepticism about the effectiveness of the Administration's 

response to crisis. I agree with you that at this stage our response to the current crisis needs to be 

«dJ:amatic" or at least propo¢onal to the significanti:isks that a further depression in housing 

. prices and waves of new defaults and foreclosures would pose to 1hc economy. 

We both sec the benefit of crca1:ing a uniforμi standard for safe, fair and stable mortgages. 

I recently unveiled my support for a new federal initiative called the Home Owners• Mortgage 

Enterprise (HOME) with a mandate similar to that of the Home Own~~ Loan Corporation 

created by President R90scvelt during the Great Depression. It would identify the non-
Pagel 

performing mortgages within mortgage pools and purchase them directly with bonds, direct cash 

or insure them at a level that would provide a greater return for banks ~ investors than 

foreclosure. A HOLC could rewrite the terms of the mongage and provide at-risk homeowners a 

fixed monthly payment not subject to change based on thdr ability to pay. Additi~y. my 

proposal would provide fl.cxi"bility to account for any unforeseen event, such as job loss or a 

health emergency by enabling the c:x:tension of the loan terms which would in effect ensure that 

the mortgage is self-amortizing. Ultimately, a program like the one I am proposing would 

provide the homeowner with the certainty of .knowing precisely how much their mon1bly liability 

is. I urge you to look at the model of the HOLC as a way to ensure that o~ foreclosure 

prevention efforts arc effective. 

As you finaJiu your plans, I hope that you will io continue to push for a fair plan that 

offers effective relief to homeowners and places accountability on banks and other lenders 

participating in the program. Restoring value to distressed mortgage assets and non-performing 

mortgage through the workout i!lld modification of unreasonable terms will prove to be a 

significant incentive for them to wm:k with you and the FDIC. You and the FDIC have 

demonstrated your ability to create; a :frameworlc for mortgage IJ?,Odifications as evidenced by 

your efforts to rework the mortgages held by IndyMac, and I hope that you will continue to be 

successful as y9u move towards.this larger challenge. Indeed. preventing the next foreclosure 

crisis is one of the most critical components of addressing this current economic turmoil. 

Thank you for your attention to my concerns. and please do not hesitate to contact me if I 

can. be helpful to the FDIC's ongoing efforts. 

Sincerely, 
f9 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable John Conyers 

Chairman 

Committee on the Judiciary 

House of Representatives 

Washington, D.C. 20515 

Dear Chairman Conyers: 

December 1, 2008 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

role in the Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled 

Asset Relief Program's (TARP) Capital Purchase Program (CPP). ~e FDIC agrees with 

you that funds received from lhe CPP primarily should be used to augment capital at 

insured depository institutions with a result of making credit available throughout the 

country. On this point, we joined the other federal banking agencies in issuing the 

/11tcragcney Statement 011 Meeting tlie Neeru of Creditworthy Borrowers on 

November 12 (copy enclosed). This Statement encourages banks to support the needs of 

creditworthy borrowers, strengthen capital, and engage in foreclosure prevention 

programs in view of the f!nancial assistance provided under recent federal initiatives to 

promote financial stability which include the EESA and the CPP. 

As you know, the U.S. Department of the Treasury (Treasury} instructed 

institutions to file CPP apRlica.tions with their primary federal regulator. The primary 

federal regulator conducts a viability assessment and then forwards the application to 

Treasury with a recommendation (or approval or denial. The FDIC, in its role as primary 

federal regulator for state non-member institutions. has implemented a comprehensive 

·review process for CPP applications that results in a recommendation to Treasury. 

Treasury, which manages and funds the CPP; makes the program's final approval and 

denial decisions. As of November 18, 2008, the FDIC has received 1,214 CPP 

application requests. We expected to have a much greater number of applications by this 

time. However, Treasury has not yet finalized a feasible CPP subscription framework for 

the vast majority of community banks supervised by the FDIC. 

I understand from your letter that you are particularly concerned about the PNC 

Financial Services, Inc.-National City Corporation merger transaction and a related CPP 

capital injection from Treasury. The FDIC is not the primary federal regulator for either 

of these companies. Therefore, the FDIC did not make a recommendation to Treasury on 

this CPP transaction. 
Our responses to lhe specific questions presented in your letter are enclosed along 

with copies of relevant documents. I hope this infonnation is helpful. If you have 

additional questions, please contact Eric Spitler. l)ircctor of Legislative Affairs. at (202) 

898-3837. 

Sincerely, 

Sheila C. Bair 

Enclosure 
Report prepared for the Honorable John Conyers 

by the Federal Deposit Insurance Corponition's Division of Supervision 

and Consumer Protection and Legal Division 

Ql: Please detail what conditions have or will be imposed upon the use of the 

federal funds provided to PNC l<'inancial Services Group or any other financial 

entity through the Emergency Economic: Stabilization Act. Describe and explain 

any factors taken into account when fedenl tax dollars are being used to help fund 

an acquisition of another firm. Please provide a copy of all documents ... from 

September 2008 onward relating to any aspect of the foregoing. 

Al: The U.S. Department of Treasury (Treasury) issued the CPP Terms Sheet (attached) 

on October 14, 2008, which establishes the conditions imposed on institutions receiving 

fcdend funtls. We do not believe that Treasury has mandated restrictions on the use of 

CPP funds (other than the executive compensation limitations in the EESA), however, the 

FD[C has an expectation that insured depository institutions and their holding companies 

will prudently use these funds to augment capital and make loans. Since Treasury is 

entering into a stock offering with participating institutions and imposing its own 

conditions to protect the taxpayers' inlcn:sts, the FDIC will not be issuing separate: 

restrictions on CPP subscriptions. In the normal course of supervisory activity, the FDIC 

will review each state nonmember institution's use ofCPP funds, lending activities, and 

compliance with the executive compensation/golden parachute limitations mandated by 

the EESA. It should be noted thin on November 1 z. the FDIC joined the other federal 

banking agencies in issuing the /11terage11cy Statement on Meeting tire Needs of 

Creditworthy Borrowers (copy attached). this Statement encourages banks to support 

the needs of creditworthy borrowers, strengthen capital, and engage in foreclosure 

prevention programs in view ohhe financial assistance provided under recent federal 

initiatives to promote financial stability which include the _EESA and the CPP. 

The FDIC docs not have c."<pcriencc using federal tax dollars to facilitate private sector 

mergers. However, we suggest that such transactions should be predicated on reasonable 

assurances that the post-merger entity would: I) be adequately capitalized and viable 

over the long tenn; 2) have positive future earnings and business prospects; 3) operate 

with satisfactory board and management oversight; 4) present an appropriate plan for 

making credit and banking services available in its community; and 5) recapture the 

taxpayers' investment and provide a suitable return. 

Q2: Please detail the mctbodolo2r and criteria that were considered in connection 

with the possible transfer of federal funds through the Emergency Economic 

Stabilization Act to National City Corporation as compared to the other regional 

baaks for which you recently approved funding. Also, please describe the extent to 

whkh :ny impact on National City Corp.'s casto~en and employees as well as the 

relevant local economy was taken !nto consideration with regard to approval or 

denial of funds to National City and the proposed ac:quisitfoc o!National City by 
PNC. Please provide a copy of all documents ... from September 2008 onward 

relating to any aspect of the foregoing. 

A2: As mentioned above, the FDIC _is not the primary federal regulator for PNC 

Financial or National City Corp. While the FDIC docs not comment publicly on the 

condition of specific open and operating institutions, the FDIC believes that, under 

certain circumstances, it is appropriate to require institutions to raise additional private 

capital or seek a strategic partner in order to receive funds through the CPP program. 

This can help strengthen weaker institutions and ensure that they can continue providing 

financial services to their communities. With respect to the merger of these two firms, 

the FDIC does not have specific knowledge of the methodology and criteria used in the 

CPP transaction. 

QJ: As noted above, the press bas recently reported that the banking industry "bas 

no intention of using the [bailout} money to make new loans;" the Treasury has 

acknowledged that one or their principal motives in allocating the funds is to "drive 

consolidation;" and a JP Morgan official acknowledged that the bailout funds would 

allow them to be "more active on the acquisition side." Please detail any knowledge 

by your deparbnents or agencies of these matten, as well as any discussions or 

understandings you may have regarding the use of the funds the government is 

providing and their possible use with regard to mergers and consolidations. Please 

provide a copy of all documents .•• from September 2008 onward relating to uy 

aspect of the foregoing. 

A3: In the FDIC's discussions with state non-member institutions interested in 

participating in the TARP CPP, we find that many applicants are planning ta use awarded 

monies prospectively to suppori,;'their lending business. The FDIC strongly advocates the 

use of CPP funds for capital augmentation and prudent lending as envisioned by the 

EESA. We articulated this positioll in our October 20, 2008, Financial Institution Letter 

titled "Applicalians to rhe Troubled Asset Relief Program's Capital PHrclrase Program" 

{see attachment). 

The FDIC believes, in certain circumstances. that CPP injections can be used effectively 

by applicants to provide additional funding for ~cquisitions, particularly if the applicant 

acquires a weakened institution. Importantly, such acquisitions may reduce the potential 

for market disruption, including reduced )ending avenues and bank failures. Particularly 

for community banks, their inability to obtain capital, or their demise can have a 

devastating eITcct on their local communities. In many smaller communities. banking 

services and credit availability arc heavily dependent on the financial health of their local 

bank. Over the long term, acquisitions pursued by CPP awardees could save taxpayer 

dollars and restore capital and lending capacities at banking institutions. As indicated in 

the Financial Institution Letter referenced above, the FDIC believes that participation fo 

the CPP can bolster an institution's financial strength or potentially support acquisitions, 

both of which allow for prudent lending that currently may be constrained by capital 

levels. 

' 
Q4: Please detail the manner in which antitrust considentions generally have been 

and are being taken into account in recent consolidations, particul~rly in the 

proposed acquisition of National City Corp. by PNC Financial Services Group. 

Please detail how the antitrust review is impacted by the fact that the Treasury or ,:· 

Federal Reserve, their employees and/or representatives may have participated in 

discussion involving the possible acquisition of one financial entity by another 

financial entity. Please provide a copy of all documents .•. relating to any aspect of 

the foregoing. 

A4: Anti-trust considerations arc a significant aspect of merger transactions involving 

FDIC-supervised state non-member institutions. All merger transactions require a 

regulatory application process which includes analysis of potential anti-trust issues. 

Section 18(c)(5) of the Federal Deposit Insurance Act prohibits the FDIC from approving 

any merger which would result in a monopoly or whose effect in any part of the country 

may substantially lessen competition. Our overall process for considering merger 

applications is guided by the FDIC's Statement of Policy on Bank Merger Transactions 

(sec attachment). 

In our analysis of the competitive effects of a proposed merger transaction, the FDIC 

focuses on the type and extent of competition that exists within the relevant geographic 

markel(s) and the degree to which that competition will be eliminated, reduced, or 

enhanced by the proposed merger. We rely heavily on conclusions from the Department 

of Justice's review of the proposed merger, including its Competitive EfTects Report. We 

also focus on the respective shares of total deposits held by the merging institutions and 

the various other participants .in the relevant markets. 

As the FDIC did not have a supervisory role in the PNC Financial Services Group, me.-

National City Corporation:ttansaction, we do not have infonnation to provide relative to 

the regulatory antitrust analysis. 

Attachments 
Issuer: 

Initial Holder: 

Size: 

Security: 

Rankine: 

TARP Capital Purchase Program 

Senior Preferred Stock and Warrants 

Summary of Senior Preferred Terms 

Qualifying Financial Institution ( .. QFI") means (i) any U.S. bank or U.S. 

savings association not controlled by a Bank Holding Company ("'BHC") 

or Savings and Loan Holding Company ("SLHC'); (ii) any U.S. BHC. or 

any U.S. SLHC which engages only in activities permitted for financial 

holdings companies under Section 4(k) of the Bank Holding Company 

Act, and any U.S. bank or U.S. savings association controlled by such a 

qualifying U.S. BHC or U.S. SLHC; and (iii) any U.S. BHC or U.S. 

SLHC whose U.S. depository institution subsidiaries are the subject ofan 

application under Section 4(c)(8) of the Bank Holding Company Act; 

except that QFl shall not mean any BHC, SLHC. bank or savings 

association that is controlled by a foreign bank or company. For purposes 

of this program, "U.S. bank", "U.S. savings association", .. U.S. BHC" and 

.. U.S. SLHC" means a bank, savings association, BHC or SLHC organized 

under the laws of the United Sates or any State of the United States, the 

District of Columbia, any territory or possession of the United States, 

Puerto Rico, Northern Mariana Islands. Guam, American Samoa, or the 

Virgin Islands. The United States Department of the Treasury will 

determine eligibility and allocation for QFJs after consultation with 

the appropriate 14'ederaJ banking agency. 

United Stat~s Department of the Treasury (the "UST"). 

QFts may sell preferred to the UST subject to the limits and terms 

descn'bcd below. 

Each QF1 may issue an amount of Senior Preferred equal to not less than 

l % of its risk-weighted assets and not more than the lesser of (i) S25 

billion and (ii) 3% of its risk-weighted assets. 

Senior Preferred, liquidation preference Sl,000 per share. (Depending 

upon the QFl's available authorized preferred shares. the UST may agree 

to purchase Senior Preferred with a higher liquidation preference per 

share, in which case the UST may require the QFI to appoint a depositary 

to hold the Senior Preferred and issue depositary receipts.) 

Senior to common stock and pari passu with existing preferred shares 

other than preferred shares which by their tenns rank junior to any existing 

~~~~ . 

1 

.-· _., 
Regulatory 

Capital 

Status: 

Term: 

Dividend: 

Redemption: 

Tier l. 

Perpetual life. 

The Senior Preferred will pay cumulative dividends at a rate of 5% per 

annum until the fifth anniversary of the date of this investment and 

thereafter at a rate of9% per annum. For Senior Preferred issued by banks 

which are not subsidiaries of holding companies, the Senior Preferred will 

pay non-cumulative dividends at a rate of 5% per annum until the fifth 

anniversary of the date of this investment and thereafter at a rate of 9% per 

annum. Dividends will be paya~le quarterly in arrears on February 15, 

May 15. August 15 and November 15 of each year. 

Senior Preferred may not be redeemed for a period of three years from the 

date of this investment, except with the proceeds from a Qualified Equity 

Offering (as defined below) which results in aggregate gross proceeds to 

the QFI of not less than 25% of the issue price of the Senior Preferred. 

After the third anniversary of the date of this investment. the Senior 

Preferred may be redeemed. in whole or in part, at any time and from time 

to time, at the option of the QFI. All redemptions of the Senior Preferred 

shall be at 100% of its issue price, plus (i} in the case of cumulative Senior 

Preferred, any accrued and unpaid dividends and (ii) in the case of non~ 

cumulative Senior Preferred. accrued and unpaid dividends for the then 

current dividend period (regardless of whether any dividends arc actually 

declared for such dividend period). and shall be subject to the approval of 

the QFI's _ _primary federal bank regulator. 

"Qualified Equity Offering" shall mean the sale by the QFI after the date 

of this investment of Tier 1 qualifying perpetual prcfC?TCd stock or 

. common stock for cash. 

Following the redemption in whole of the Senior Preferred held by the 

UST. the QFI shall have the right to repurchase any other equity security 

of the QFI held by the UST at fair market value. 

2 
Restrictions 

on Dividends: For as long as any Senior Preferred is outstanding, no dividends may be: 

declared or paid on junior preferred shares, preferred shares ranking pari 

passu with the Senior Preferred. or common shares (other than in the case 

of pari passu preferred shares. dividends on a pro rata basis with the 

Senior Preferred), nor may the QFI repurchase or redeem any junior 

preferred shares, preferred shares ranking pari passu with the Senior 

Preferred or common shares, unless (i) in the case of cumulative Senior 

Preferred all accrued and unpaid dividends for all past dividend periods on 

the Senior Preferred arc fully paid or (ii) in the case of non-cumulative 

Senior Preferred the full dividend for the latest completed dividend period 

has been declared and paid in full. 

Common dividends: The UST's consent shall be required for any increase in common 

dividends per share until the third anniversazy of the date of this 

investment unless prior to such third anniversary the Senior Preferred is 

redeemed in whole or the UST has transferred all of the Senior Preferred 

to third parties. 

Repurchases: 

Voting rights: 

The UST's consent shall be required for any share repurchases (other than 

(i) repurchases of the Senior Preferred and (ii}-repurchases of junior 

preferred shares or common shares in connection with any benefit plan in 

the ordinary course of business consistent with past practice) until the 

third anniversary of the date of this investment unless prior to such third 

anniversary the Senior Preferred is redeemed in whole or the UST has 

transferred all of the Senior Preferred to third parties. In addition, there 

shall be no share repurchases of junior preferred shares, pref erred shares 

ranking pari passu with the Senior freferred, or common shares if 

prohibited .-s descnbed above under "Restrictions on Dividends ... 

The Senior Prcfcned shall be non-voting, other than class voting rights on 

(i) any authorization or issuance of shares ranking senior to the: Senior 

Preferred, (ii) any amendment to the rights of Senior Preferred, or (iii) any 

merger, exchange or similar transaction which would adversely affect the 

rights of the Senior Preferred. 

If dividends on the Senior Preferred arc not paid in full for six dividend 

periods, whether or not consecutive, the Senior Prcfcm:d will have the 

right to elect 2 directors. The right to elect directors will end when full 

dividends have been paid for four consecutive dividend periods. 

3 
Transferability: 

Executive 

Compensation: 

The Senior Preferred will not be subject to any contractual restrictions on 

trnnsfer. The QFI will file a shelf registration statement covering the 

Senior Preferred as promptly as practicable after the date of this 

investment and, if necessary, shall take all action required to cause such 

shelf registration statement to be declared effective as soon as possible. 

The QFI will also grant to the UST piggyback registration rights for the 

Senior Preferred and will take such other steps as may be reasonably 

requested to facilitate the transfer of the Senior Preferred including, if 

requested by the UST, using reasonable efforts to list the Senior Preferred 

on a national securities exchange. If requested by the UST, the QFl will 

appoint a depositary to hold the Senior Pref erred and issue depositary 

receipts. 

As a condition to the closing of this investment. the QFI and its senior 

executive officers covered by the EESA shall modify or terminate all 

benefit plans, arrangements and agreements (including golden parachute 

agreements) to the extent necessary to be in compliance with, and 

following the closing and for so long as UST.holds any equity or debt 

securities of the QFI, the QFI shall agree to be bound by, the executive 

compensation and corporate governance requirements of Section 111 of 

the EESA and any guidance or regulations issued by the Secretary of the 

Treasury on or prior to the date of this investment to carry out the 

provisions of such subsection. As an additional condition to closing, the 

QFI and its senior executive officers covered by the EESA shall grant to 

the UST a waiver releasing the UST from any claims that the QFI and 

such senior executive officers may otherwise have as a result of the · 

issuance -~f any regulations which modify the tenns of benefits plans, 

arrangements and agreements to eliminate any provisions that would not 

be in compliance with the executive compensation and corporate 

governance requirements of Section 111 of the EESA and any guidance or 

regulations issued by the Secretary of the Treasury on or prior to the date 

of this investment to carry out the provisions of such subsection. 

4 

.., 
Warrant: 

Term: 

Exercisability: 

Transferability: 

Voting: 

Summary of Warrant Terms 

The UST will receive warrants to purchase a number of shares of common 

stock of the QFI having an aggregate market price equal to 15% of the 

Senior Preferred amount on the date ofinvcstment, subject to reduction as ;: 

set forth below under "Reduction". The initial exercise price for the 

warrants, and the market price for detennining the number of shares of 

common stock subject to the warrants, shall be the market price for the 

common stock on the date of the Senior Preferred investment (calculated 

on a 20-trading day trailing average), subject to customary anti-dilution 

adjustments. The exercise price shall be reduced by 15% of the original 

exercise price on each six-month anniversary of the issue date of the 

warrants if the consent of the QFI stockholders descnbed beJow has not 

been received. subject to a maximum reduction of 45% of the original 

exercise price. 

10 years 

Immediately exercisable, in whole or in part 

The warrants will not be subject to any contractual restrictions on transfer; 

provided that the UST may only transfer or exercise an aggregate of onehalf of the wamnts prior to lht: earlier of (i) the date on which the QFI has 

received aggregate gross proceeds of not less than· 100% of the issue price 

of the Senior Preferred from one or more Qualified Equity Offerings and 

{ii) December 31, 2009. The QFl will file a shelf registration statement 

covering the warrants and the common stock Ufldcrlying the warrants as 

promptly.as practicable after the date of this investment and, if necessary, 

shall take' all action required to cause such shelf registration statement to 

be declared effective as soon as possible. The QFI will also grant to the 

UST piggyback.registration nghts for the warrants and the common stock 

underlying the warrants o.nd will take such other stq,s as may be 

reasonably requested to facilitate the transfer of the warrants and the 

common stock underlying the warrants. The QFI will apply for the listing 

on the national exchange on which the QFl's common stock is traded of 

the common stock underlying the warrants and will take such other steps 

as may be reasonably requested to facilitate the transfer of the warrants or 

the common stock. 

The UST will agree not to exercise voting power with respect to any 

shares of common stock of the QFJ issued to it upon exercise of the 

warrants. 

s 
Reduction: 

Consent: 

Substitution: 

,. 

In the event that the QFJ has received aggregale gross procectl.s of not less 

than 100% of the issue price of the Senior Preferred from one or more 

Qualified Equity Offerings on or prior to December 31, 2009, the number 

of shares of common stock underlying the warrants then held by the UST 

shall be reduced by a number of shares equal to the product of (i) the 

number of shares originally underlying the wammts (taking into account 

all adjustments) and (ii) 0.5. 

In the event that the QFI does not have sufficient available authorized 

shares of common s·tock to reserve for issuance upon exercise of the 

warrants and/or stockholder approval is required for such issuance under 

appJicable stock exchange rules, the QFI will call a meeting of its 

stockholders as soon as practicable after the date of this investment to 

increase the number of authorized shares of common stock and/or comply 

with such exchange rules, and to take any other measures deemed by the 

UST to be necessary to allow the exercise of warrants into common stock. 

In the event the QFI is no longer listed or ~dcd on a national securities 

exchange or securities association, or the consent of the QF1 stoclcholdcrs 

descnbed·above has not been received within 18 months after the issuance 

date of the warrants, the wanants will be exchangeable, at the option of 

the UST, for senior term debt or another economic instrument or security 

of the QFI such that the UST is appropriately compensated for the value of 

the warrant. as determined by the UST. 

6 

__ , 

~-
------------------.---------------------

FDII 

Federal Deposit Insurance Corporation 

550 17th Slreel NW, \Y'""'hml""' O.C. 20429-9990 

Financial ln$titution Letter 

FIL-109-2008 

October 20 ~.2008 

,. 

APPLICATIONS TO THE TROUBLED ASSET RELIEF 

PROGRAM'S CAPITAL PURCHASE PROGRAM 

1---------------------------------------·-

Summary: State nonmember institutions are encouraged lo participate in !he Troubled Asset Relief 

Program's (TARP) Capital Pun:hase Program (CPP) to strengthen !heir capital positions and abiftty to 

prudently make credit available in their lending markets. All financial institutions are ef,gible lo apply for a 

capital Injection from the U.S. Department or Treasury. Applications should be filed with the FDIC according to 

the instructions in lhis letter and on the FDIC's Web site at www.fdic.gov. 

Distribution: 

Al FOIC-Supetlllsed lnslllUllani 

Suggested R~utlng: 

Chief Exec:ufive Officllr 

Chief Francial Officel' 

Attachment: 

,nstrudlons for Applying to lhe Traubled 

Auat Relief Program's Capllal Puchase 

Ptogram for Stalo Nonnanbttr 

lnstlutiona• 

Contact: 

lnstllullon's conlact person (Case Maneglll' 

or Flald SUpemsor) at applicable FD~ 

RagionalOfflce 

Note: 

Highlights: 

The FDIC strongly encourages state nonmember institutions to consider 

applying for infusions of capital under the CPP. The following 

summarizes lhe application process: 

• Interested state nonmember institutions should contact their 

appropriate FDIC Regional Office to expre;ss interest in the 

program and file an application with that office using the 

in~truclions at www.fdic.gov. The deadline fer applying is 5:00 

p.m. EST, November 14, 2008. 

• The FDIC wi11 review all state nonmember institution applications 

and make a recommendation to the U.S. Department of Treasury 

(which wlU approve or deny program participation). 

FDIC lnandal lnslllulicln lellers (FILI) may -~ 

• Participation in this low-cost capital program can bolster financial 

strength, or potentially support acquisitions, both of which 

ultimately allow for prudent lending that may currenlly be 

constrained by capital levels. 

be accessed fl'0m Iha FDIC's Web slla al 

www.fgic.govfnaws/news/linanoal/'2008[,n 

~-

To rcc:oiYe Fils elactrorically, plaase Yisit 

h1tp· 11w-Jdic.qovlaboyllsubscriplionsllil. him!, 

Paper copies of FDIC lnanclal inslltullcn 

letters 1rt11ff be obtained through !he 

FDIC'1 Pubic lnformallon Cenlflr, 3501 

Faltfu Drive, E-1002, Minglcn, VA 

222215. 

• For those institutions controlled by a holding company, Treasury 

will make capital Injections at the hokfing company level. 

Applications should be submitted to the Federal Reserve and the 

FDIC if the company's largest institution is a state nonmember 

charter. 

• Institutions with less than $1 billion in assets that serve low- to 

moderate-income populations and underserved communities and 

that have been impacted by Fannie Mae or Freddie Mac stock 

depreciation may apply (under certain conditions) for 

consideration under lhe CPP. 

• Minority Depository Institutions requiring technical assistance 

should contact lhelr appropriate FDIC Regional Office. I--___________ ,__ _______________________ .. 
Instructions for Applying to the _Troubled Asset Relief Program's 

Capital Purchase Program for State Nonmember Institutions 

On October 14, ~008, the U.S. Treasury Department announced a Capital Purchase Program; 

(CPP) under the Troubled Asset Relief Program mandated by the Emergency Economic 

Stabilization Act of 2008. The CPP is designed to encourage U.S. financial institutions to 

build capital to increase the flow of financing to U.S. businesses and consumers and support 

the U.S. economy. Under this program. the Treasury will purchase μp to $250 billion of 

senior preferred shares in financial institutions on standardized terms as descnoed in the 

program's term sheet available at http://wv.'W.trcas.gov/prcss/rclcascs/hpl207.htm. The 

Treasury's investment agreement and associated documents will be posted on the Treasury 

Web site soon. ' 

How to Apply 

Any state nonmember institution may apply to the FDIC for a CPP capital infusion using the 

application materials and frequently asked questions posted on the Internet at 

http://www.treas.gov/initiati•tt!SleesQ/docs/application-guidelines.pdf, 

http://www.treas.gov/i-nitiativcs/eesa/docs/fag-cpo.pdf, and www.fdic.gov. Although the 

U.S. Treasury ultimately will make decisions regarding capital injections, applications should 

be submitted through an institution's primary federal regulator. Applications must be 

received by the FDIC by 5:00 p.m. EST on November 14, 2008, to receive consideration. 

Interested institutions should submit their applications to the appropriate FDlC Regional 

Office via e.mail or U.S. mail. If interested in electronic submission, applying institutions 

should contact their FDIC Regional Office. Once applications arc considctcd complete, they 

will be formally accepted for processing by the FDIC Regional Office, and applicants will be 

advised in writing. Applications will then be forwarded to the FDIC's Washington Office for 

fmal consideration and.sut,mitted to the Treasury for action. At any time during this process, 

an applicant may withdraw its request to participate in .the CPP. · 

Prospective applicants arc encouraged to begin a dialogue immi:diately with their FDIC 

Regional Office to express interest in participating in the program and discuss any corporate 

structure obstacles or other challenges. The FDIC Regional Office staff is available to 

answer questions and provide consultation on program requirements. 

State Nonmember lnstitutio1u Within a Bank Holding Company Structure 

Treasury will be making CPP injections at the bank holding company level for institutions 

controlled by a bank holding company. Therefore, state nonmember institutions controlled 

by a bank holding company will apply to the Federal Reserve for a CPP injection. The 

holding company should provide a copy of the application to the appropriate FDIC Regional 

Office. ·11tc Federal Reserve will make a recommendation on the application to Treasury in 

consultation with the FDIC. 
/nstitutintL, with a Non-Public. Subchapler S, or Mutual Corporate Structure 

Treasury is aware of potential legal and tax obstacles in these corporate structures in relation 

to the tcnns of the CPP senior perpetual preferred shares and waqants. Accordingly, 

Treasury is investigating possible alternatives. State nonmember institutions with these nonpublic structures that arc interested in applying should submit their CPP application to their 

FDIC Regional Office by November 14, 2008, and dcscn"be any structural conditions that 

may not comply with the Trc~ury•s guidelines. 

Participation 

The FDIC encourages all state nonmember institutions to seriously considcr·applying for 

CPP injections. Participation in this low-cost capital program can bolster financial strength, 

or potentially support acquisitions, both of which ultimately allow for prudent lending that 

may currently be constrained by capital levels. Any questions on the application process 

should be directed to the institution's FDIC Regional Office. 

Institutions Serving Low- to Moderate-Income or Underserved Communities 

Institutions with less than Sl biJlion in assets that serve low- to moderate-income populations 

and other underscrvcd communities that were well or adequately capitalized as of June 30, 

2008, and will drop one or more regulatory capital levels because of depreciation in Fannie 

Mac or Freddie Mac equity securities, are identified for specified consideration for a CPP 

injection under Section 103 of the Emergency Economic Stabilization Act of 2008. The 

FDIC encourages such institutions to apply for a CPP capital injection; these institutions · 

should note their status Under Section I 03 in application materials. 

Minority Depository Institutions 

I ., 

If state nonmember minoritY:·bwned or -operated depository institutions require technical 

assistance in completing CPP applications, they should contact their fDlC Regional Office. 

Notification of Treasury's Detenninations 

Institutions will be advised in writing by the U.S. Treasury of their decisions by year-end 

2008. 
FDIC Statement of Policy on Bank Merger Transactions 

I. Introduction 

Section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. l 828lc)). popularly known as the 

"Bank Merger Act," requires the prior written approval of the FDIC before any insured · 

depository institution may: 

(1) Merge or consolidate with, purchase or otherwise acquire the assets of, or assume any deposit 

liabilities of, another insured depository institution if the resulting institution is to be a state 

nonmember bank, or · 

(2) Merge or consolidate with, assume liability lo pay any deposits or similar liabilities of, or 

transf cr assets and deposits to, a noninsured bank or institution. 

Institutions undertaking one Qf the above described "merger transactions" must file an 

application with the FDIC. Transactions that do not involve a transfer of deposit liabilities 

typically do not require prior FDIC approval under the Bank Merger Act, unless the transaction 

involves the acquisition of all or substantially all of an institution's assets. 

The Bank Merger Act prohibits the FDIC from approving any proposed merger transaction that 

would result in a monopoly, or would further a combination or conspiracy to monopolize or to 

attempt to monopolize the business of banking in any part of the United States. Similarly, the 

Bank Merger Act prohibits the FDIC from approving a proposed merger transaction whose effect 

in any section of the country may be substantially to lessen competition, or to tend to create a 

monopoly, or which in any other manner would be in restraint of trade .. An exception may be 

made in the case of a merger transaction whose effect would be to substantially lessen 

competition. tend to create a monopoly, or otherwise restrain trade, if the FDIC finds that the 

anticompetitive effects of the proposed transaction are clearly outweighed in the public interest 

by the probable effect of the transaction in meeting the convenience and needs of the community 

to be served. For example. the FDIC may approve a merger transaction to prevent the probable 

failure of one of the institutions involved. · 

ln every proposed merger transaction. the .FDIC must also consider the financial and managerial 

resources and future prospects of the existing and proposed institutions, the convenience and 

needs of the community to be served, and the effectiveness of each insured depository institution 

involved in the proposed merger transaction in combating money-laundering activities, including 

in overseas branches. 

II. Application Procedures 

1. Applicalion filing. y Application fonns and instructions may be obtained from the appropriate 

FDIC omcc. Completed applications and any other pertinent materials should be filed with the 

appropriate FDIC office. The application and related materials will be reviewed by the FDIC for 

compliance with applicable laws and FDIC rules and regulations: When all necessary 

information has been receive~ the application will be processed and a decision rendered by the 

FDIC. 
2. Expedited processing. Section 303.64 of the FDIC rules and regulations O 2 CFR 3QJ.64) 

provides for expedited processing. which the FDIC will grant to eligible applicants. In addition 

to the eligible institution criteria provided for in § 303.2 (12 CFR 303.2), § 303.64 provides 

expedited processing criteria specifically applicable to proposed merger transactions. 

3. Publication of notice. The FDIC will not take final action on a merger application until notice 

of the proposed merger transaction is published in a newspaper or newspapers of general 

circulation in accordance with the requirements of section 18(c)(3) of the Federal Deposit 

Insurance Act. See§ 303.65 of the FDIC rules and regulations ( 12 CFR 303.65). The applicant 

must furnish ~vidence of publication of the notice to the appropriate FDIC office following 

compliance with the publication requirement. Sec § 303.7(b) of the FDIC rules and regulations 

(12 CFR 303.7(b)). 

4. Reports on competitive/actors. As required by law, the FDIC will request reports on the 

competitive factors involved in a proposed merger transaction from the Attorney General, the 

Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the 

Director of the Office of Thrift Supervision. These reports must ordinarily be furnished within 30 

days, and the applicnnt upon request will be given an opportunity to submit comments to the 

FDIC on the contents of the competitive factors reports. 

5. Notification of the Attorney General After the FDIC approves any merger transaction, the 

FDIC will immediately notify the Attorney General. Generally, unless it involves a probable 

failure or an emergency exists requiring expeditious action, a merger transaction may not be 

consummated until 30 calendar days after the date of the FDIC's 

{ {2-28-03 p.5146}} approval. However, the FDIC may prescnbe a 15-day period, provided the 

Attorney General concurs with th·e shorter period. 

6. Merger decisions available. Applicants for consent to engage in a merger transaction may 

find additional guidance in the repor,ted bases for FDIC approval or denial in prior merger 

transaction cases compiled in the FDIC's annual "Merger Decisions" report. Reports may be 

obtained from the FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002, 

Arlington, VA 22226. Reports may also be viewed at http://wwwfdic.gov. 

Ill. Evaluation of Merger Applications 

The FDIC's intent and purpose is to foster and maintain a safe. efficient, and competitive banking 

system that meets the needs of the communities served. With these broad goals in mind, the 

FDIC will apply the specific standards outlined in this Statement of Policy when evaluating and 

acting on proposed merger transactions. 

Competitive Factors 

ln deciding the competitive effects of a proposed merger transaction, the FDIC will consider the 

extent of existing competition between and am9ng the merging institutions, other depository 

institutions, and other providers of similar or equivalent services in the relevant product 

market{s} within the relevant geographic market(s). 

. 

,· 
1. Relevant geographic market. The relevant geographic market(s) includes the areas in which 

the offices to be acquired are located and the areas from which those offices derive the 

predominant portion of their loans. deposits, or other business. The relevant geographic market 

also includes the areas where existing and potential customers impacted by the proposed merger 

transaction may·practically tum for alternative sources of banking services. In delineating the 

relevant geographic market. the FDIC will also consider the location of the acquiring instituti6n's 

offices in relation to the offices lo be acquired. 

2. Relevant product market. The relevant product market(s)" includes the banking services 

currently offered by the merging institutions and to be offered by the resulting institution. In 

addition, the product market may also include the functional equivalent of such services offered 

by other types of competitors, including other depository institutions, securities firms, or finance 

companies. For example, share draft accounts offered by credit unions may be the functional 

equivalent of demand deposit accounts. Similarly, captive finance companies of a1,1.tamobile 

numufacturers may compete directly with depository institutions for automobile loans, and 

mortgage bankers may complete directly with depository institutions for real estate loans. 

3. Analysis of competitive effects. In its anlaysis of the competitive effects of a proposed merger 

transaction, the FDIC will focus particularly on the type and extent of competition that exists and 

thnt will be eliminated, reduced, or enhanced by the proposed merger transaction. The FDIC will 

also consider the competitive impact of providers located outside a relevant geographic market 

where it is shown that such providers individually or collectively influence materially the nature, 

pricing, or quality of services offered by the providers currently· operating within the geographic 

market. 

The FDICs analysis will focus primarily on those services that constitute the largest part of the 

businesses of the merging institutions. In its analysis, the FDIC will use whatever analytical 

proxies arc available that reasonably reflect the dynamics of the market, including deposit and 

loan totals, the number and volume of transactions, contributions to net income, or other 

measures. Initially, the FDIC will focus on the respective shares of total deposits 1 held by the 

merging institutions and the various other participants with offices in the relevant geographic 

market(s), unless the other participantS" loan, deposit, or other business varies markedly from that 

of the merging institutions. Where it is clear, based on market share considerations alone, that the 

proposed merger transaction would not significantly increase concentration in an unconcentrated 

market. a favorable finding will be made on the competitive factor. 

{ {2-28-03 p.5147}} 

Where the market shares of the merging institutions are not clearly insignificant, the FDIC will 

also consider the degree of concentration within the relevant geographic market(s) using the 

Herfindahl-Hirschman Index (HHI): as a primary measure of market concentration. For 

putposes of this lest, a reasonable approximation for the relevant geographic markct(s) consisting 

of one or more predefined areas may be used. Examples of such predefined areas include 

counties, the Bureau of the Census Metropolitan-Statistical Areas (MSAs), or Ra.nd-McNally 

Ranally Metro Areas (RMAs). 

The FDIC nonnally will nol deny a proposed merger transaction on antitrust grounds (absent 

objection from the Department of Justice) where the post-merger HHI in the relevant geographic 
market(s) is 1,800 points or less or, if it is more than 1,800, it reflects an increase ofless than 200 

points from the pre-merger HHI. Where a proposed merger transaction fails this initial 

concentration test, the FDIC will consider more closely the various competitive dynamics at 

work in the market. taking into account a variety of factors that may be especially relevant and 

important in a particular proposal, including: • 

" 

• The number, size, financial strength, quality of management, and aggressiveness of the various 

participants in the market; 

• The likelihood of new participants entering the market based on its attractiveness in terms of 

population, income levels~ economic growth, and other features; 

• Any legal impediments to entry or expansion; and 

· • Definite entry plans by specifically identified entities. 

In addition, the FDIC will consider the likeliho~ that new entrants might enter the market by 

less direct means; for example. electronic banking with local advertisement of the availability of 

such services. This consideration will be particularly important where there is evidence that the 

mere possibility of such entry tends to encourage competitive pricing and to maintain the quality 

of services offered by the existing competitors in the market 

The FDIC will also consider the extent to which the proposed merger transaction likely would 

create a stronger, _more efficient institution able to compete more vigorously in the relevant 

geographic mnrkets. 

4. Consideration of the public interest. The FDIC will deny any proposed merger transaction 

whose overall effect likely would be to reduce existing competition substantially by limiting the 

service and price options avi!il~ble to the public in the relevant geographic marlcct(s), unless the 

anticompetitive effects of the'j'lroposed merger transaction are clearly outweighed in the public 

interest by the probable effect of the transaction in meeting the convenience and needs of the 

community to be served. For this purpose, the applicant must show by cle3! and convincing 

evidence that any claimed public benefits would_ be both substantial and incremental and 

generally available to seekers of banking services in the relevant geographic market(s) and that 

the expected benefits cannot reasonably be achieved through other, less anticompetitive means. 

Where a proposed merger transaction is the least costly alternative to the probable failure of an 

insured depository institution, the FDIC may approve the merger transaction even ifit is 

anticompetitive. 

Prudential Factors 

The FDIC does not wish to create larger weak institutions or to debilitate existing institutions 

whose overall condition. including capital, management, and earnings, is generally satisfactory. 

Consequently, apart from competitive considerations. the FDIC nonnally will not approve a 

proposed merger transaction where the resulting institution would fail to meet existing capital 

standards, continue with weak or unsatisfactory management, or whose earnings prospects, both 
in tenns of quantity and quality, arc weak. suspect, or doubtfu]. In assessing capital adequacy 

and earnings prospects. particular attention will be paid to the adequacy of the allowance for loan 

and lease losses. In { {2-28-03 p.5148} }evaluating managei:nent, the FDIC will rely to a great 

extent on the supervisory histories of the institutions involved and of the executive officers and 

directors thnt are proposed for the resultant institution. In addition, the FDIC may review the 

adequacy of management's disclosure to shareholders of the material aspects of the merger 

transaction to ensure that management has properly fulfilled its fiduciary tluties. 

Convenience and Needs Factor 

In assessing the convenience and needs of the community to be served, the FDIC will consider 

such elements as the extent to which the proposed merger transaction is likely \o benefit the 

general public through higher lending limits, new or expanded services, reduced prices, 

increased convenience in utilizing the services and facilities of the resulting institution, or other 

means. The FDIC, as required by the Community Reinvestment Act, will also note and consider 

each institution's Community Reinvestment Act performance evaluation record. An 

unsatisfactory record may form the basis for denial or conditional approval of an application. 

Anti-Money Laundering Record 

In every case, the FDIC will take into consideration the effectiveness of each insured depository 

institution involved in the proposed merger transaction in combating money-laundering 

activities, including in overseas branches. In this regard, the FDIC will consider the adequacy of 

each institution's programs, policies, and procedures relating to anti-money laundering activities; 

the relevant supervisory history of each participating institution, including their compliance with 

anti-money laundering laws and regulations; and the effectiveness of any corrective program 

outstanding. The FDIC's assessment may also incorporate information made available to the 

FDIC by the Department of the Treasury, other Federal or State authorities, and/or foreign 

govenmicnts. Adverse findings.may warrant correction of identified problems before consent is 

granted. or the imposition of conditions. Significantly adverse findings in this area may form the 

basis for denial of the application. 

Special Information requirement if applicant is affiliated with or will be affiliated with an 

insurance ce>mpany. · 

If the institution that is the subject of the application is, or will be, affiliated with a company 

engaged in insurance activities that is subject to supervision by a state insurance regulator, the 

applicant must submit the following information as part ofits application: (l) The name of 

insurance company; (2) a description of the insurance activities that the company is engaged in 

and has plans to conduct; and (3) a list of each state and the lines of business in that state which 

the company holds, or will hold, an insurance license. Applicant must also indicate the state 

where the company holds a resident license or charter, as applicable. 

JV. Related Considerations 

1. /nterslale bank merger trwuactions. Where a proposed transaction is an interstate merger 

transaction between insured banks. the FDlC will consider the additional factors provided for in 
section 44 of the Federal Deposit [nsurancc Act. 12 U.S.C. I 831 u. 

2. Interim merger transactions. An interim institution is a state- or federally-chartered institution 

that does not operate independently, but exists, normally for a very short period of time, solely as 

a vehicle to accomplish a merger transaction. In cases where the establishment of a new or 

interim institution is contemplated in connection with a proposed merger transaction. the 

applicant should contact the FDIC to discuss .μiy relevant deposit insurance requirements. In 

general, a merger transaction (other than a purchase and assumption) involving an insured 

depository institution and a federal interim depository institution wilJ not require an application 

for deposit insurance. even if the federal interim depository institution will be the surviving 

institution. 

3. Optional conversion. Section 5(d)(3) of the Federal Deposit Insurance Act, 12 U.S.C. 

l 81 S(d)(3), provides for •optional conversions" (commonly Jcnown as Oakar transactions) which, 

in general. are merger transactions that involve a mcm~er of the Banlc Insurance Fund and a 

member of the Savings Association Insurance Fund. These transactions are subject to specifi~ 

rules regarding deposit insurance coverage and premiums. Applicants may find additional ·· 

guidance in§ 327.31 of the FDIC rules and regulations (12 CFR 327.31). 

{ {2-28-03 p.5149}} 

4. Branch closings. Where banking offices arc to be closed in connection with the proposed 

merger transaction, the FDIC will review the merging institutions' conformance to any applicable 

requirements of section 42 of the FDI Act concerning notice of branch closings as reflected in 

the lnteragency Policy Statement Concerning Branch Closing Notices and Policies. See 2 FDIC 

Law. Regulations, Related Acts 5391. 

5. Legal fees and other expenses. The commitment to pay or payment of unreasonable or 

excessive fees and other expenses incident to an application reflects adversely upon the 

management of the-applicant i~titution. The FDIC will closely review expenses for professional 

or other services rendered by present or prospective board members, major shareholders, or other 

insiders for any indication of self-dealing to the detriment of the institution. As a matter of 

practice. the FDIC expects full disclosure to all directors and shareholders of any arrangement 

with an insider. In no case will the FDIC approve an application where the payment of a fee. in 

whole or in part. is contingent upon any act or forbearance by the FDIC or by any other federal 

or state agency or official. 

6. Trade names. Where an acquired bank or branch is to be operated under a different trade 

name than the acquiring bank, the FDIC will review the adequacy of the steps taken to minimize 

the potential for customer confusion about deposit insurance coverage. Applicants may refer to 

the lntcragency Statement on Branch Names for additional guidance. See FDIC, Financial 

Institution Letter, 46--98 (May 1, 1998). · 

By Order of the Board of Directors, December 19, 2007. 

[Source: 6.1 Feel Reg. 44761. August :w, /998. cffeC'tive Octoher I. /998: amended at 67 Fed. 

Reg. 48178, July 23, 2002; 67 Fed. Reg. 79278, December 17, 2002.; 73 FR 8870. February 15, 

2008.J 
FDIC: Press Releases - PR-115-2008 11/12/2008 Page 1 of 3 

Home> N1.'WS & E111.,n1s > Press Reloases 

Press Releases 

Joint Release 

For Immediate Release 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency 

Office of Thrift Supervision 

November 12, 2008 

lnteragency Statement on Meeting the Needs of Creditworthy Borrowers 

The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve 

have recently put into place several programs designed to promote financial stability and to mitigate 

procydical effects of the current market conditions. These programs make new capital widely available 

to U.S. financial institutions, broaden and increase the guarantees on bank deposit accounts and certain 

liabilities, and provide backup liquidity to U.S. banking organizations. These efforts are designed to 

strengthen the capital foundation of our financial system and improve the overall functioning of credit 

markets. 

The ongoing financial and ecor:iomic stress has highlighted the crucial role that prudent bank lending 

practices play in promoting the nation's economic welfare. The recent policy actions are designed to 

help support responsible lending activities of bankhg organizations, enhance their ability to fund such 

lending, and enable banking organizations to better meet the credit needs of households and business. 

Al this critical time, it is imperative that all banking organizations and their regulators work together to 

ensure that the needs of t.:reditworthy borrowers are met. As discussed below, to support this objective, 

consistent with safety and soundness principles and existing supervisory standards, each individual 

banking organization needs to ensure the adequacy or its capital base, engage in appropriate loss 

mitigation strategies and foredosure prevention, and reassess the incentive implications of its 

compensation policies. -~ 

Lending to creditworlhy borrowers 

The agencies expect all banking organizations to fulfill their fundam·enlal role in the economy as 

intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a 

result of problems In financial markets, the economy will likely become increasingly reliant on banking 

organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to 

creditworthy borrowers provides sustainable returns for the lending organization and is constructive for 

the economy as a whole. 

It is essential that banking organizations provide credit in a manner consistent with prudent lending' 

practices and continue to ensure that they consider new lending opportunities on the basis of realistic 

asset valuations and a balanced assessment of borrowers' repayment capacities. However, if 

underwriting standards tighten excessively or banking organizations retreat from making sound credit 

decisions. the asrrent market conditions may be exacerbated. leading lo slower growth and potential 

damage to the economy as weB as the long-term Interests and profitability of individual banking 

organizations. Banking organizations should strive to maintain healthy a-edit relationships with 

businesses, consumers, and other creditworthy borrowers to enhance their own financial well-being as 

well as lo promote a sound economy. The agencies have directed supervisory staffs to be mindful of the 

procyclical effects of an excessive tightening of credit availability and to encourage banking 

. organizations to practice economically viable and appr9prtate lending activities. 

Strengthening capital 

Maintaining a strong capital position complements and facifitates a banking organization's capacity and 

wiDingness lo lend and bolsters Its ablrrty to withstand uncertain market conditions. Banking 

--· _, 

11n,1nmR 
fDIC: Press Releases- PR-115-2008 l l/12/2008 Page 2 of 3 

organizations should focus on effective and efficient capital planning and longer-term capital 

maintenance. An effective capital planning process requires a banking organization to assess both the 

risks to which it is exposed and the risk management processes in place to manage and mitigate those 

risks; evaluate its capital adequacy relative to its risks; and consider the potential inpact on eamings 

and capital from economic downturns. Further, an effective capital planning process requires a banking 

organization to recognize losses on bank assets and activities in a timely manner. maintain adequate 

loan loss provisions: and adhere to prudent dividend policies. .•· 

,, 

In particular, in setting dividend levels, a banking organization should consider its ongoing earnings 

capacity, the adequacy of its loan loss allowance, and the overal effect that a dividend payout would 

have on its cost of funding, its capitai position, and, consequently, its ability to serve the expected needs 

of creditworthy borrowers,. Banking organizations should not maintain a level of cash dividends that ls 

inconsistent with the organization's capital position, that could weaken the. organization's overall 

f11ancial health, or that could impair its ability to meet the needs of creditworthy borrowers. Supervisors 

will continue to review the dividend policies of individual banking organizations and will take action when 

dividend policies are found to be inconsistent with sound capital and lending policies. 

Working with mortgage borrowers 

Toe agencies expect banking organizations to work with existing borrowers to avoid preventable 

foreclosures, which can be costly to both the organizations and to the communities they serve, and to 

mitigate other potential mortgage-related losses. To this end, bankiig organizations need to ensure that 

their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while 

implementing effective risk-mitigation measures. 

Given escalating mortgage foreclosures, the agencies urge all lenders and servicers to adopt 

systematic, proactive, and streamlined mortgage loan modification protocols and to review troubled 

loans using these protocols. lenders and servicers should first determine whether a loan modification 

would enhance the net present value of the loan before proceeding to foredosure, and they should 

ensure that loans currently in foredosure have been subject to such analysis. Such practices are not 

only consistent with sound risk management but are also in the long-term interests of lenders and 

servlcers, as well as borrowers. 

Systematic efforts to address delinquent mortgages should seek to achieve modifications that result in 

mortgages that borrowers wDI be able to sustain over the remaining maturity or lhefr loan. Supervisors 

will fully support banking organizations as they work to implement effective and sound loan modification 

programs. Banking organizations th~t experience challenges In implementing loss mitigation efforts on 

their mortgage portfolios or in makil'lg new loans to borrowers should work with their primary supervisors 

to address specific situations. 

Structuring compensation 

Poorly-designed management compensation policies can create perverse Incentives that can ultimately 

jeopardize the health of the banking organization. Management compensation policies should be 

i;lligned with the long-term prudential interests of the institution, should provide appropriate incentives for 

safe and sound behavior, and should structure compensation to prevent short-term payments for 

transactions with long-term horizons. Management compensation practices should balance the ongoing 

earnings capacity and fina·nclal resources of the banking organization, such as capital levels and 

reserves, with the need to retain and provide proper incentives for strong management. Further, it is 

important for banking organizations to have independent risk management and control functions. 

The agencies expect banking organizations to regularly review their management compensation policies 

to ensure they are consistent with the longer-run objectives of the organization and sound lending and 

risk management practices. 

The agencies will continue to take steps to promote programs that foster financial stability and mitigate 

procyclical effects of lhe current market conditions. However, regardless of their participation in 

partiaJlar programs, all banking organizations are expected to adhere to the principles In this statement. 

·we will work with banking organizations to facilitate their active participation in those programs, 

consistent with safe and sound banking practices, and thus to support their central role in providing 

credit to support the health of the U.S. economy. 

· ·-'--""'""f'SS/2008/pr08 J 1 S.html 11/24/2008 
FDIC: Press Releases - PR-115-2008 J l/12/2008 

### 

Media Contacts 

FDIC 

Fed 

OTS 

occ 

Andrew Gray 

Dave Skidmore 

Bill Ruberry 

Bob Garsson 

(202) 898--6993 

(202) 452-2955 

{202} 906-6677 

(202) 874-5770 

FDIC-PR-115-2008 

Las1 Updated 1 1/12/2008 

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Page 3 of 3 

-11124noos 
I) FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Betty Sutton 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman Sutton: 

December 1, 2008 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

role in the Emergency Economic Stabilization Act of2008 (EESA) and the Troubled · 

Asset Relief Program's (TARP) Capital Purchase Program (CPP). The FDIC agrees with 

you that funds received from the CPP primarily should be used to augment capital at 

insured depository institutions with a result of making credit available throughout the 

country. On this point, we joined the other federal banking agencies in issuing the 

lnteragency S1a1eme11t on Meeting the Needs of Creditworthy Bo"ower3 on 

November 12 (copy enclosed). This Statement encourages banks to support the needs of 

creditworthy borrowers, strengthen capital, and engage in foreclosure prevention 

programs in view of the financial assistance provided under recent federal initiatives to 

promote financial stability which include the EESA and the CPP. 

As you know, the U.S. Department of the Treasury (Treasury) instructed 

institutions to file CPP applications with their primary federal regulator. The primary 

federal regulator conducts a viability assessment and then forwards the application to 

Treasury with a recommendation for approval or denial. The FDIC, in its role as primary 

federal rcguiator for state non-member institutions, has implemented a comprehensive 

review process for CPP applications that results in a recommendation to Treasury. 

Treasury, which manages and funds the CPP, makes the program's final approval and 

denial decisions. As of November 18, 2008, the FDIC hllS received 1,214 CPP 

application requests. We expected lo have a much greater number of applications by this 

time. However, Treasury has not yet finalized a feasible CPP subscription framework for 

the vast majority of community banks supervised by the FDIC. 

l understand from your letter that you are particularly concerned about the PNC 

Financial Services, lnc.-NationaJ City Corporation merger transaction and a related CPP 

capital injection from Treasury. The FDIC is not the primary federal regulator for either 

of these companies. Therefore, the FDIC did not make a recommendation to Treasury on 

this CPP transaction. 
Our responses to the specific questions presented in your letter are enclosed along 

with copies of relevant documents. I hope this information is helpful. If you have 

additional questions, please contact Eric Spitler, Director of Legislative Affairs, at (202) 

898-3837. 

Sincerely, 

Sheila C. Bair 

Enclosure 
Report prepared for the Honorable Betty Sutton 

by the Federal Deposit Insurance Corporation's Division of Supervision 

and Consumer Protection and Legal Division . . 

Q 1: Please detail what conditions have or will be imposed upon the use of the 

federal funds provided to PNC Financial Services Group or any other financial 

entity through the Emergency Economic Stabilization Act Describe and explain 

any facton taken into account when federal tax dollars are being used to help fund 

an acquisition of another firm. .Please provide a copy of all documents ... from 

September 2008 onward relating to any aspect of the foregoing. 

Al: The U.S. Department of Treasury (Treasury) issued the CPP Tenns Sheet (attached) 

on October 14, 2008, which establishes the conditions imposed on institutions receiving 

federal funds. We do not believe that Treasury has mandated restrictions on the use of 

CPP funds (other than the executive compensation limitations in the EESA). however, the 

FDIC has an expectation that insured depository institutions anti their holding companies 

will prudently use these funds to augment capital and make loans. Since Treasury is 

entering into a stock offering with participating institutions and imposing its own 

conditions to protect the taxpayers' interests, the FDIC will not be issuing separate 

restrictions on CPP subscriptions. In the nonnal course of supervisory activity. the FDIC 

will review each state nonmember institution's use ofCPP funds, lending activities. and 

compliance with the executive compensation/golden parachute limitations mandated by 

the EESA. It should be noted that on November 12, the FDIC joined the other federal 

banking agencies in issuing the Jnterage11cy Statement on Mecti11g the Needs of 

Creditwortlry Borrowers (copy attached). This Statement encourages banks to support 

the needs of creditworthy borrowers. strengthen capital, and engage in foreclosure 

prevention programs in view ofthci'financial assistance provided under recent federal 

initiatives to promote financial stability which include the EESA and the CPP. 

The FDJC does not have experience using federal tax <.loUars to facilitate private sector 

mergers. However, we suggest that such transactions should be predicated on reasonable 

assurances that the post-merger entity would: l) be adequately capitalized and viable 

over the long term; 2) have positive future earnings and business prospects; 3) operate 

with satisfactory board and management oversight; 4) present an appropriate plan far 

making credit and banking services available in its community; and 5) recapture the 

taxpayers' investment and provide a suitable ~tum. 

. Ql: Please detail the methodology and criteria that were considered in connection 

with the possible transfer of federal funds through the Emergency Economic 

Stabilization Act to National City Corporation as compared to the other regionnl 

banks for which you recently approved funding. Also, please describe the extent to 

whkh any impact on National City Corp.'s customcn and employees as well as the 

relevant local economy was taken Into consideration with regard to approval or 

denial offunds to National City and the proposed acquisition of National,City by 
PNC. Please provide a copy of all documents .•• from September 2008 on,nrd 

relating to any aspect of the foregoing. · 

Al: As mcntionec;I above. the FDIC is not the primary federal regulator for PNC 

Finilllcial or National City Corp. Whi1e the FDIC does not comment publicly on the 

condition of specific open and operating institutions, the FDIC believes that, under 

certain circumstances, it is appropriate to require institutions to raise additional private 

capital or seek a strategic partner in order to receive funds through the CPP program. 

This can help strengthen weaker institutions and ensure that they can continue providing 

financial services to their communities. With respect to the merger of these two firms, 

the FDIC does not have specific knowledge of the methodology and criteria used in the 

CPP transaction. 

QJ: As noted above, the press bas recently reporte~ that the banking industry "has 

no intention of using the [bailout) money to make new loans;" the Treasury has 

acknowledged that one of their principal motives in allocating the funds is to "drive 

consolidation;" and a JP Morgan official acknowledged that the bailout funds would 

aUow them to be "more active on the acquisition side;" Please detail any knowledge 

by your de.partments or agencies of these matters, as \Veil as any discussions or 

understandings you may have regarding the use of the funds the government is 

providing and their possible use with regard to mergers and consolidations. Please 

provide a copy of all doc~ments .•. from September 2008 onward relating to any 

aspect of the foregoing. 

Al: In the FDIC's discussions with state non-member institutions interested in 

participating in the TARP CPP. we eynci that many applicants are planning to use awarded 

monies prospectively to support th~ir lending business. The FDIC strongly advoc~cs the 

use of CPP funds for capital augmentation and prudent lending_as envisioned by the 

EESA. We articulated this positio_o in our October 20. 2008. Financial Institution Lener 

titled .. Applications to lire Troubled Asset Relief Program's Capital Purchase Program .. 

(see attachment). 

The FDlC believes. in certain circumstances, that CPP injections can be used effectively 

by applicants lo provide additional funding for acquisitions, particularly if the applicant 

acquires a weakened institution. Importantly, such acquisitions may reduce the potential 

for market disruption. including reduced lending avenues and bank failures. Particularly 

for community banks, their inability to obtain capital, or their demise can have a 

devastating effect on their local communities. In many smaller communities, banking 

services and credit availability are heavily dependent on the financial health of their local 

bank. Over the Jong term. acquisitions pursued by CPP awardees could save taxpayer 

dollars and restore capital and lending capacities at banking institutions. As indicated in 

the Financial Institution Lener referenced above, the FDIC believes that participation in 

the CPP can bolster an institution's financial strength or potentially support acquisitions, 

both of which allow for prudent lending that currently may be constrained by capital 

. levels. 
Q4: Please detail the manner in which antitrust considerations generally have been 

and are being taken into account in recent consolidations, particularly in the 

proposed acquisition of National City Corp. by PNC Financial Services Group. 

Please detail how tbe antitrust review is ~mpacted by the fact that the Treasury or 

Federal Reserve, their employees and/or representatives may have participated in 

discussion involving the possible acquisition of one financial entity by another 

flnanclal entity. Please provide a copy ofalJ documents ... relating to any aspect of 

the foregoing. 

A4: Anti-trust considerations arc a significant aspect of merger transactions involving 

FDIC-supervised state non-member institutions. All merger transactions require a 

regulatory application process which includes analysis of potential anti-trust issues. 

Section l 8(c){5) of the Federal Deposit Insurance Act prohibits the FDIC from approving 

any merger which would result in a monopoly or whose effect in any part of the country 

may substantially lessen competition. Our overall process for consiuc:ring merger 

applications is guided by the FDIC's Statement of Policy on Bank Merger Transactions 

(see attachment). 

In our analysis of.the competitive effects of a proposed merger transaction. the FDIC 

focuses on the type and extent of competition that exists within the relevant geogr.tphic 

market(s) and the degree to which that competition will be eliminated, reduced, or 

enhanced by the proposed merger. We rely heavily on conclusions from the Department 

of Justice's review of the proposed merger, including its Competitive Effects Report. We 

also focus on the respective shares of total deposits held by the merging institutions and 

the various other participants in the relevant markets. 

As the FDIC did not have a supervisory role in the PNC Financial Services Group, Inc.-

National City Corporation transaction, we do not have information to provide relative to 

the regulatory antitrust analysis. 

Attachments 

.• 

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OCT 2 9 2008 

October 29, 2008 

OFFICE OF LEGISLATIVE AFFAIRS 

Secretary Henry Paulson. Jr. 

Department of the Treasllr)' 

1500 Pennsylvania Avenue. NW 

Washington. DC 20530 

Chairman Benjilmin S. Bernanke 

Board of Governors of the Federal 

Reserve System 

2Qlli and C Streets, NW 

Washington, DC 205S1 

Mr. Thomas O. Barnett 

Assistant Attorney General for Antitrust 

Department of Justice, Antitrust Division 

950 Pennsylvania Avenue, NW. 

Washington, DC 20S30 

Chaitwornan Sheila C. Blair 

Federal Deposit Insurance Corporation 

550 11t11 Street, NW 

Washington. DC 20429 

Comptroller John C. Dugan 

Office of the Comptroller of the Currency 

Administrator of National Banlcs 

250 E Street. SW 

Washington. DC 20219 

Director John M. Reich 

Office of Thrift Supervision 

1700 G Street, NW 

Washington, DC 20552 

Dear Messrs. Palllson. Beman kc. Barnett, Dugan, Reich, and Chairwoman Blair: 

We are writing regarding recent disclosures that funds approved by Congress pursuant to 

the Emeri;cncy Economic Stabili~Ation Act of 200S .ire not bcin: used to :icquire troubled :).UC'IS 

or facilitate lending in these troubled dines. but largely to facilitate acquisitions by pref erred 

banks of other, smaller banks. While we cenainly understand and appreciate the fact that 

difficult financial times may lead to some industry-wide consolidation, it is unusual, if not 

unprecedented. for the federal government not only to arbitrate the consolidations, but to 

affirmatively take sides by funding specific acquisitions. Furthermore, we are concerned that the 

antitrust laws may be ignored in the rush to consolidate and that mtitrust enforcement may be 

prejudiced by the government's actions. 

Under the Troubled Asset Relicf Progr&m. Congress authorized $700 billion for the 

Treasury to buy troubJed assets to prevent disruption in the economy. 1 A little over one weclc 

'E.mcr:(:ncy Economh; StubiJi;r.ution Act of ~oos. Puh. L. Nu. 110-34~. 1 :?2 Sl::.t.. )76!i 

(2008). 
iJCT-29-2008 -02: 49 

Page Two 

October 29. 2008 

JUD IC r ARY CClr1'1 I TTEE· 

after the Act was passed. the Administration·decided that it would use: some of these funds to 

recapitalize some banks by buying sh.arcs in·the Nation's leading banks. As stated by President 

Bush, "This new capital will help healthy banks continue making loans to businesses and 

consumers. And this new capital will help struggling banks fill the hole created by losses during 

the financial crbis, so they can resume lending and help spur job c:rea.tion and economic 

growth.''1 

Despite this stated intention, it has been reported that the b3nlc:ing industry "has no 

intention or using the money to ma.Jee new lo.ms"1 and that one of the principal purposes of 

providing funds under the bailout legislation was to drive consolidation. Having obtained access 

10 a conference call among JP Morgan employees and executives on October 17, New York 

Times reported that a JP Morgan e.xecutive said the cash infusion would "help us ... be a little bit 

more active on the acquisition side or opportunistic side for some: banks who [sic:] are still 

struggling·- I think then: an: going to be some great opportunities for us to grow in this 

environment, and I think. we have an opportunity to use that SlS billion in that way and obviously 

depending on whether recession turns into depression or what happens in the future, you know, 

we have that as a backstop .... Anonymous sources in the Treusury confinned that "[o]ne purpose 

of this plan is to drive consolidation,"' while yesterday's Wall Srr~~, Journal reported that banks 

had aclcnowl~ged thal "only a small chunlc of [bailout] money would be funneled into loans.',. 

In particular, it appears that the Federal government may be picking which bank.S will 

survive and which will either fail or be primed for a buyout by a larger bank. Last Friday, PNC 

Financial SCTVices Group Inc. announced that it would purchase National City Corp and is using 

$7.7 billion of the bailout fund to help make the acquisition. Media accou1us have revealed that 

·•some of that $7.7 billion would l;tavc gone to NatOty if the go.vernment h.id deemed ii worth 

saving."1 National City Corp. reportedly agreed to the deal because it feared '

1

ir could not su~ivc 

2

President George W. Bush, Addiess at the Ro$e Garden Regarding the Economy, 

(Oct.14, 2008). 

lJoe Nocera. So W1ztn Will Banks Givt Loans?. N.Y. TIMES, Oct. 25, 2008, al Bl. 

'Id. 

JMark Landler, U.S. ls Said to Bt Urging Ntw Mtrz~rs in Banking, N.Y. nMES, Oct. 21. 

2008, at Bl. 

6

David Enrich. ~r al., Much Bank Aid May Not Go ro Loan.s, WALL ST. J., Oct. 28. 2008, 

al Cl. 

'Joe Noc:era. So WMn Will Banks Giv, l.oan.r?, N.Y. TL\CES, Oct. 25, 2008, 11t Bl. 

P.03/06 
OCT-29-2008 02:49 

Page Three 

October 29. 2008 

JUD IC 1 PR( CCM1 I TTEE 

the stigma of the government's rejection.'" The Mayor of Cleveland, Frank G. Jackson, staccd 

that '"if the government had a:reed to invest in National City. 'we would not be having this 

conversation.'"9 

This ac:quisition could prove economic:ally problematic for Ohio. In northeastern Ohio, 

where National City Corp. has 8,000 cmployce1. rholi$ands of jobs may be cut. 1° Cleveland 

Mayor Jackson likened the dcpanure of National City to "the loss of a steel mill or other major 

employer, as well as a stalwart corporate citizen that has been cngaeed in almost every 

philanthropic endeavor in the city." 11 

Of particular concern ro the Judiciary Committee is the potential anticompetitive 

consequence~ of these matters - namely, that large national banks could use taxpayer money to 

entrench their dominant positions while eliminating competition and reducing consumer choice. 

Under the Bank Merger Aces of 1960 and 196611 and the Bank: Holding Comp:my Act,n banlcs 

seeking to merge require preliminary approval from the federal entity (Office of the Comptroller 

of the Currency. the Board of Governors of the Feder.tl Reserve, the FDIC, or the Office of Thrift 

Supervision) overseeing rhat category of banks. The federal ent\ty i.s instructed to take into 

acc:ounr Section 7 of the Clayton Act (prohibiting mcrgen and .acquisitions that tend lo lessen 

competition). Each regulatory agency is required to obtain a report from the Oepartmenr of 

Justice befoTC approving a commercial bank merger and the Federal Reserve obtains similar 

reports when reviewing banking holding company mergers. After preliminary approval has been 

granted, the Attorney General typically ha.i thirty days in which to file an injunction to bloc:lc the 

merger. if no injunction is filed. the mcr:er is immunized from further antitrust suit. These laws 

were passed assuming that the banlcs were operating under free market conditions. They did not 

:inticipatc that the federal govcrmnent would be providing bi11ions of do11.:u-s in spending money 

'Michael A. Fletcher, Tabover·by PNC Herald$ Fall of a Cl,vdand lnstirution. W ,A.Sl-1. 

POST., Oct. 25, 2008, at ADJ. . 

•rd. 

1

°Chris Knape, PNC Financial purcha.u of Narional City banks apecrt!.d lo hav, minimal 

impaci in Michigan. GR.AN'D RAPlDS Pllss, Oct. 24, 2008. 

11 /d. 

'2Bank Merger Act. Pub. L No. 86-463. 74 Stat. 129 (1960), amended by Act of Feb. 21, 

1966. Pub. L No. 89-356. 80 Stat. 7 {1966) (codified as amended :tt 12. U.S.C. f 1828). 

1

)8:ink 'Holding Comp!ln)' Act of 19S6, Pub. L. No. 109-41, 70 St:it. l~J (codified -:i,; 

amended at 12 U.S.C. §f 1971-78, 1841-1850). 

P.04Xl6 

.•· 

,· 
O:T-29-2000 0,2:50 

Page Four 

October 29, 2008 

JUDICIARY COTIITTEE 

to the largest market players at the expense of smaller competitors, and potentially to the 

detriment of bank cu:.tomers. 

Because of the concerns detajled above, we request the following infonnation from you: 

Questions for the Federal Reaerye. Department of Trusury, Office of the Complroller or 

the Cun-encv, Federal Depo!-il Jn~-uronce Corpor:ttion, and Office of Thrift Supervision 

1. Please detail what conditions ha.ve or will be imposed upon the use of the federal 

funds provided to PNC Firumci.:il Services Group or ony other financial entity through the 

Emergency Economic Stabilization Acc. Describe and explain any factors taJcen into account 

when federal tax dollars arc being used to help fund an acquisition of another firm. Please 

provide :i copy of a.ll documents (including, but nol limited to. records, memoranda. 

correspondence, rcc:ordcd mcsugcs, chnns. graphs. notes. studies. reports, other writings, and 

electronic media such as emails, instant messages, and texts) from September 2008 onward 

relating to any aspect of the foregoing. 

2. Ptcase detail the methodology and criteria that were considered in connection with the 

possible transfer of federal funch through the Emergency Economic Stabilizatjon Act to National 

City Corpontion as comp3TCd to the other regional bilnks for which you recently approved 

runding. Also, please describe the extent to which any impact on National City Corp. ·s 

customers and employees as well as the relevant local economy was taken into consideration 

with regatd to approval or dcni~ of funds to National City and the proposed acquisition of 

National City by PNC. Please provide a copy of all documents (including, but not limited to. 

records, memoranda. correspondcQee, recorded mcs~gcs. chans, graphs, notes, studies, reports, 

other writings, and c)eclronic media such as emails, instant messages. and texts) from September 

2008 onward relating to any aspect of the foregoing. 

3. As noted above. me press has"recently reported that the banking industry .. h:is no 

intention.of using the [bailout] money to make new loans"; the Treasury has :i.cknowledged th:i.t 

one of their princip:i.l motives in allocating the funds is to .. drive consolidation"; and a JP 

Morgan official acknowledged that the bailout funds would allow them to be .. more :active on the 

acquisitidn side." Please det:iil any knowledge by your dep:irtments or agencies of these matters. 

as well as any discussions or understandings you m:iy have regarding the use of the funds the 

government is providing and their possible use with regard to mergers and consolidations. 

Plc:ue provide a copy of all documents (including. but not limited to, records, memoranda. 

correspondence, recorded messages. chans, graphs. notes, studies, reports, other writings. and 

electr0nic media such as emails. instant messages, and texts) from September 2008 onward 

relatint to any aspect of rhc foregoing. 

P.05,106 
o:T-29-2008 02:se JUD l CI ARY COl"N I TTEE 

Page Five 

October 29. 2008 

Question for Department or Justice, the Federal Re!crve, Office or Lhe ComptroJler or the 

Currency, Federal Deposit Insurance Corporation. and Office or 'rbrift Supenision 

4. Please detail the manner in which antitrust consider.itions generally have been and arc 

being taken inro account in recent consolidation,. and particularly in the proposed acquisition of 

National Ciry Corp. by PNC Financial Services Group. Pfease detail how the antittusl review is 

impilcted by the fact that the Treasury or Federal Reserve, their employees and/c,r repre~ntacives 

may have participated in discussions invol-ving the possible acquisition of one financial entity by 

another financial entity. Please provide a copy of all documents (including. but not limited to, 

records, memoranda. correspondence, recorded messages, chmu. graphs, notes, studies, repons. 

other writings, and electronic media such as emails, instant messages. and tex.ts) relating to any 

aspect of the forcgoini;. 

We ask that you provide the requested documentary materials and other information to us 

by Monday, November 10, 2008. Responses and any questions should be directed to the 

Judiciary Committee office, 2138 Rayburn House Office Building, Washington, DC 20515 (tel: 

202-225-395 l; fa~: 202-225-7680). Th:ink you for your cooperation in thi.s matter. 

cc: The Honorable Lam;ar S. Smith 

The Honorable Barney Frank · 

The Honorable Spen~cr Bachus 

ncerely • 

P.eS/06 

TOTR. P. 
FEDERAL DEPOSIT INSURANCE CORPOMJlON, Washington, DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Betty Sutton 

House of Representatives 

Washington, D.C. 20515 

Dear Congresswoman Sutton: 

December 1, 2008 

Thank you for your letter regarding the Federal Deposit Insurance Corporation's 

role in the Emergency Economic Stabilization Act of2008 (EESA) and the Troubled 

Asset Relief Program's (TARP) Capita] Purchase Program (CPP). The FDIC agrees with 

you that funds received from the CPP primarily should be used to augm~nt capital at 

insured depository institutions with a result of making credit available throughout the 

country. On this point, we joined the other federal banking agencies in issuing the 

lnteragency Statement on Meeting the Needs of Creditworthy Bo"qwers on 

November 12 (copy enclosed). This Statement encourages banks to support the needs of 

creditworthy borrowers, strengthen capital, and engage in foreclosure prevention 

programs in view of the :financial assistance provided under recent federal initiatives to 

;>romote financial stability which include the EESA and the CPP. 

As you know, the U.S. Department of the Treasury (Treasury) instructed 

<nstitutions to file CPP applications with their primary federal regulator. The primary 

· federal regulator conducts a viability assessment and then forwards the application to 

Treasury with a recommendation for approval or denial. The FDIC, in its role as primary 

federal regulator for state non-mCJDber institutions, has implemented a comprehensive 

review process for CPP applications that results in a recommendation to Treasury. 

Treasury, which manages and funds the CPP, makes the program's final approval and 

denial decisions. As of November 18, 2008, the FDIC has received 1,214 CPP 

application requests. We expected to have a much greater number of applications by this 

1imc. However, Treasury has not yet finalized a feasible CPP subscription framework for 

the vast majority of community banks supervised by the FDIC. 

I understand from your letter that you are particularly concerned about the PNC 

financial Services, Inc.-Nation~I City Corporation merger transaction and a related CPP 

c.apital injection from Treasury. The FDIC is not the primary federal regulator for either 

cif these companies. Therefore, the FDIC did not make a recommendation to Treasury on. 

trris CPP transaction. 
Our responses to the specific questions pre~ented in your letter are enclosed along 

with '1()pies of relevant documents. I hope this infon;nation is helpful. If you have 

additional questions, please contact Eric Spitler, Director of Legislative Affairs, at (202) 

898-3837. 

Sincerely. 

Sheila C. Bair 

Enclosure 
Report prepared for the Honorable Betty Sutton 

by the Federal Deposit Insura~ce Corporation's Division of Supervision 

and Consumer Protection and Legal Division 

Ql: Please detail what conditions have or will be imposed upon the use of the 

federal funds provided to PNC Financial Services Group or any other financial 

entity through the Emergency Economjc StabiJization Act. Describe and explain 

any factors taken into account when federal tax dollars are being used to help fund 

an acqoisition of another firm. Please provide a copy of au documents ... from 

September 2008 onward relating to any aspect of the foregoing. 

Al: The U.S~ Department of Treasury (Treasury) issued the CPP Terms Sheet (attached) 

on October 14, 2008, which establishes the conditions imposed on institutions receiving 

federal funds. We do not believe that Treasury has mandated restrictions on the use of 

CPP funds (other than the executive compensation limitations in-the EESA), however, the 

FDIC has an expectation that insured depository institutions and their holding companies 

will prudently use these funds to augment capital and make loans. Since Treasury is 

entering into a stock offering with participating institutions and imposing its own 

conditions to protect the taxpayers' interests, the FDIC will not be issuing separate 

restrictions on CPP subscriptions. In the normal course of supervisory activity, the FDIC 

will review each state nornnember institution's use of CPP funds, lending activities, and 

compliance with the executive compensation/golden parachute limitations mandated by 

the EESA. It should be noted that on Nove~ber 12, the FDIC joined the other federal 

banking agencies in issuing the lnleragency Stalemenl on Meeting the Needs of 

Creditwonhy Borrowers ( copy attached). This Statement encourages banks to support 

the needs of creditworthy borrowers, strengthen capital, and engage in foreclosure 

prevention programs in view of the financial assistance provided under recent federal 

initiatives to promote financial stabi,Iity which include the EESA and the CPP. 

The FJ.)'JC does not have experience using federal tax dollars to facilitate private sector 

mergers. Ifowever, we suggest that such transactions should be predicated on reasonable 

assurances that the post-merger entity would: 1) be adequately capitalized and viable 

over the long term; 2) have positi've future earnings and business prospects; 3) operate 

with satisfactory board and management oversight; 4) present an appropriate plan for 

making credit and banking services available in its community; and 5) recapture the 

taxpaye_rs' investment and provide a suitable return. 

Q2: Please detail the methodology and criteria that were considered in connection 

with the p~ssible transfer of federal funds through the Emergency Economic 

Stabilization Act to National City Corporation as compared to the other regional 

banks for which you recently approved funding. Also, please describe the extent to 

which any impact on National City Corp.'s customers and employees as well as the 

relevant local economy was taken Into consideration with regard to approval or 

· denial of funds to National City and the proposed acquisition of National _City by 
PNC. Please provide a copy of all documents ••• from September 2008 onward 

relating to any aspect of the foregoing. 

A2: As mentioned above, the FDIC is not the primary federal regulator for PNC 

Financial or National City Corp. While the FDIC does not comment publicly on the 

condition of specific open and operating institutions, the FDIC believes that, under 

certain circumstances, it is appropriate to require institutions to rais<: additional private 

capital or seek a strategic partner in order tQ receive funds through the CPP program. 

This can help strengthen weaker institutions and ensure th.at they can continue providing 

financial services to their communities. With respect to the merger of these two firms, 

the FDIC docs no~ have specific knowledge of the methodology and criteria used in the 

CPP transaction. 

QJ: As noted above, the press bas recently reported that the banking industry "bas 

no intention of using the [bailout) money to make new loans;" the Treasury bas 

acknowledged that one of their principal motives in allocating the funds is to "drive 

consolidation;" and a JP Morgan official acknowledged that the bailout funds would 

aUow them to be "more active on the acquisition side.,, Please detail any knowledge 

by your departments or agencies of these matters, as well as any discussions or 

· understandings you may have regarding the use of the funds the government is 

providing and their possible use with regard to mergers and consolidations. Please 

provide a copy of all documents ... from September 2008 onward relating to any 

.aspect of the foregoing. 

A3: In the FDIC's discussions with state non-member institutions interested in 

participating in the TARP CPP, we find that many applicants are planning to use awarded 

monies prospectively to support their lending business. The FDIC strongly advocates the 

use of CPP funds for capital augmentation and prudent lending as envisioned by the 

EESA. We articulated this position in our October 20, 2008, Financial Institution Letter 

titled "Applications to the Troubled Asset Relief Program 's Capital Purchase Program" 

(see attachment). 

The FDIC believes, in certain circumstances, that CPP injections can be used effectively 

. by applicants to provide additional funding for acquisitions, particularly if the applicant 

acquires a weakened institution. Importantly, such acquisitions may reduce the potential 

for market disruption, including reduced lending avenues and banlc failure~. Particularly 

for community banks, their inability to obtain capital, or their demise can have a 

devastating effect on their local communities. In many smaller communities, banking 

services and credit availability are heavily dependent on the financial health of their local 

.bank. Over the Jong term, acquisitions pursued by CPP awardees could save ta,xpayer . 

dollars and restore capital and lending capacities at banking institutions. As indicated in 

the Financial Institution Letter referenced above, the FDIC believes that participation in 

the CPP can·bolster an institution's financial strength or potentially support acquisitions, 

both of which allow for prudent lending that currently may be constrained by capital 

levels. 
Q4: Please detail the manneF in which antitrust considerations generally have been 

and are being taken into account in recent consolidations, particularly in the 

proposed acquisition of National City Corp. by PNC Financial Services Group. 

Please detail how the antitrust review is impacted by the fact that the Treasury or 

Federal Reserve, their employees and/or representatives may have participated in 

discussion involving the possible acquisitfo~ of one fin~ncial entity by another 

financial entity. Please provide a copy of all documents ..• relatiog to any aspect of 

the foregoing. · 

A4: Anti-trust considerations are a significant aspect of merger transactions involving 

FDIC-supervised state non-member institutions. All merger transactions require a 

regulatory application process which includes analysis of potential anti-trust issues. 

Section 18(c)(5) of the Federal Deposit Insurance Act prohibits the FDIC from approving 

any merger which would result in a monopoly or whose effect in any part of the country 

may substantially lessen competition. Our overall process for considering merger 

applications is guided by the FDIC's Statement of Policy on Bank Merger Transactions 

(see attachment). 

In our analysis of the competitive effects of a proposed merger transaction, the FDIC 

focuses on the type and extent of competition that exists within the relevant geographic 

market(s) and the degree to which that competition will be eliminated, reduced, or 

enhanced by the proposed merger. We rely heavily on conclusions from the Department 

of Justice •s review of the proposed merger, including its Competitive Effects Report. We 

also focus on the respective shares of total deposits held by the merging institutions and 

the various other participants in the relevant markets. 

As the FDIC did not have a supervisory role in the PNC Financial Services Group, Inc.-

National City Cotporation transaction, we do not have information to provide relative to 

the regulatory antitrust analysis. 

Attachments 
Issuer: 

Initial Holder: 

Size: 

Security: 

Ranking: 

TARP Capital Purchase Program 

Senior Preferred Stock and Warrants . . 

Summary of Senior Preferred Terms 

Qualifying Financial Institution ("QFT') means (i) any U.S. bank or U.S. 

savings association not controlled by a Bank Holding Company ("BHC") 

or Savings and Lom Holding Company ("SLHC"); (ii) any U.S. BHC, or 

any U.S. SUIC which engages only in activities pcmritted for financial 

holdings companies under Section 4(k) of the Bank Holding Company 

Act, and any U.S. bank or U.S. savings association controlled by such a 

qualifying U.S. BHC or U.S. SLHC; and (iil) any U.S. BHC or U.S. 

SUIC whose U.S. depository institution subsidiaries are the subject of an 

application under Section 4(cX8) of the Bank Holding Company Act; 

except that QFI shall not mean any BHC, SLHC, bank or savings 

association that is controlled by a forcjgn bank or company. For pmposcs 

ofthis program. "U.S. bank''. "U.S. savings association°, "U.S. BHC" and 

"U.S. SLHC" means a bank, savings association, BHC or SLHC organized 

under the laws of the United Sates or any State of the United States, the 

District of Columbia, any temtory or possession of the United States, 

Puerto Rico, Northern Mariana Islands, Guam. American Samoa, or the 

Virgin Islands. The United States Department of the Treasury will 

determine eligibility and allocation for QFis after consultation with 

the appropriate Federal banlclng agency. 

United States Department of the Treasury (the ''UST"). 

QFis may sell preferred to the UST subject to tlie limits and terms 

dcscn"bed below. 

Each QFI may issue an amount of Senior Preferred equal to not less than 

l 3⁄4 of its risk-weighted assets and not mote than the lesser of (i) $25 

billion and (ii) 3% of its risk-weighted assets. 

Senior Preferred. liquidation preference S 1,000 per share. (Depending 

upon the QFI's available authorized preferred shares, the UST may agree 

to purchase Senior Preferred with a higher liquidation preference per 

share, in which case the UST may require the QFI to appoint a depositary 

to bold the Senior Preferred and issue depositary receipts.) 

Senior to common stock and pari passu with existing preferred shares 

other than pref erred shares which by their terms rank junior to any existing 

pref erred shares. 

1 
Regulatory 

Capital 

Status: 

Term: 

Dividend: 

Redemption: 

Tier 1. 

Pcipctual life. 

The Senior Preferred will pay cumulative dividends at a rate of 5% per 

annum until the fifth anniversary of the date of this investment and 

thereafter at a rate of 9% per annum. For Senior Preferred issued by banks 

which are not subsidiaries of holding companies, the Senior Preferred will 

pay non-cumulative dividends at a rate of 5% per annum until the fifth 

anniversary of the date of this investment and thereafter at a rate of93⁄4 per 

annmn. Dividends wt11 be payable quarterly in arrears on February 15, 

May 15. August 15 and November 15 of ~h year. 

Senior Preferred may not be redeemed for a period of three years from the 

date of this investment; except with the proceeds from a Qualified Equity 

Offering (as defined below) which results in aggregate gross proceeds to 

the QFI of not less than 25% of the issue price of the Senior Preferred. 

After the third amrivcrsary of the date of this investment, the Senior 

Preferred may be redeemed, in whole or in part, at any time and from time 

to time, at the option of the QFI. All redemptions of the Senior Preferred 

shall be at 100% of its issue price, plus (i) in the case of cumulative Senior 

Preferred, any accrued and unpaid dividends and (ii) in the case of noncumulative Senior Preferred, accrued and unpaid dividends for the then 

cum:nt dividend period (regardless of whether any dividends are actually 

declared for such dividend period), and shall be subject to the approval of 

the QFI's primary federal bank regulator. 

"Qualified Eguity Offering" shall mean the sale by the QFI after the date 

of this invcsbncnt of Tier 1 qualifying perpetud preferred stock or 

common stock for cash. 

Fo11owing the redemption in whole of the Senior Preferred held by the 

UST, the QFI shall have the right to repurchase any other equity security 

of the QFI held by the UST at fair market value. 

2 
Restrictions 

on Dividends: For as long as any Senior Preferred is outstanding, no dividends may be 

declared or paid on junior preferred shares. preferred shares ranking pari 

passu with the Senior Preferred, or common shares ( other than in the case 

of pari passu preferred shares, dividends on a pro rata basis with the 

Senior Ptefencd}, nor may the QFI repurchase or redeem any junior 

preferred shares, preferred shares ranking pari passu with the Senior 

Prefc:m:d or common ~ unless (i) in the case of cumulative Senior 

Preferred all accrued and unpaid dividends for all past dividend periods on 

the Senior Preferred m: fully paid or (iI) in the case of non-cumulative 

Senior Preferred the full dividend for the latest completed dividend period 

has been declared and paid in full. 

Common dividends: The UST's consent shall be required for any increase in common 

dividends per share until the third anniversary of the date oftbis 

investment unless prior to such third anniversary the Senior Preferred is 

redeemed in whole or the UST has transferred all of the Senior Preferred 

to third parties. 

Repurchases: 

Voting rights: 

The UST's consent shall be required for any share repurchases (other than 

(i) repurchases of the Senior Preferred and (ii) repurchases of junior 

preferred shares or common shares in connection with any benefit plan in 

the ordinary course of business consistent with past practice) until the 

third anniversazy of the date ofthis investment unless prior to such third 

anniversary the Senior Preferred is redeemed in whole or the UST has 

transferred all of the Senior Prcfc:rred to third parties. In addition, there 

shall be no share repurchases of junior preferred sh.arcs. preferred shares 

ranking pari passu with the Senior Preferred, or common shares if 

prolnbited as descn"bed above under "'Restrictions on Dividends". 

The Senior Preferred shall be non-voting. other than class voting rights on 

(i) my· authomtfon or issuance of shares ranking senior to the Senior 

Preferred. (ii) any amendment to the rights of Senior Preferred., or (iii) any 

merger. exchange or similar transaction wbich would adversely affect the 

rights of the Senior Preferred. 

If dividends on the Senior Preferred arc not paid in full for six dividend 

periods, whether or not consecutive. the Senior Preferred will have the 

right to elect 2 directors. The right to elect directors will end when ful] 

dividends have been paid for four consecutive dividend periods. 

3 

,., 
Transferability: 

Executive 

Compensation: 

The Senior Preferred wiJJ not be subject to any contractual restrictions on 

transfer. The QFI will file a shelf registration statement covering the 

Senior Prcfened as promptly as practicable after the date of this 

investment and, if necessary, shall take all action required to cause such 

shelf registration statement to be declared· effective as SQon as pom"blc. 

The QFI will also grant to the UST piggyback registration rights for the 

Senior Preferred and will take such other steps as may be reasonably 

requested to facilitate the transfer of the Senior Preferred including, if 

requested by the UST, using reasonable efforts to list the Senior Preferred 

on a national securities exchange. If requested by the UST, the QFI will 

appoint a depositary to bold the Senior Preferred and issue depositary 

receipts. 

As a condition to the closing of this investment, the QFI and its senior 

executive officers covered by the EESA shall modify or terminate all 

benefit plans, arrangements and agreements {including golden parachute 

agreements) to the extent necessary to be in compliance with, and 

following the closing and for so long as UST holds any equity or debt 

sectirities oftbc QFI, the QFI shall agree to be bound by, the executive 

compensation and corporate gov~ce requirements of Section 111 of 

the BESA and any guidance or regulations issued by the Secretary of the 

Trca.smy on or prior to the date of this investment to carry out the 

provisions of such subsection. As an additional condition to closing, the 

QFI and its senior executive officers covered by the EESA shall grant to 

the UST a waiver releasing the UST from any claims that the QFI and 

such senior executive officers may otherwise have as a result of the 

issuance of any regulations which modify the terms of benefits plans, 

arrangements and agreements to eliminate any provisions that would not 

be in compliance with the executive compensation and corporate 

governance re.guirernents of Section J 11 of the EESA and any guidance or 

regulations issued by the Secretary of the Treasuzy on or prior to the date 

of this investment to carry out the provisions of such subsection. 

4 
Warrant: 

Tenn: 

Exercisability: 

Transferability: 

Voting: 

Summary of Warrant Terms 

The UST will receive warrants to purchase a number of shares of common 

stock of the QFI having an aggregate market price equal to 15% of the 

Senior Preferred amount on the date of investment, subj cct to reduction as 

set forth below under "Reduction". The initial exercise price for the 

wammts, and the market price for dctcnnining the number of shares of 

common stock subject to the warrants, shall be the marlcet price for the ... 

common stock on the date qf the Senior Prefeued investment ( calculated 

on a 20-trading day trailing average). subject to customazy anti-dilution 

adjustments. The exercise price shall be reduced by 15% of the orlginaJ 

exercise price on each six-month anniversary of the issue date of the 

warrants if the consent of the QFI stockholders described below bas not 

been received, subject to a maximum reduction of 45% of the original 

·exercise price. 

10 years 

Immediately exercisable, in whole or in part 

The warrants will not be subject to any contractual restrictions on transfer; 

provided that the UST may only transfer or exercise an aggregate of onehalf of the warrants prior to the earlier of (i) the date on which the QFI has 

received aggregate.gross proceeds of not less than 100% oftbe issue price 

of the Senior Preferred from one or more Qualified Equity Offerings and 

(ii) December 31, 2009. The QFI will file a shelf registration statement 

covering the warrants and the common stock underlying the warrants as 

promptly as practicable after the date of this investment an~ if necessary, 

shall take all action required to cause such shelf registration statement to 

be declared effective as soon as possible. The QFI will also gmnt to the 

UST piggyback registration rights for the warrants and the common stock 

underlying the warrants and will take such other steps as may be 

reasonably requested to facilitate the transfer of the wammts and the 

common stock underlying the warrants. The QFI will apply for the listing 

on the national exchange on which the QFI's common stock is traded of 

the common stock underlying the warrants and will take such other steps 

as may be reasonably requested to facilitate the transfer of the warrants or 

the common stock. 

The UST will agree not to exercise voting power with respect to any 

shares of common stock of the QFJ issued to it upon exercise of the 

warrants. · 

5 
Reduction: 

Consent: 

Substitution: 

In the event that the QFI has received aggregate gross proceeds of not less 

than 100% of the issue price of the Senior Preferred from one or more 

Qualified Equity Offerings on or prior to December 31, 2009, the number 

of shares of common stock underlying the warrants then held by the UST 

shall be reduced by a number of shares equal to the product of (i) the 

number of shares originally underlying the wammts (taking into account .--

all adjustments) and (ii) 0.5. 

In the event that the QFI docs not have sufficient available authorized 

shares of common stock to reserve for issuance upon exercise of the 

warrants and/or stockholder approval is required for such issuance under 

applicable stock exchange rules, the QFI will call a meeting of its 

stockholders as soon as practicable after the date of this investment to 

increase the number of authorized shares of common stock and/or comply 

with such exchange rules, and to take any other measures deemed by the 

UST to be necessary to allow the exe:rcise of warrants into common stock. 

In the event the QFI is no longer listed or traded on a national securities 

exchange or securities association, or the consent of the QFI stockholders 

dcscnbcd above has not been received within 18 months after the issuance 

date of the warrants, the warrants will be-exchangeable, at the option of 

the UST, for senior term debt or another economic instrument or security 

of the QFI such-that the UST is appropriately compensated for the value of 

the warrant, as determined by the UST. 

6 
FDII 

Federal Deposit Insurance Corporation 

550 171h Street NW Washinnm D.C. 20429-~ 

Financial Institution Letter 

FIL-109-2008 

October 20, 2008 

APPLICATIONS TO THE TROUBLED ASSET RELIEF. 

PROGRAM'S CAPITAL PURCHASE PROGRAM 

Summary: State nonmember institutions are encouraged to participate In the Troubled Asset ReRef 

Program's (TARP) Capital Purchase Program (CPP) to strengthen their capital positions and ability to 

prudently make crealt available in their lending markets. All financial Institutions are eligible to apply for a 

capital Injection from the U.S. Department of Treasury. AppRcations should be filed with the FDIC according lo 

the instructions in this letter and on the FDIC's Web site at www,fdic:.oov. 

Distribution: 

AJ FDIC-Supervised lnstllutions 

Suggested Routing: 

Chief Execuliw Officer· 

Chief Financial Officer 

Attachment: 

"lnslrudlans fer Applying tD the Troubled 

Assat Reiaf Program's Capllal Purchase 

Program for Stata Nonmermer 

lnslllulions• 

Contact: 

lnstllutlcn's contad person (C- Manager 

or Flald Supervisor) al applicable FDIC 

Reglonal Offla, 

Note: 

FDIC financial lnstllu1ion lette11 {Fils) may 

bit accessed from Iha FOIC's Web site at 

www Jcfrc.0ovJnewslnl!'ws/TlndaV2QOMn ~ 

To racelve Als eledronlcally. please visit 

http://www.fdic,ooy/about/subsgj@nslffl. 

h!ml, 

Paper copies of FDIC fmandal insthution 

letlara may be obtained 1h1DUgh lhe 

FOIC's Public Information Center, ·3501 

Fairfax Drive, E-1002, Arington, VA 

22228. 

Hlghflghts: 

The FDIC strongly encourages state nonmember institutions to consider 

applying for Infusions of capital under the CPP. The following 

summarizes the application process: 

• ·_. Interested state nonmember institutions should contact their 

appropriate FPIC Regional Office to _express interest in the 

program and file an app6calion with that offi~ using the 

instructions at www.fdic.gov. The deaclfme for applying is 5:00 

p.in. EST, November 14, 2008.: 

• The FDIC will review all state nonmember institution applications 

and make a recommendation to the U.S. Department of Treasury 

(which will approve or deny program participation). 

• Participation In this low-cost capital program can bolster financial 

strength. or potentially support acquisitions. both of which 

· ultima\ely allow for prudent lending that may currently be 

constrained by capital levels. 

• For those institutions controDed by a holcfing company, Treasury 

will make capital injections at the holding company level. 

Appffcations should be submitted to the Federal.Reserve and the 

FDIC if the company's largest institution is a state nonmember 

charter. 

• Institutions with less than $1 billion in assets that serve low- to 

moderate-income popuJations and underserved communities and 

that have been impacted by Fannie Mae or Freddie Mac stock 

depreciation may apply (under certain conditions) for 

consideration under the CPP. 

• Minority Depository Institutions requiring technical assistance 

should contact their appropriate FDIC Regional Office. 
Instructions for Applying to the Troubled Asset Relief Program's 

Capital Purchase Progi-am for State Nonmember Institutions· 

On October 14, 200&, the U.S. Treasury Department announced a Capital Purchase Program 

(CPP) under the Troubled Asset Relief Program mandated by the Emergency Economic 

Stabilization Act of 2008. The CPP is designed to encourage U.S. financial institutions to 

build capital to increase the flow of financing to U,S. businesses and consumers and support·· 

the U.S. economy. Under this program. the Treasury will purchase up to $250 billion of 

senior preferred shares in financial institutio~ on standardized terms as descn"bed in the 

program's term sheet available at http://www.treas.gov/press/releases/hp1207 .htm. The 

Treasury"s investment agreement and associated documents will be posted on the Treasury 

Web site soon. · 

How to Apply 

Any state nonmember institution may apply to the FDIC for a CPP capital infusion using the 

application materials and frequently asked questions posted on the Internet at 

http://www.trcas.govfmitiativcs/eesa/docs/application-guidelines.pdf. 

http://www.treas.gov/initiatives/eesa/docs/fag-cpp.pdf. and www.fdic.gov. Although the 

U.S. Trc:asury ultirn,ately will make decisions regarding capital injections, applications should 

be submitted through an institution's primary federai regulator. Applications must be 

received by the FDIC by 5:00 p.m. EST on November 14, 2008, to receive consideration. 

Interested institutions should submit their applications to the appropriate FDIC Regional 

Office via e-mail or U.S. mail. If interested in electronic submission, applying institutions 

should contact their FDIC Regional Office. Once 11pplications are considered complete, they 

will be formally accepted for processing by the FDIC Regional Office, and applicants will be 

advised in writing. Applications will then be forwarded to the FDIC's Washington Office for 

final consideration and submitted to the Treasuxy for action. At any time during this process, 

an applicant may withdraw its request to participate in the CPP. · 

Prospective applicants are encouraged to begin a dialogue immediately with their FDIC 

Regional Office to express interest in participating in the program and discuss any corporate 

structure obstacles or other challenges. The FDIC Regional Office staff is available to 

answer questions and provide consultation on program requirements. 

State Nonmember Institutions Within a Ban.Jc Holding Company Structure 

Treasury will be making CPP injections at the bank holding company level for institutions 

controlled by a bank holding company. Therefore, state nonmember institutions controlled 

by a bank holding company will apply to the Federal Reserve for a CPP inj~tion. The 

holding company should provide a copy oftbe application to the appropriate FDIC Regional 

Office. The Federal Reserve will make a recommendation on the application to Treasury in 

consultation with the FDIC. 
Institutions with ti Non-Public, Subchapter S, or Mutual Corporate Structure 

Treasury is aware of potential legal and tax obstacles in these corporate structures in relation 

to the terms of the CPP senior perpetual preferred shares and warrants. ACCQntingly, 

Treasury is investigating posst"ble alternatives. State nonmember institutions with these .nonpublic structures that are interested in applying should submit their CPP application to their 

FDIC Regional Office by November 14. 2008, and descnoe any structural conditions that 

may not comply with the Treasury's guidelines. 

Participation 

The FDIC encourages all state nonmember institutions to seriously consider applying for 

CPP injections. Participation in this low-cost capital program can bolster financial strength, 

or potentially support acquisitions, both of which ultimately allow for prudent lending that 

may currently be constrained by capital levels. Ally questions on the application ptocess 

should be directed to the institution's FDIC Regional Office. 

Institutions Serving Low- to Moderate-Income or Underserved Communities 

Institutions with less than SI billion in assets that serve low- to moderate-income populations 

and other undcrserved communities that were well or adequately capitalized as of June 30, 

2008, and will drop one or more regulatory capital levels because of depreciation in Fannie 

Mae or Freddie Mac equity securities, arc identified for specified consideration for a CPP 

injection under Section 103 of the Emergency Economic Stabilization Act of 2008. The., 

FDIC encourages such institutions to apply for a CPP capital injection; these institutions ' 

should note their status under Section 103 in application ~terials. 

Minority Depository Institutions 

If state nonmember minority-owned or -operated depository institutions require technical 

assistance in completing CPP applications, they should contact their FDIC Regional Office. 

Notification of Treasury's Determinations 

Institutions will be advised in writing by the U.S. Treasury of their decisions by year-end 

2008. 
FDIC Statement of Policy on Bank Merger Transactions 

I. Introduction 

Section.18(c) of the Federal Deposit Insurance Act 02 U.S.C. 1828{c)). popularly known as the 

"Bank Merger Act," requires the prior written approval of the FDIC before any insured 

depository institution may: · 

(1) Merge or consolidate with, purchase or otherwise acquire the assets of: or assume any deposit 

liabilities of, another insured depository institution if the resulting institution is to be a state 

nonmember bank, or 

(2) Merge or consolidate with, assume liability to pay any deposits or similar liabilities of, or 

transfer assets and deposits to, a noninsured bank or institution. 

Institutions undertaking one of the above descn"bed "merger transactions" must file an 

application with the FDIC. Transactions that do not involve a transfer of deposit liabilities 

typically do not require prior FDIC approval under the Bank Merger Act, unless the transaction 

involves the acquisition of all or substantially all of an institution's assets. 

The Bank Merger Act prohibits the FDIC from approving any proposed merger transaction that 

would result in a monopoly, or would further a combination or conspiracy to mbnopolize or to 

attempt to monopolize the business of banking in any part of the United States.. Similarly, the 

Bank Merger Act proln"bits the FDIC from approving a proposed merger transaction whose effect 

in any section of the country may be substantially to lessen competition, or to tend to cteate a 

monopoly, or which in any other manner would be in res1raint of trade. An exception may be 

made in the case of a merger transaction whose effect would be to substantially lessen 

competition, tend to create a monopoly, or otherwise restrain trade, if the FDIC finds that the 

anticompetitive effects of the proposed transaction are clearly outweighed in the public interest 

by the probable effect of the transaction in meeting the convenience and needs of the community 

to be served. For example, the FDIC may approve a merger transaction to prevent the probable 

failure of one of the institutions involved. 

In every proposed merger transaction, the FDIC must also consider the financial and managerial 

resources and future prospects of the existing and proposed institutions, the convenience and 

needs of the community to be served, and the effectiveness of each insured depository institution 

involved in the proposed merger transaction in combating money-laundering activities, including 

in overseas branches. 

II. Application Procedures 

1. Application filing. yApplication forms !llld instructions may be obtained from the appropriate 

· FDIC office. Completed applications and any other pertinent materials should be filed with the 

appropriate FDIC office. The application and related materials will be reviewed by the FDIC for 

compliance with applicable laws and FDIC rules and regulations. When all necessary 

information has been received, the application will be processed and a decision rendered by the 

.FDIG. 
2. Expedited processing. Section 303.64 of the FDIC rules and regulations (12 CFR 303.64) 

provides for expedited processing, which the FDIC will grant to eligil>le applicants. In addition 

to the eligil>le instituti!?n criteria provided for in§ 303.2 (12 CFR 303.2), § 303.64 provides 

expedited processing criteria specifically applicable to proposed merger transactions. 

3. Publication of notice. The FDIC will not take final action on a merger application until notice 

of the proposed merger transaction is published in a newspaper or newspapers of general 

circulation in accordance with the requirements of section 18(c)(3) of the Federal Deposit 

. Insurance Act. See§ 303.65 of the FDIC rules and regulations (12 CFR 303.65), The applicant 

must furnish evidence of publication of the notice to the appropriate FDIC office following 

compliance with the publication requirement. Sec§ 303.?(b) of the FDIC rules and regulations 

(12 CFR 303.7(b)). 

4. Reports on competitive factors. As required by Jaw, the FDIC will request reports on the 

competitive factors involved in a proposed merger transaction from the Attorney General, the 

Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the 

Director of the Office of Thrift Supervision. These reports must ordinarily be .furnished within 30 

days, and the applicant upon request wiUbe given an opportunity to submit comments to the 

FDIC on the contents of the competitive factors reports. 

5. Notification of tne Attorney General After the FDIC approves any merger transaction, the 

FDIC will immediately notify the Attorney General. GeneralJy, unless it involves a probable 

failure or an emergency exists requiring expeditious action, a merger transaction may not be 

consummated until 30 calendar days after the date of the FDIC's · · 

{ {2-28-03 p.5146} }approval. However, the FDIC may prescn1>e a 15-day period, provided the 

Attorney General concurs with the shorter period. 

6. Merger decisions available. Applicants for consent to engage in a merger transaction may 

find additional guidance in the reported bases for FDIC approval or denial in prior merger 

transactio:q. cases compiled in the FDIC's annual "Merger Decisions" report. Reports may be 

obtained from the FDIC Public Info!IDation Center, 3501 North Fairfax Drive, Room E-1002, 

Arlington, VA 22226. Reports may also be viewed at http://wwwfdic.gov. 

m. Evaluation of Merger Applications 

The FDIC's intent and purpose is to foster and maintain a safe, efficient, and competitive banking 

system that meets the needs of the communities served. With these broad goals in mind. the 

FDIC will apply the specific standards outlined in this Staterpent of Policy when evaluating and 

acting on proposed merger transactions.· 

Competitive Factors 

In deciding the competitive effects of a proposed merger transaction, the FDIC will consider the 

extent of existing competition between and among the merging institutions, other depository 

institutions, and other providers of similar or equivalent services in the relevant product 

market(s) within the relevant geographic marlcet(s). 
l. Relevant geographic market. The relevant geographic marlcet(s) includes the areas in which 

the offices to be acquired are located and the areas from which those offices derive the 

predominant portion of their loans, deposits; or other business. The relevant geographic marlcet 

also includes the areas where existing and potential customers impacted by the proposed merger 

transaction may practically tum for alternative sources of banking services. In delineating the 

relevant geographic market, the FDIC will also consider the location of the acquiring institution's 

offices in relation to the offices to be acquired. 

2. Relevant product market. The relevant product marlcet(s) includes the banking services 

currently offered by the merging institv.tions· and to be offered by the resulting institution. In 

addition, the product mar:ket may also iμclude the functional equivalent of such services offered 

by other types of competitors, including other depository institutions. securities firms, or :finance 

companies. For example, share draft accounts offered by credit unions may be the functional 

equivalent of demand deposit accounts. Similarly. captive finance companies of automobile 

manufacturers may compete directly with depository institutions for automobile loans, and 

mortgage bankers may cmμplete directly with depository institutions for real estate loans. 

· 3. Analysis of competitive ejfect.s. In its anlaysis of the competitive effects of a proposed merger 

~action, the FDIC will focus particularly on the type and extent of competition that exists and 

that will be eliminated, reduced, or enhanced by the proposed merger transaction. The FDIC will 

also consider the competitive impact of providers located outside a relevant geographic market 

where it is shown that such providers individually or collectively influence materially the nature, 

pricing. or quality of services offered by the providers currently operating within the geographic 

market. 

The FDIC's analysis will focus primarily on those services that constitute the largest part of the 

businesses of the merging institutions. In its analysis, the FDIC will use whatever analytical 

proxies are available that reasonably reflect the dynamics of the market, including deposit and 

loan totals. the nwnber and volume of transactions, contn'butions to net income, or other 

measures. Initially. the FDIC will focus on·the respective shares of total deposits 1 held by the 

merging institutions and the various. other participants with offices in the relevant geographic 

market(s). unless the other participants' loan, deposit, or other business varies markedly from that 

of the merging institutions. Where it is clear, based on market share considerations alone, that the 

proposed merger transaction would not significantly increase concentration in an unconcentrated 

market, a favorable finding wiU be made on the competitive factor. 

{ {2-28-03 p.5147}} 

Where the market shares of the merging institutfons are not clearly insignificant, the FDIC will 

also consider the degree of concentration within the relevant geographic marlcet(s) using the 

Herfindahl-Hirschman Index (HHl) l:as a primary measure of market concentration. For 

purposes of this test, a reasonable approximation for the relevant geographic market(s) consisting 

of one or more predefined areas may be used. Examples _of such predefined areas include 

counties, the Bureau of the Census Metropolitan-Statistical Areas {MSAs), or R.and-McNally 

Ranally Metro Areas (R.MAs). 

The FDIC normally will not deny a proposed merger transaction on antitrust grounds (absent 

objection from· the Department of Justice) where the post-merger HHI in the relevant geographic 
market(s) is 1,800 points or less or, if it is more than 1,800, it reflects an increase ofless than 200 

points from the pre-merger HJil. Where a proposed merger transaction fails this initial 

~ncentration test, the FDIC will consider more closely the various competitive dynamics at 

work in the market, taking into account a variety of factors that may be especially relevant and 

1II1portant in a particular proposal, including: 

• The number, size, financial strength, quality of management, and aggressiveness of the various 

participants in the market; 

• The likelihood of new participants entering the market based on its attractiveness in terms of 

pop~ation, income levels; CCODOffil:C growth, and other features; 

• Any legal impediments to entry or expansion; and 

• Definite entry plans by specifically identified entities. 

In addition, the FDIC will consider the likelihood that new entrants might enter the market by 

less direct means; for example, electronic banking with local advertisement of the availability of 

such services. This consideration will be particularly important where there is evidence that the 

mere possibility of such entry tends to encourage competitive pricing and to maintain the quality 

of services offered by the existing competitors in the market 

The FDIC will also consider the extent to which the proposed merger transaction likely would 

create a stronger, more efficient institution able to compete more vigorously in the relevant 

geographic markets. 

4. Consid.erah'on of the public interest. The FDIC will deny any proposed merger transaction 

whose overall effect likely would be to reduce existing competition substantially by limiting the 

service and price options available to the public in the :relevant geographic market(s), unless the 

anticompetitive effects of the proposed merger transaction are clearly outweighed in the public 

interest by the probable effect of the transaction in meeting the convenience and needs of the 

commllllity to be served For this purpose, the applicant must show by cJear and convincing 

evidence that any claimed public benefits would be both substantial and incremental and 

generally available to seekers of banking services in the relevant geographic market(s) and that 

the expected benefits cannot reasonably be achieved through other, less anticompetitive means. 

Where a proposed merger transaction is the least costly alternative to the probable failure of an 

insured depository institution, the FDIC may approve the merger transaction even if it is 

anticompetitive. 

Prudential Factors 

The FDIC does not wish to create larger weak institutions or to debilitate existing institutions 

whose overall condition, including capital, management, and earnings, is generally satisfactory. 

Consequently, apart from competitive considerations. the FDIC normally will not approve a 

proposed merger transaction where the resulting institution would fail to meet existing capital 

standards, continue with weak or unsatisfactory management, or whose earnings prospects, both 
in terms of quantity and quality, are weak, suspect, or doubtful. In assessing capital adequacy 

and earnings prospects, particular attention will be paid to the adequacy of the allowance for loan 

and lease losses. In { {2-28-03 p.5148} }evaluating management, the FDIC will rely to a great 

extent on the supervisory histories of the institutions involved and of the executive officers and 

directors that are proposed for the resultant institution. In addition. the FDIC may review the 

adequacy of management's disclosure to shareholders of the material aspects of the merger 

transaction to ensure that management has properly fulfilled its :fiduciary duties. 

Convenience and Needs Factor 

In assessing the convenience and needs of the community to be served, the FDIC will consider 

such elements as the extent to which the proposed merger transaction is likely to benefit the 

general public through higher lending limits, new or expanded services, reduced prices, 

increased convenience in utilizing the services and facilities of the resulting institutio~ or other 

means. The FDIC, as required by the Commllllity Reinvestment Act, will also note and consider 

each institution's Community Reinvestment Act performance evaluation record. An 

unsatisfactory record may form the basis for denial or conditional approval of an application. 

Anti-Money Laundering Record 

In every case, the FDIC will take into consideration the .effectiveness of each insured depository 

institution involved in the proposed merger transaction in combating money-laundering 

activities. including in overseas branches. In this regard, the FDIC will consider the adequacy of 

each institution's programs, policies, and procedures relating to anti-money laundering activities; 

the relevant supervisory history of each participating institution, including their compliance with 

anti-money laundering laws and regulations; and the effectiveness of any corrective program 

outstanding. The FDIC's assessment may also incOiporate information made available to the 

FDIC by the Department of the Treasury, other Federal or State authorities, and/or foreign 

governments. Adverse findings may warrant correction of identified problems before consent is 

granted, or the imposition of conditions. Significantly adverse findings in this ar~ may form the 

basis for denial of the application. 

Special Information requirement if applicant is affiliated with or will be affiliated with an 

insurance company. 

If the institution that is the subject of the application is, or will be, affiliated with a company 

engaged in insurance activities that is subject to supervision by a state insurance regulator, the 

applicant must submit the following information as part of its application: (1) The name of 

insurance company; (2) a description of the insurance activities that the: company is engaged in 

and has plans to conduct; and (3) a list of each state and the lines of business in that state wmch 

the company holds, or will bold, an insurance license. Applicant must also indicate the state 

where the company holds a resident license or charter, as a:pplicable. 

IV. Related Considerations 

1. Interstate bank merger transactions. Where a proposed transaction is an interstate merger 

transaction between insured banks, the FDIC will consider the additional factors provided. for in 
section 44 of the Federal Deposit Insurance Act, 12 U.S.C. 183lu. 

2 Interim merger transactions. An interim institution is a state- or federally-chartered institution 

that does not operate independently, but exists, norm.ally for a very short period of time, solely as 

a vehicle to accomplish a merger transaction. In cases where the establishment of a new or 

interim institution is contemplated ~ connection with a proposed merger transaction, the 

applicant should contact the FDIC to discuss any relevant deposit insurance requirements. In 

general, a merger transaction (other than a purchase and assumption) involving an insured ..-

depository institution and a federal interim depository institution will not require an application 

for deposit insurance, even if the federal interim depository institution will be the surviving 

institution. 

3. Optional conversion. Section S(d)(3) of the Federal Deposit Insurance Act, 12 U.S.C. 

1815(d)(3), provides for "optional conversions" (commonly known as Oakar transactions) which, 

in genera.I. are merger transactions that involve a member of the Bank Insurance Fund and a 

member of the Savings Association Insurance Fund. These transactions are subject to specific 

rules regarding deposit insurance coverage and premiums. Applicants may find additional 

guidam:e in§ 327.31 ofthe FDIC rules and regulations (12 CFR 327.31). 

{ {2-28-03 p.5149}} 

4. Branch closings. Where banking offices are to be closed in connection with the proposed 

merger transaction, the FDIC wi11 review the merging institutions\ conformance to any applicable 

requirements of section 42 of the FDI Act concerning notice of branch closings as reflected in 

the Intcrageacy Policy Statement Concerning Branch Closing Notices and Policies. See 2 FDIC 

Law, Regulations, Related Acts 5391. · 

5. Legal fees and other expenses. The commitment to pay or payment of unreasonable or 

excessive fees and other expenses incident to an application reflects adversely upon the 

management of the applicant institution. The FDIC will closely review expenses for professional 

or other services rendered by present or prospective board members, major shareholders, or other 

insiders for any indication of self-dealing to the detriment of the institution. As a matter of 

practice, the FDIC expects full disclm~ure to all directors and sh&.reholders of any arrangement 

with an insider. In no case will the FDIC approve an applicationwbere the payment of a fee, in 

whole or in part, is contingent upon any act or forbearance by the FDIC or by any other federal 

or state agency or official. 

6. Trade names. Where an acquired bank or branch is to be operated under a different trade 

name than the acquiring bank, the FDIC will review the adequacy of the steps taken to minimize 

the potential for customer confusion about deposit insurance coverage. Applicants may refer to . 

the Intcragency Statement on Branch Names for additional guidance. See FDIC, Financial 

Institution Letter, 46--98 (May 1, 1998). 

By Order of the Board of Directors, December 19, 2007. 

{Source: 63 Fed. Reg. 44761, August 20, 1998, effective October I, 1998: amended at 67 Fed. 

Reg. 48178, July 23, 2002; 67 Fed. Reg. 79278, December 27, 2002.; 73 FR 8870, February 15, 

2008.} 
FDIC: Press Releases - PR-11 >-WU!S 11/ l:lf.lUU!S rage 1 u1:, 

1-iPm!! ,. News & !;vont$ > Press Rel-• 

Press Releases 

Joint Release 

. For Immediate Release 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency 

Office of Thrift Supervision_.. 

November 12, 2008 

lnteragency Statement on Meeting the Needs of Creditworthy Borrowers 

The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve 

have recently put into place several programs designed to promote financial stability and to mitigate 

procydical effects of the c:urrent market conditions. These programs make new capital widely available 

to U.S. financial institutions, broaden and increase the guarantees on bank deposit accounts and certain 

liabilities. and provide backup liquidity to U.S. banking organizations. These efforts are designed to ' 

strengthen the capital foundation of our.financial system and Improve the overall functioning of credit 

markets. 

The ongoing financial and economic stress has highlighted the crucial role that prudent bank lending 

practices play in promoting the nati9n's economic welfare. The recent policy actions are designed to 

help support responsible lending activities of banking organizations, enhance their ability to fund such 

lending, and enable banking organizations to better meet the credit needs of households and business. 

At. this critical time, it is inperative that all banking organizations and their regulators work together to 

ensure that the needs of creditworthy borrowers are mel As discussed below, to support this objective, 

consistent with safety and soundness principles and existing supervisory standards, each individual 

banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss 

mitigation strategies and foreclosure prevention, and reassess the incentive Implications of its 

compensation p~licies. 

Lending to creditworthy borrowers . 

The agencies expect all banking organizations to fulfill their fundamental role in the economy as 

intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a 

result of problems in financial markets, the economy will likely becom~ increasiAgly reliant on banking 

organ~tions to provide credit formerly provided or facilitated by purchasers of securities. Lending to 

creditworthy borrowers provides sustainable returns for the lending organization and is constructive for 

the economy as a whole. 

It is essential that banking organizations provide credit In a manner consistent wtth prudent lending 

practices and continue to ensure that they consider new lending opportunities on the basis of realistic 

asset valuations ani;1 a balanced assessment of borrowers' repayment capacities. However, if 

underwriting standards tighten excessively or banking organizations retreat from making sound credit 

decisions, the current market conditions may be exacerbated, leading to slower growth and potential 

damage to the economy as wen as the long-term interests and profitabmty of individual banking 

organizations. Banking organizations should strive to maintain healthy credit relationships with 

businesses, consumers, and other creditworthy borrowers to enhance their own financial well-being as 

well as to promote a sound economy. The agencies have directed supervisory staffs to 1:>e mindful of the 

procyclical effecis of an excessive tightening of credit availability and to encourage banking 

organizations to practice eco~lcally viable and appropriate lending activities. 

strengthening c:apitaf 

Maintaining a strong capital posltJon complements and facDitates a banking organization's capacity and 

willingness to lend and bolsters its abmty to withstand uncertain market conditions. Banking 

http://www.fdic.gov/news/news/press/2008/pr08115.html 11/24/2008 
organizations should focus on effective and efficient capital planning and longer-tenn capital 

maintenance. An effective capital planning process requires a banking organization to assess both the 

risks to which it is exposed and the risk management processes in place to manage and mitigate those 

risks; evaluate its capital adequacy relative to its risks; and consider the potential impact on earnings 

and capital from economic downturns. Further, an effective capital planning process req1,1ires a banking 

organization to recognize losses on bank assets and activities in a timely manner; maintain adequate 

· loan loss provisions; and adhere to prudent dividend policies. 

In particular, in setting dividend levels, a banking organization should consider Its ongoing earnings 

capacity, the adequacy of its loan loss allowance, and the· overall effect that a dividend payout would 

have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs.· 

of creditworthy borrowers,. Banking organizations should not maintain a level of cash dividends that is 

inconsistent with the organization's capital position, that could weaken the organization's overall 

financial health, or that could Impair its ability to meet the needs of creditworthy borrowers. ·supervisors 

will continue to review the dividend policies of individual banking organizations and will take action when 

cfrvidend policies are found to be inconsistent with sound capital and lending policies. 

Worf<ing with mortgage borrowers 

The agencies expect banking organizations to work with existing borrowers to avoid preventable 

foreclosures, which can be costly to both the organizations and to the·communities they serve, and to 

mitigate other potential mortgage-related losses. To this end, banking organizations need to ensure that 

their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while 

implementing effective risk-mitigation measures. 

Given escalatlntJ mortgage foreclosures, the agencies urge all lenders and servicers·to adopt 

~tematic, proactive, and streamlined mortgage loan modification protocols and to review troubled 

loans using these protocols. Lenders and servicers should first determine whether a loan modification 

would enhance the net present value of the loan before proceeding to foreclosure, and they should 

ensure that loans currently in foreclosure have been subject to such analysis. Such practices are not 

only consistent with sound risk manage.meol but are also io the long-~erm interests of lenders and 

servicers, as well as Borrowers. · 

Systematic efforts to address delinquent mortgages should seek lQ achieve modifications that result in 

mortgages that borrowers will be able to sustain over the remaining maturity of their loan. Supervisors 

will fully support banking organizations as they work to implement effective and sound loan modification 

programs. Banking organizations that experience challenges In implementing loss mitigation efforts on 

their mortgage portfolios or in making new loans to borrowers should work with their primary supervisors 

to address specific situations. · 

structuring compensation 

Poorly-designed management compensation policies can create perverse incentives that can ultimately 

jeopardize the health of the banking organization. Management compensation policies should be 

aligned with the long-term prudential Interests of the institution, should provide appropriate incentives for 

safe and sound behavior, and should structure compensation to prevent short-term payments for 

transactions with long-term horizons. Management compensation practices should balance the ongoing 

earnings capacity and financial resources of the banking organization, such as capital levels and 

reserves, with the need to retain and provide proper incentives for strong management. Further, It is 

important for banking organizations to have independent risk management and control functions. 

The agencies expect banking organizations to regularly review their management compensation policies 

to ensure they are consistent with the longer-run objectives of the organization and sound lending and 

risk management practices. 

The agencies will continue to take steps to promote programs that foster financial stability and mitigate 

procyclical effects of the current market conditions. However, regardless of their participation in 

particular programs, all banking organizations are expected to adhere to the principles in this statement. 

We wiD work with banking organizations to facilitate their active participation in those programs, 

consistent with safe and sound banking practices, and thus to support their central role In providing 

credit to support the health of the U.S. economy. 

http://www.fdic.gov/news/news/press/2008/pr081 l 5.html 11/24/2008 
· .t'UlC: Press KeJeases - t'K-11.::,-:LUU!S i 1/ 12/LUU!S 

Media Contacts 

FDIC 

Fed 

OTS 

occ 

Andrew ~ray 

Dave Skidmore 

Bill Rubeny 

Bob Garsson 

FDIC-PR-115-2008 

Lui Updated 11/12/20011 

### 

(202) 898-6993 

(202) 452-2955 

{202) 906-6677 

(202) 874-5770 

tmill C!Wtilg.!bi ~111.b lkJ12 . SiteMap ~ 

communlcations@fdlc gov 

Freedom of,loformalion Act (FOlA} Service Center Website Policies USA.!W! 

FDIC Office of ln~eclor General 

http://www.fdic.gov/news/news/press/'2008/pt0811 S .html 11/24/2008 
SHEILA C. BAIR 

CHAIRMAN 

Honorable Mel Martinez 

United States Senate 

. Washington, D.C. 20510 

Dear Senator Martinez: 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

December 2, 2008 

It was a pleasure meeting with you recently to djscuss the important issues facing the 

banking industry and its credit customers during these challenging economic times. I assure you 

the Federdl Deposit Insurance Corporation is sensitive to the critical role that credit availability 

plays in the Florida and national economies, and we are balancing those considerations with 

prudential safety and soundness requirements. 

The FDIC and our counterparts at the other federal banking agencies are concerned about 

the availability of credit because of the rapid slowdown in the nation's real estate sector and 

serious disruptions in the credit market Through published guidance and in discussions with the 

industry, we have encouraged banks to continue extending credit. On November 12. 2008, the 

federal banking agencies issued the brterage11cy Statement pn Meeting the Needs of Creditworthy 

Borrowers (copy enclosed) that encourages depository institutions to continue making loans to 

creditworthy borrowers. Furthermore, the FDIC is actively engaged with the Department of the 

Treasury and the other federal banking agencies in considering capital subscriptions under the 

Temporary Asset Relief Program's Capital Purchase Program. There is a significant expectation 

from the FDIC that banks will use these federal monies to provide credit to individuals and 

businesses. In our transmittal of the November 12 Statement to state non-member institutions, 

we articulated this expectation and advised banks that our examiners will be reviewing their 

performance in this regard. We are encouraged that over 1,200 state nonmember institutions 

have already applied to participate in the Capital Purchase Program. 

FDIC examiners have considerable flexibility in conducting field examinations where 

they assess overall risk and evaluate compliance with applicable laws and regulations. Our 

examiners serve solely in a federal oversight role and do not instruct banks to make business 

decisions on individual credit relationships. Our policies recognize that a customer can have a 

problem and the bank can work with them to return the loan to perfonning status. For example, 

on consumer loans, if a bank .. re-ages" a delinquent loan and it subsequently pcrfonns 

adequately for 120 days, we do not subject it to criticism. In other words, the FDIC understands 

that consumer and businesses run into financial obstacles in slowdowns and we give banks 

flexibility to work with these customers. 

In the nonnal course of examinations, FDIC examiners may offer recommendations 

relative to asset or business line diversification, or the write-down/provisioning for weakened 
assets. However, we do not tell institutions what loans to make, how to deploy their capital or 

how to manage their operations. In addition, we do not direct institutions to take specific actions 

regarding customer relationships. In practice, bank management has great latitude in dealing 

with its loan customers. We leave the business of banking to bankers, who arc in the best 

position ta know their customers and communities. However, it is important to recognize that 

regardless of how banks deal with individual borrowers, the banks' financial statements must 

accurately reflect their financial condition. 

As federal supervisor for more than 5,000 institutions, most of which arc community 

banks, the FDIC uniquely understands the vital role of bank lending on Main Street. The banks 

we supervise are often the lifeblood of credit in their communities, and these institutions have a 

tradition of working with local customers when times get tough. The FDIC recognizes the 

importance of financial institutions to the economy, and our practices as a bank supervisor reflect 

those priorities. · · 

Again, I enjoyed meeting with you and please contact me if you have additional 

questions. 

Sincerely, 

Sheila C. Bair 

Enclosure 
FDIC: Press Releases - PR- I 15-2008 11/12/2008 Pagel of 3 

Homt, > N-:w:. & Ev~11w > Press Releases 

Press Rel1:tases 

Joint Raleasn 

For lmmediatE1 Release 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency 

Office of Thrift Supervision 

November12,2008 

lnteragenc~, Statement on Meeting the Needs of Creditworthy Borrowers 

The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve 

have recently 1:>ut into place several programs designed to promote financial stabRity and to mitigate 

procyclical effods of the current market conditions. These programs make new capital widely available 

to U.S. financi::11 institutions, broaden and increase the guarantees on bank deposit accounts and certain 

liabilities, and provide backup liquidity to U.S. banking organizations. These efforts are designed to 

strengthen the capital foundation of our financial system and improve the overall functioning of credit 

markets. · 

The ongoing financial and economic stress has highlighted the crucial role that prudent bank lending 

practices play in promoting the nation's economic welfare. Toe recent policy actions are designed to 

help support msponsible lending activities of banking organizations, enhance their ability to fund such 

lending, and enable banking organiZations to better meet the credit needs of households and business. 

At this critical time, it is imperative that all banking organizations and their regulators work together to 

ensure that th•~ needs of creditworthy borrowers are met. As discussed below, to support this objective, 

consistent with safety and soundness principles and existing supervisory standards, each individual 

banking organization needs to ensure the adequacy of its capital base. engage in appropriate loss 

mitigation stra1tegies and foreclosure prevention, and reassess the incentive implications of its 

compensation policies. 

Lending to creditworthy borrowers 

The agencies expect all banking organizations to fulfill their fundamental role in the economy as 

intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a 

result of problltms in financial markets, the economy will likely become Increasingly reliant on banking 

organizations lo provide credit formerly provided or facilitated by purchasers of securities. Lending to 

creditworthy borrowers provides sustainable returns for the lending organization and is constructive for 

the economy as a whole. 

It is essential that banking organizations provide credit in a manner consistent with prudent lending 

practices and continue to ensure that they consider new lending opportunities on the basis of realistic 

asset valuations and a balanced assessment or borrowers' repayment capacities. However, If 

underwriting standards tighten excessively or banking organizations retreat from making sound credit 

decisions, the current market conditions may be exacerbated, leading to slower growth and potential 

damage to thE1 economy as well as the long-term interests and profitability of Individual banking 

organizations. Banking organizations should strive to maintain healthy aedit relationships with 

businesses, 0:>nsumers, and other creditworthy borrowers to enhance their own financial well-being as 

well as to promote a sound economy. The agencies have directed supervisory staffs to be mindful of the 

procyclical eff1ects of an excessive tightening of credit avaUability and to encourage banking 

organizations to pradice economically viable and appropriate lending activities. 

Strengthening· capital 

Maintaining a strong capital position complements and facmtates a banking organiZation's capacity and 

willingness to lend and bolsters its ability to withstand uncertain market conditions. Banking 

• -·-'"""ws/0ress/2008/pr08115.html 11/21/2008 
FDIC: Press Releases - PR• l 15-2008 l l/ l 2/2008 Page 2 of3 

organizations should focus on effective and efficient capital planning and longer-term capital 

maintenance. An effective capital planning process requires a banking organization to assess both the 

risks to which it is exposed and the risk management processes in place to manage and mitigate those 

risks; evaluate its capital adequacy relative to its risks; and consider the potential impact on earnings 

and capital from economic downturns. Further, an effective capital planning process requires a banking 

organization lo recognize losses on bank assets and activities in a timely manner; maintain adequate 

loan loss provisions; and adhere to prudent dividend policies. 

In particular, in setting dividend levels, a banking organization should consider its ongoing earnings 

capacity, the adequacy of its loan loss allowance, and the overall effect that a dividend payout would 

have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs 

of creditworthy borrowers,. Banking organizations should not maintain a level of cash dividends that is 

inconsistent with the organization's capital position, that could weaken the organization's overall 

financial health, or that could impair its ability to meet the needs of creditworthy borrowers. Supervisors 

will continue to review the dividend policies of individual banking organizations and will take action when 

dividend policies are found to be Inconsistent with sound capital and lending policies. 

Worl<ing with mortgage borrowers 

Toe agencies expect banking organizations to work with existing borrowers to avoid preventable 

foreclosures. which can be cosUy to both the organizations and to the communities they serve. and to 

mitigate other potential mortgage-related losses. To this end, banking organizations need to ensure that 

their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while 

implementing effective risk-mitigation measures. 

Given escalating mortgage foreclosures, the agencies urge all lenders and servicers to adopt 

systematic. proactive, a·nd streamlined mortgage loan modification protocols and to review troubled 

loans using these protocols. Lenders and servicers should first determine whether a loan modification 

would enhance the net present value of the loan before proceeding to foreclosure, and they should 

ensure that loans currently in foreclosure have been subject to such analysis. Such practices are not 

only consistent with sound risk management but are also in the long-term Interests of lenders and 

servicers, as well as borrowers. 

Systematic efforts to address delinquent mortgages should seek to achieve modifications that result in 

mortgages that-borrowers will be able to sustain over the remaining maturity of their loan. Supervisors 

will fully support banking organizations as they work lo implement effective and sound loan modification 

programs. Banking organizations that experience challenges in implementing loss mitigation efforts on 

their mortgage portfolios or in ma]<ing new loans to borrowers should work with their primary supervisors 

to address specific situations. 

Structuring compensation 

Poorly-designed management compensation policies can create perverse incentives that can ultimately 

jeopardize the health of the banking organization. Management compensation policies should be 

aligned with the long-term prudenUal interests of the institution, should provide appropriate incentives for 

safe and sound behavior, and should structure compensation to prevent short-term payments for 

transactions with long-term horizons. Management compensation practices should balance the ongoing 

earnings capacity and financial resources of the banking organization, such as capital levels and 

reserves, with the need to retain and provide proper incentives for strong management. Further, it is 

important for banking organizations to have independent risk management and control functions. 

The agencies expect banking organizations to regularly review their management compensation policies 

to ensure they are consistent with the longer-run objectives of the organization and sound lending and 

risk management practices. 

Toa agencies will continue to take steps to promote programs that foster financial stability and mitigate 

procyclical effects of the current market conditions. However. regardless of their participation in 

particular programs, all banking organizations are expected to adhere to the principles In this statemenl 

We will work with banking organizations to facilitate their active participation in those programs, 

consistent with safe and sound banking practices, and thus to support their central role in providing 

a-edit to support the health of the U.S. economy. 

,. ...... JJwww .fdic.gov/news/ncws/press/2008/prOS l l S.html 11/21/2008 
FDIC: Press Releases -PR-115-2008 11/12/2008 ... 

Media Contacts 

FDIC 

Fed 

OTS 

occ 

Andrew Gray 

Dave Skidmore 

Bill Ruberry 

Bob Garsson 

FDIC-PR-115-2008 

### 

(202) 898-6993 

(202) 452-2955 

(202) 906-6677 

(202) 874-5770 

Page 3 of3 

l.aSI Updated 11/1212008 - commun,caflons@fdic.go., 

Home Contact Us Search J,felp SiteMap FofTI!s 

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FD.IC Office _of Inspector General 

..... _.,,utWW.fdic.gov/news/news/press/2008/prOS l l 5.html 11/21/2008 
FDII 

Federal Deoosit Insurance Corooration 

550 171h Slreet tm, Washi'1g1011, DC 20429 

Honorable Michael R. McNulty 

Representative; U.S. Congress 

827 O'Brien Fedc~I Building 

Albany. New York 12207 

Dear Congressman McNulty: 

December 4, 2008 

Thnnk you for your letter on behalf of Mr.-• Vice President oflnformed Marketing 

Services, Incorporated. 

Mr.-scnt a Jetter to our procurement staff on October 17, 2008, providing information on 

his company and its capabilities, which was used to add his firm to our Contractor Resource List 

(CRL). He was advised on October 24, 2008, that his corporation had been added to the CRL. 

There arc a large number of finns that arc now aggressively marketing to do business with the 

FDIC. We cannot guarantee that Informed Marketing Services, Inc. or any other potential 

contractor that submits a corporate capabilities statement will be included on future source lists. 

However, since Mr. ~rm has been added to the CRL. his information is available for 

consideration. 

When the FDIC begins the procurement process for goods and/or services, we use market 

research data to identify potential contractors that can provide the needed goods or services. A 

repository for this market information is our CRL. This system organizes and maintains 

corporate capability statements submitted by firms seeking business with the FDIC, and our 

program managers and contracting officers use this system to identify sources for solicitation. 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely. 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
COMMITTEE ON WAYS AND MEANS 

c-.. 

S&,c-TTH 0N S0CW. S!CUIIITT 

$u1COM .. IIU OIi ~ StCUWTT ....., F .. _,. $1.--T 

MAJORITY WNP AT-LARGE 

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w.-.,_ nr. ,os1s 1211 

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F•• :,c,. ns SQTT 

t.SHIIC'f OHCI.: 

1127 o·-• ftru,. ••- .... ...,._ ..,., y_ 1110, 

l!J'l14fS•D70D 

MICHAEL R. McNULTY 

CONGRESS OF TIIE UNITED STATES 

21 ST DISTRICT. NEW YORK 

November 13, 2008 

Ms. Alice C. Goodman 

Director, Office of Legislative Affairs 

FDIC 

550-17th Street, NW, Room 6076 

Washington, D.C. 20429 

Dear Ms. Goodman: 

The att-:.1ched corresp1:mdt=mce frc,m :-1r. 

review. 

Saelc, l71i-••.SuTt2 __ _ ,._ 12305 

151All7•-e547 

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is sent f-=,:r: yc'..lr 

I would-appreciate it if you would investigate the enclosed 

statements and forward me the necessary informatior. for reply. 

Please send your reply to my Albany office, Leo O'Brien Federal 

Bui:ding, Albany, New York 12207. 

Thank you for your consideration in this matter. 

MRM/mjs 

Enclosure 

Michael R~~ul~ 

Member of Congress 

.,._,,Let °"' l'lt.:--a ca ""1" 

111-~~+--• 

FDIC 

OFFICE OF LEGISLATIVE AFFAIRS 
L4o'6-735 

COMMI1'1XE ON Al'P.1tOPJt1A'.f'IONS 

Subcommittcc Oil Dcfcnsc 

Subcommittcc OJI Transportation, HUD, 

· and Related Agencies 

WASHINGTON. D.C. OFFICE 

2186 Raybam Building 

Washingtca. DC 20515-3509 

(202) 225-4146 

Subc:ommiuec on Agricu1mrc, 

:RinJ Devdopment. 

Fu: (202) 225-771 t 

omoontCE 

FDA and Related Agencies 

CoMMITl'U ON THE BUDGET 

DEMocRATIC S:r.l::E:JaNG AND POLICY 

One Marliimc P!ill'JI 

61hFloor 

Tokdo, OH 43ti04-l&S3 

(419) 259-7500 

{100)964-4699 

Fax: (419) 255-9623 

http:/~ 

December 5, 2008 

- . -, 

The Honorable Sheila Bair 

Chairwoman. 

F edcral Deposit Insurance Corporation 

550 17~ Street,. NW. 

Washington, DC 20429-9990 

Dear Chairwoman Bair: 

Thank you for all you arc doing to secure our nation's financial system during this 

time of economic crisis. In particular, your focus on restmcturing mortgages for 

struggling homeowners is one of few effective efforts addressing 1he root oftbis crisis. It 

is my hope that more of our policies will follow the direction you have taken at the FDIC. 

Unfortunately, the Washington-focus of the TARP to date is making the situation in our 

region worse. To this end, I would like to offer our region of Toledo and northern Ohio, 

which has been particularly bard hit by the rise in foreclosures, as a test bed against 

which to measure how well, or how poorly, the federal government's efforts to deal with 

this crisis are working. 

In Lucas County, OH, the most populous county I represent, an estimated 4,100 

· foreclosures will occur in 2008 alone. If nothing changes, another 600 families will lose 

their homes. in the Toledo area in the nexf 60 days. Based on recent foreclosure rates, this 

translates into 10% of our housing stock over the past 2.S years - an astounding figure. 

Thus, our urgency is apparent. On the eastern side of our distric~ Lorain County has 

experienced 2,089 foreclosures this year to date. The pace of foreclosures continues 

· unabated and is projected to rise next year. 

What is most troubling is that despite several bills passing Congress and being 

signed by the Bush Administration, the mortgage situation at tlie local level grows worse. 

Though foreclosures arc increasing, workouts are the exception rather than the rule. Wall 

Street banks that hold or sold these mortgages often do not manage 1heir property 

holding~ while they are frequently shipped of copper, electrical wiring, etc. Wall Street 

banks mange for auction of properties before local communities arc aware this will be 

occurring. Thus, they arc largely unprepared to bid on their own behalf. The HUD funds 

thet were to be available for such bidding have not mrived. Homes are auctioned for as 

little as $4,500. For that amount, ~ could have put the ori~ occupants back in. 

. 
Chairwoman Sheila Bair 

Page Two 

December 5, 2-008 

Something is very wrong with the manner in which the U.S. government is 

allowing equity to be bled from local communities. W-rth declining property values, local 

banks find their books out of balance, end the downward spiral continues. Your authority 

at the FDIC as well as that of the SEC's is not being exercised as in fumier fun~ to 

resolve inter-bank credit confidence and achieve mortgage wotlcoum. 

I am working with the Treasury Department to set up a tele-video conference 

between key Washington based agency officials rcspoDSJ."ble for TARP, FDIC, SEC, 

HUD, and any other appropriate parties. Your participation in such a conference would 

be most beneficial. By convening government leaders and our -local Ohio experts. our 

region will serve as an impoctant source of experience regarding the impact of this 

continuing equity hemorrhage on our economy. Our goal is to infoim and impact more 

positively those responsible for alleviating this growing housing and credit crisis. 

With the team we assemble, and those local experts who come to the table, we 

wish to answer the question: "What is it that the U.S. Government could be doing better 

to make a difference in the housing foreclosure crisis?" We stand ready to conduct this 

discussion at your earliest convenience. ~ 

Attached is the 2008 foreclosure listing for the comrtics in our district I value· 

your time and attention to this critical matter. 

Sincerely, 

MARCY 

Member of Congress . 

MK.:ja· 

Attachment 2007 and 2008 Lucas, Lorain, Erie, and Ottawa Counties foreclosure listings 
FDII. 

Federal De00sit Insurance Corooratlon 

550 17th Slreet NW, Washington, DC 20429 

Honorable Christopher J. Dodd 

Chainnan 

Committee on Banking, Housing, and 

Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Dear Mr. Chairman: 

Office of Legislative Affairs 

December 8, 2008 

Thank you for your Jetter to Chairman Bair concerning the impact of providing unlimited 

insurance coverage to noninterest-bearing transaction accounts under the Federal Deposit 

Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP). The FDIC received 

a number of similar comments during the rulemaking process. 

The Final Rule governing the TLGP, issued on November 20, 2008, provides that, assuming the 

other requirements of tqe Transaction Account Guarantee Program are met by a participating 

entity and irrespective of the standard maximum deposit insurance amount defined in the FDIC's 

regulations (presently $2_50,000), IOLTAs will be guaranteed by the FDIC in full as .noninterestbearing transaction accounts. 

Your interest in this matter is appreciated. If you have further questions, lhe Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
l/J os-ti, 'If 

IIAANEY FRANlt, MA. CMAIIIMAN tinittd .Smtt1 t\Duar or 'RqJrt1mt11tiDm 

ltommitttt on ;11nanctal ~as 

SPENCEft MCHUS, AL. RANKING MEMBER 

2129 Alpllnrn J,mt emu •11ill1in1 

Dallliugtn, BQ: m1t 

November 21, 2008 

The Honorable Henry M. Paulson, Jr. 

Seaetar:, 

Department of the Treasury 

1 S00 Pennsylvania A vc. NW 

Washington, DC 20220 

The Honorable Ben S. Bcmankc 

Chairman 

Board of Governors of the Federal Reserve 

20111 Street and Constitution Ave. NW 

Washington DC 20551 

The Honorable Steve Preston 

Secretary 

Department of Housing and Urban Development 

4S1 rtt St. SW 

Washington, DC 20410 

The Honorable Sheila C. Bair 

Chairman 

Federal Deposit Insurance CoJJ)Oration 

550 1711a Street, NW 

Washington, DC 20429 

Dear Directors of the Board of the Hope for Homeowners Program: 

I am writing to express my appreciation for the changes that were just announced to the FHA 

"Hope for Homeowners" program. and to suggest some additional modifications which I believe 

could further enhance the program and make it more uscr-fticndly. 

Since the passage of Hope for Homeowners in July, we have learned some things about the 

program and about the challenges the program was designed to address. This weclc's announced 

changes represent improvements to the program as originally established. 

Io particular. the Board's increase in the maximum loan to value (LTV) to 96.5% for borrowers 

with no more than a 31 % mortgage debt to income (DTI) ratio and no more than a 43% total DTI 

ratio should be helpful in inccntivizing greater program participation. I believe this goal could 

be enhanced by further action by the Board to raise the maximum LTV above 90-/4 to some 

extent for those boirOWcrs wbo are above these DTI levels but below the maximum DTI program 

ceilings of38% and SO% respectively. 

The announcement that the trial modification requirement will be eliminated for this latter class 

of borrowers is also a good change. which should expedite loan closings. I also believe the 

Board should act to provide some flexibility to exceed DTl ceilings on a case by case basis based 

on compensating factors, consistent with general FHA practice. 

I also commend the Board for utilizing authority granted tmder the TARP bill to authorize 

immediate payments to subordinate lien holders, to induce such holders to extinguish these liens, 

as the program requires. And. the extension of the maximum loan term to 40 years is a helpful 

step in making program loans more financially viable. 
The effectiveness of these changes could be enhanced by other administrative changes which I 

believe the Board should make to make the prog;ram more user-friendly: 

Flnt Payment Defaalt LiabDity. Hope for Homeowners establi~es full liability for loan 

originators for loan losses to any borrower that misses their first payment The Board's ,· 

implementation of this provision seems unnecessarily harsh, as it denies insurance in the case of 

a borrower who makes the first payment, but subsequently has a rolling 30 day delinquency for· 

subsequent months. If such delinquent loan has not yet been endorsed and remains 30 days 

delinquent by the fourth month, the loan can ~er be insured. This is contrary to existing FHA 

endorsement policy which allows a loan to be eligi"ble for endorsement once the loan becomes 

current even if this takes 2 years. In co,:1trast, the Board has shortened this period to four months. 

There seems to be some confusion over the statutory requirement concerning first payment 

defaults and subsequent defaults which are not covered by the statute. As a result, the Board's 

policy provides an unnecessary disincentive for potential loan originators to participate. I 

believe the intent of the statutory provision could be maintained while making its 

implementation more consistent with current FHA policy for endorsements. 

HOEPA ud TILA Complbmce. The equity and appreciation sharing transactions under Hope 

for Homeowners loans raise unresolved questions about the applicability of HOEP A, TILA. and 

other consumer lending laws that may place unnecessary legal risk on loan originators. I believe 

it would be helpful for the Fcde:ral Reserve to provide guidance regarding compliance with such 

laws in the execution of the federal government's equity and appreciation notes and mortgages. 

In this respect. it may be necessary or appropriate to make clear that such equity and appreciation 

share components are a separate transaction from the underlying first mortgage. Of course, there 

should be clear disclosures to the botTOwer about the equity and appreciation sharing 

rcquircm~ of these loans. 

HUD bas issued instruments for use by lenders in executing Hope for Homeowners loans. 

However, these instruments require originatots to warrant that HUD-created instruments comply 

with state Jaw. This shifts the rc~h cost and legal burden of the sufficiency ofHUD's own 

instruments to the lenders, which may be inhibiting the origination ofloans. I suggest that the 

HUD remove this warranty requirement 

2- to 4-11ult Properties. Hope for Homeowners made qualifying single family properties 

eligible for these FHA·Ioans. FHA single family loans by definition include 2-, 3-, and 4-unit 

properties. Unfortunately, the Boanf limited eligibility to 1-unit properties. Not only does the 

statutory legislation not restrict eligibility in such fashion. the section on the maximum Joan 

amount refcn to "a property of the applicable size .. -with the clear implication that 2- to 4-unit 

properties should be eligible to participate in the program. I suggest the Board change the 

implementing regulations to m~e such properties eligil>le. 

Thank you for consideration of these recommcndatio~ 
THF. BOARD OF DIRECTORS OF THE 

HOPE FOR HOMEOWNERS PROGRAM 

451 7th Street SW. Suite 9100 

Washington. DC 10410-8000 

DEC 2 4 axm 

The Honorable Barney Fronk 

Cl1.1innan. Contmittc~ on Financial Services 

U. S. House of Representatives 

Washington. DC ::ms 15-6052 

Deur Mr. Chainnan: 

On behalf of the Board ofDirt..-cton: (Boan.I) of the HOPE for Homeowners Program 

(Program). thank you for your November 21.1008. letter in which you expressed support for 

recently announced Program change.,; and suggested additional changes for the Board's 

considt.-ration. 

The Board is l.-Ontmitted lo implem~ting the Program and iU.:hieving ils objt.-ct1ves. 

consistent with the language and intent of the authorizing legislation. Title JV of the Housing and 

Economic R<:covery,At.1 of 2008 (HERA). This st:itute. while authorizing the Board to .. estahlish 

r<.-quirements ;:ind standards for the Program.·· is very specitic on many aspects of implementation, 

including requirements for appreciation- nnd equity-sharing and the foct that participation in the 

Program is voluntary for both homeowners and existing loan holders. As you note: in your lct!er, 

the Board recently approved several changes to the Program, such as increasing the maximum 

loan-to-value (LTV) ratio for certain borrowers. These flexibilities were made posi.ible by 

passage of the Emergency Economic Stabilization Act of 2008, and will likely qualify additional 

bom1wc:rs for the Prob,r.un. Further. they may provide the necessary incentive for lenders to 

participate in the PrugrJm. I think we can all agree that our joint goals are lo promote sustainable 

homeownership and avoid the social and economic costs of foreclosure for as many families as 

possible. 

The Board will certainly tuke your suggestions for the l'rogram under consideration. The 

Board also has rt.-ceivccl comments and n.-commcndations from lenders, sc:rviccrs, counselors :ind 

homcowm.'fS through the outreach activities conducted for the Prognun. l am pleased to note that 

at its nmsl r<.-cent mccting on December 17. 1008. the Board approvt.-<l the following changL-s to 

the Progmm: 

• 2-4 Unit Properties. The types of properties eligible for the Pnigrnm have been 

expanded lo include::?- lo 4-unil owncr-oL-cupied propcrtil!S. That change should allow 

more homiwers tu participate in the Prog.mm. especially in certain gL·ogrophic nrcus 

like the Nurtlu.~·.ist. where 2-4 unit properties are more.: t.:ummun. 

• Endorsement Timcframe. The timefrmnc for kndL.TS to obtain cndorscmt!nt for• 

Program loans has been expanded so that it is <.-onsistcnt with other FHA programs. To 

ensure that lenders comply with the first payment default prm,ision esraolishL-d in the 

law. the 13c1ard will 'continue to require the lender to include in the tile. cvidLncc that 

the borruwL-r has made the: first pa1mcnt within 120 <lays of loan closing. 
2 

• Equity Sharing. The equity sharing requirements of the Progmm have been modified 

to eliminate the: potential for a borrower to be required to share any existing equity the 

borrower may already have in the home with HUD through the PnJJ,.'Tam. 

The Board has dircct1.-d staff to make the appropriate changes to the Program regulations 

and guidance and forward them to the Otlice of Management and Budget for review and 

clearance. As soon as that proces.,; is complete, the Board will vole on publishing the regulations 

in the F1.-<leral Rcgist1.-r and issuing the finulizcd guidance documents. We will let you kno\Y as 

' soon as that has occurred. 

In your letter. you also suggested that it would be helpful for the Board of Governors of the 

Federal Reserve System (FRB) to provide guidance on the treatment of the statutory equity and 

apprcci:;ition sharing provisions of the Prut::ram umh.T lht: Truth in Lending Act (TILA), the Home 

Owners Equity Protection Act (HOEPA). and other consumer laws administered by the FRB. The 

fRB's Division of Coni;umer and Community Affair~. which is responsible for issuing interpretive 

guidan1.'C under Tl LA and HOEPA, has infonned the Board that it plans tu provide interpretive 

guidance on these issues shortly. This guidance will be posted on the Pro1:,rram·s website. 

You :ilsn rai$~ concerns about how the model Program instruments reflect compliance 

with state law. The Board notes that those instruments merely advise lenders of their 

responsibility to modify the documents as may be necessary for compliance with state Jaw. In 

addition. we understand that wcll-cstablishc:d document preparation services have modified. or are 

in the proct:Ss of modifying, the FHA model instruments for the Progrrun to the extent necessary 10 

ensure compliance with state law. FHA lenders have long used these services. The Boa.rd is 

monitoring the development and availahility ofstate-<..--ompli,mt Program docurnentation and will 

take appropriate steps if such documentation is not reasonably a_vailable to lenders. 

You further recommended that the Bciard consider: (i) raising the ma.i(.imum loan-to-value 

(LTV} ratio above 90 percent for borrowers with dcht-to-inoomc (DTI) ratios above 3 I percent for 

mortgage-related debt and 43 percent for total debt: and (ii) allowing I.he DTJ ratios to be exceeded 

on a case-by-case basis based on mmpensating factors, consistent with other FHA single family 

loan pmbrrams. As noted above, the ,Board recent!>-· amended the Pro&rrnm 's LTV and DTI 

thn.-sholds after carefully considering both the desire to make the rrogram available to borrowers 

rind the need to ensure that the new loans are sustainable. The Board will monitor the number and 

pcrfonnance of Progmm loans and may adjust Probrram requirements :is appropriate based on this 

monitoring. lnc Board will update you on any future Program changes. 

The Board appreciates your rccommcndatiuns and shares your goal of making the Prn1,,•1wn 

an atlrnctivi: rclinancing. option for both lcnut!rs anJ borrowers, um: that will hdp avoid 

forcdosurcs and provide for sustainahlc homt.'owncrship. 

Drian D. L~nt~>mcry 

Chairman 
SHEILA C. BAIR 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

December 9, 2008 

Honorable Richard J. Durnin 

United States Senate 

Washington, D.C. 20510 

Dear Senator Durbin: 

. Thank you foi; your letter and your concern for the thousands of homeowners and 

families at risk oflosing their home through foreclosure. 

· As you know, I have been a strong advocate for systematic approaches that enable 

owners and scrvicers of mortgage loans to provide affordable and sustainable modifications 

to the largest possible number of homeowners in distress. Beginning in April 2007, the 

Federal Deposit Insurance Corporation hosted a series of forums to address the growing 

problem of mortgage ~efaults and forcclos"1res. These forums were attended by a broad 

spectrum of participants from the mortgage finance and securitization industry as well as 

financial regulators and senior representatives from the Federal Reserve and Treasury 

Department. Following these forums, the FDIC urged lenders and servicers to implement 

systematic approaches to modify mortgages for homeowners at risk of default and 

foreclosure. While many have been helped, I have been disappointed that too little has been 

achieved. As we have all seen, the rapid rise in foreclosoures has had a dramatic effect on 

mortgage finance, credit availability, and our economy. 

During 2008, I have advocated stronger steps to achieve the needed help for 

homeowners. The FDIC was designated by Congress as member of the Oversight Board for 

the FHA's Hope for Homeowners program. We strongly support this approach to helping 

homeowners, but recognize that it alone wi II not be sufficient to address the problems in our 

housing markets. Other tools are needed. 

That is why the FDIC, after appoin~ent as conservator of IndyMac Bank in July 

2008, implemented a loan modification program designed to help as many IndyMac 

delinquent borrowers as quickly as possible. The program is designed to achieve affordable 

and sustainable mortgage payments for borrowers and increase the value of distressed 

mortgages by rehabilitating them into performing loans. This in tum will maximize value for 

the FDIC as well as improve returns to the creditors of the former IndyMac Bank and to 

investors in those mortgages. 

Under the IndyMac program, modifications are designed to achieve sustainable 

payments for the first mortgage at no greater than a 38 percent housing debt-to-income ratio 

(DTI), including monthly principal, interest, taxes, and insurance and as low as a 31 percent 
debt-to-income ratio. If a borrower's existing monthly payments are unaffordable, IndyMac 

will propose a modification of the loan using the following three tools: 

I. A mortgage interest rate reduction. The modified mortgage wiJJ be permanently 

capped at the Freddie Mac Weekly Primary Mortgage Market Survey Rate (Freddie 

Mac Rate) for conforming mortgages in effect when the modification is proposed. 

Interest rate reductions below the current Freddie Mac Rate may be made for a period 

of five years. The mortgage interest rate will remain at this lower rate for five yea.ts. 

After five years, the interest rate will increase by no more than 1 percent per year until 

it reaches the Freddie Mac Rate where it will remain for the balance of the loan term. 

2. If an interest rate reduction is insufficient to achieve an affordable payment, IndyMac 

may offer to extend the term for amorti7.ation of the mortgage to a maximum of 40 

years from the original date of the mortgage. 

3. If an affordable payment is not achievable through interest rate reduction or an 

extension of the amortization term, then payments on a portion of the principal 

amount can be deferred. Payments are calculated on the balance of the mortgage that 

is not deferred to achieve an affordable mortgage payment. The repayment of the 

deferred principal will be due only upon payoff of the loan. No interest will accrue on 

the deferred principal amount. 

As of the end of November, IndyMac Bank had completed over 5,554 modifications 

with many more in process. 

Based on this experience, the FDIC has discussed with the Treasury the 

implementation of a credit guaranty program, as authorized· under the Emergency Economic 

Stabilization Act {EESA), which wou]d provide financial incentives for a wide range of 

mortgage lenders and servicers to modify high-cost mortgage loans using streamlined 

protocols similar to those we are applying al IndyMac. The purpose of the proposed credit 

guaranty program would be to focus the net present value calculation away from immediate 

foreclosure and toward an analysis· of whether a loan modification is a less costly alternative. 

The credit guaranty would protect mortgage lenders and servicers for up to half of the 

downside risk of a redefault, a risk made less likely due to the requiremeqt that mortgage 

payments under modified loans be affordable under a clear, objective standard. As at 

IndyMac, the FDIC has proposed that loans modified under this process would be subject to 

verification of borrower income and occupancy status, and the modification would be 

available only for loans on owner-occupied properties. 

The FDIC also has incorporated loan modification concepts into several actions 

involving troubled banks_ In its sale ofJoans from banks placed into receivership, the FDIC 

has _long used loss sharing agreements to improve its return on the sale and has required that 

acquirers of failed banks engage in loss mitigation activities to reduce the loss exposure. 

Because loan modifications reduce losses by converting troubled loans into affordable, 

sustainable loans, the FDIC is now requiring that purchasers of residential mortgages under 

loss sharing agreements engage in loan modifications consistent with the FDIC protocols 
developed at IndyMac Federal Bank. The FDIC also recently required that Citigroup apply 

the FDIC Loan Modification Program for mortgages subject to the eligible asset guarantee 

provided to Citigroup. The FDIC intends to continue to include loan modifications as an 

integral part of future loss sharing agreements. 

We appreciate your continued interest in this matter. If you have further questions, 

please contact me at 898-6974 or Eric Spitler, Director of our Office of Legislative Affairs, at 

898-3837. . _,,, 

Sincerely, 

Sheila C. Bair 
RICHARD J. DURBIN IWNOIS 

COMMITTEE ON APPROPRIATIONS 

COMMITTEE ON "THE JUDIOARY 

COMMITTEE ON RULES 

AND ADMINISTRATION 

ASSISTANT MAJORln' 

LEADER 

ti.Rited ~tatts ~matt 

Dashington, Bd: 20510--nOf 

October 3, 2008 

The Honorable Sheila Bair 

Chairperson 

Federal Deposit Insurance Corporation 

3501 Fairfax Drive 

Arlington, VA 22226 

Dear Chairperson Bair: 

Llloi-L/1#/ JDS HART SENA"TE OFFICE Bl.lLDING WASHINGTON, DC Z051G-1J04 

12112) 2.24-2152 

TTY 1202) 22.&-a180 

230 SOUTH DEAR80RH. 38TH A.OCR 

CHICAGO, l.80504 

{l12l353-4SZ 

525 S01.JTN EIGHTH STHEET 

SPRINGFELD. IL 627tlJ 

1217) 492-4062 

7a, NORTll COURT S'71IEET 

MARION,l.'2959 

llllllt,._.12 

durbi,u,-..go,r 

Ff.DJC -, 

'"OCT - 8 2008 

.__ i 

. fflTCE ·oF LEGISLATIVE AW,~ 

I am writing to urge you to take all necessary steps to systemically address the most immediate 

cause of our cmrcnt economic crisis: the huge number of home mortgage foreclosures that 

continue to put hard-working families and their surrounding neighborhoods at risk. I am sending 

a similar letter to Chairman Bernanke, Secretary Paulson, and Director Lockhart. 

Because of recent events involving Bear Steams, IndyMac, Fannie Mae, Freddie Mac, and other 

institutions, the federal government now owns or has a controlling interest in a large percentage 

of the outstanding mortgages in America. After the President signs into law the Emergency 

Economic Stabilization Act, which was passed by the Congress today, an even larger share of the 

U.S. mortgage market will be controlled directly or indirectly by you and your colleagues. 

With that control and influence comes responsibility. You are responsible for handling your 

portion of those mortgages in a manner that assists homeowners, protects taxpayers, and 

promotes the public good. 

Foreclosures generally benefit no one: not the famiJy that is uprooted; not the mortgage owners 

who lose expected income and take a loss when the property is sold; and certainly not the 

surrounding community whose nearby properties lose mar~et value. You are in a position to 

reverse the rapid increase in foreclosures that is devastating Jocal housing markets and countless 

local communities. By facilitating a systemic restructuring of the hundreds of thousands of 

mortgages that currently cannot be paid - replacing them with modified mortgages that reflect 

the underlying value of the home and that are affordable to the homeowners - you can bring 

greater stability to the housing markets, the affected families, and the surrounding communities. 

The new stabilization bill requires you, as well as each of your colleagues, to "implement a plan 

that seeks to maximize assistance for homeowners." The bill encourages you to make 

modifications. that include "(A) reduction in interest rates; (B) reduction of loan principal; and 

(C) other similar modifications." You are required within 60 days of the bill's enactment to 

''report to Congress specific information on the number and types of loan modifications made 

and the m.nnber of actual foreclosures occuning during the reporting period." I strongly 

encourage you to use this authority aggressively and quickly, so that as many families as possible 

can stay in their homes and retum to making timely payments to their lenders. 
I look forward to your eventual reports to Congress regarding the number of loans you have 

modified, but more immediately I would like to know what policies you will put in place, or are 

considering putting in.place, to maximize assistance for homeowners through mortgage . 

modifications, which in tum will benefit taxpayers and the public good. I would appreciate your 

timely response. 

Sincerely, 

Richard J. Durbin 

United States Senator 
IL'." J1.,1i'·!:-.•. l". 

. • .. j;. -•• .. :J:. 

•• ':~' • • 'I: • .. ~-

• .. , -· : . ..; .. .I• '.· .,-:, 

.. ;_ .. :- .. :·.: 

1 ~ ... .. ••• 

. ·· ..... 

lh: I lun,,ruhk Sheila l". Uair 

Ch~1irm:m 

llnitrd States Senate 

Dl.."c:cmhcr 16 • .10IJS 

F\!i.h:rnl D1:pi1si1 lnsur:mcl! C.\1rpor-Jli(ln 

550 17th Stri.:cl. ~-\\". 

\\":1.shing111n. ()(' ~0.f~l) 

FntC i"."111h· 111' Pnipust:J Ruk111aldng Rf:-.; JD6.f-A()JS 

Dear n,airm:ul B.iir: 

.·.•:.:,,·:· .. ·_:.r. r• . 

t:tt,!f-.:~: ~f.• •• ·.~, tJr·• r ,:: ......... _ 

:r I • ,.: : 

-,•.··' '! : ·:. :..••: .. 

FDIC 

OFFICE OF LEGISLATIVE AFFAIR 

Th~mk y011 for thi: opp1>nuni1y 111 pnwidi: c:omm.:111.~ 10th~ FcJl.."ml lkpnsit lnsuram:.: 

( ·0rporati1111·s (Fl>JC) ~pcdlic n:qt11:st ,111 tht: apprup1ia1c:111;•ss 11f1n:;i1ing n:dpn,c:il Jc:posi1s 

pbt:cd 1hn,11gh :1 n.:l\\nrk <liffi:r~ntly than m1<lilional ··hrukcrc:d .. di:posit!.. 

I h:1vi: hc:ml from nunlL'mus community hanks in nur district.~. our s1.11cs. :md nation:,lly 1lwt 

FDI( .. s prl)pl1:-cJ n1lt:m:1king woulJ make il 111atL·riall~· mnri: diflii.:uh fur L·um111uni1y h.:mls to 

attr.11:1 ni:,:ilr.:J fonding for ltir.:ul loan:-. frum·li1ea) sources. I unJl!rstm1tl lh,ll !'llll have rccdvcrJ 

:1ho11t ."'\00!1 r.:mnmcnts from hankr.:rs and h.:1n~ing organir.uions wh11 rais.: serious t:<>nt:.:ms :1ho11t 

th~ prnpo:-::11. which \\11uld impose a highr.:r insuranc:c ;1.sst:ssmt:lll u11 tic-posits thal "rl' l"Um:n1ly 

incluJt.·d in thr.: dL•linition of .. br1~kcr~I di:po:-i1s:· i:,·t.·n though these <.lt:posils .m.· not i1m.:s1t:J hy 

a 1r ..ulitiLm:1l J.:1wsit broker. hut rmhcr arc cxdmng1.'I.I ,llllllllg lxmks on a rr.:dprocal h:L'iis. f'hc 

hanki:rs ar,;u~ that reciprocal cli:posit.s pl.:u:cJ through :1 h:ml.ing network comprr.:hc-nsh·dy Jifft.•r 

frum 1r:.1di1ional hrukr.:rL·J Ul.'posits in !lignilk:tnl m1J mL·,mingful w.iy:; nnd :;h11ulJ nut bl! su~jl!L'l 

"' spL·dal pr..-miums pl:11:cd nn rnl:uilc hrokt:rL·tl di.:p11sits. In light or"lhl)SI! com:,:rns. this 

prnp1.1;;al sh1.1t1IJ b,: ,,dgh~J c:m:fully . 

.-\s ~ uu m:,y kmn\·, llL'l\n,rJ..s. lilc thi: Pr1. •11w111nry l111.:rfinant'i;i} i'.°i:1 \\'ork. pn)\'iJI! s111.:h 

r~•1:ipmc:1l plac1.'lllt.'lll 1l1r11ugh thi.: l \•rtilk:uc 111" lkposit :\r.:count Ri:gistry Si.:r\"il'c (Cl ):\l{S). 

\\·c: an: inli1rmct.l that 11ini.:1y-ni11,: ('J9) pcn:.:m of the ~cl\rnrk's 2.700 t11L·rnbr.:rs arc l'ommuni1y 

hanks. Jclinc<l :1s hanks ,, ith lc:.s than S5 hill ion in :isseb. 

I :nt supporliw nf 1hl: rull! lhal CtJllllllllllity h:111ks pl:i) lt1L·:1lly .utJ in thc: cl·,mumy ;;i.:nt.·nilly. 

Cdmmtmity hanki-: makL· 111:L·tli:tl luan ..; 111 ht1t1!-L'11nltl!-., small husincs..;L·s, anti 1)thcr IC1cal ht)rrtn\"L'r.s 

1h::1 ar,: th~· cngim:s Clf L't:on,1mic gro,, th in 1.>tir c,11111m111itks. T1.1 make lhl!s.: loans . ..:nm.munity 

hanl-s nci:J It.> hi.: abk to ,11tr.1ct stahk- larg.c-J,illnr d,:pu.silS u\·ailabh: loi:ull). 

l 'on~umcr 1mct.Ttaint~ anti li:ar is a majnr fa«:111r IO \\dg.h in lhl.'SI! 1ruubkJ tinti:s. Wi: nccll 10 Ju 

:111 that WI! i.::m to huilJ t.:~llt...,um~r c,mliLkm:i.:. ·11,~ l'D.-\RS program pwvi<fos a s:ift.: mctlh•d to 

appropri:itt:I} cXlL'lld d1.•f>t."lSil ins11r.111ci: cu,·i:r:igt! It> a bro.1Jt:r rangt: of di:pusit in~lilulion 

t:U~llllllt:rs. l"hi::- i:ontiut:ncL' lr.mslatt:s inh> hiμht:r i..: .. t:1~ of li4uiJity :ll panidp:.11ing li11am:i:1l 

institllliun:.. lbt.: CD:\RS pwgmm i:; 1111 diffi:ri:nt than :1 !ting i.:~tuhli:-h~J hanki11g pra..:tici: of 

.. ,:.·.:··~.-11,;-.: ~:•1 !:~ ... •.·.~.:.:;•. 
( 'haim,.m Bair 1.clli:r 

P!l£1.' :! 

gr:mting hro:iJcr di:po!.il in.sur.mcc L"1Wi:r:1gc whl!r1.: bani.: hlllding companies ha\"c multi pk 

chani:r.s anJ lcn.·ragc each of thll$1! charh:rs ti, mitltipl); thi: d1.:posit in.sumnci: rnvi.:ragi.: fnr thdr 

C' UJ.h )1111.'rS. 

"111:1111. you for your cc\nsidcration. 

Sim:.:rdy. 
FDII 

Federal Deoosit Insurance Corooration 

550 17th Street tlW, Washington, DC 20429 

Honorable Carolyn Maloney 

Chairman 

December 17, 2008 

Subcommittee on Financial Institutions and Consumer Credit 

Committee on Financial Services 

House of Representatives · 

Washington, D.C. 20515 

Dear Madam Chairman: 

Office of Legislative Affairs 

Thank you for your comments concerning the Federal Deposit Insurance Corporation's 

Proposed Rule on Risk-Based Assessments. I can assure you we wiU carefulJy consider your 

concerns and those of the other commenters. 

We appreciate for your interest in this important issue. If you have further questions, the 

Office of Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative A ff airs 
Qrnngres.s nf tire ~f.tb §taus 

Bultingtun, Dct 20515 

The HonorabJe Sheila C. Bair 

Chairman 

Federal Deposit Insurance Corporation 

550 17th Street, N. W. 

Washington, DC 20429 

December 12, 2008 

Re: FDIC Notice of Proposed Rulemaking RIN 3064-AD35 

Dear Chairman Bair: 

We welcome the opportunity to provide this letter in response to the Federal Deposit Insurance 

Corporation's (FDIC) specific request for comments on the appropriateness of treating reciprocal 

deposits placed through a network differently than traditional "brokered" deposits. 

We have beard from numerous community banks in our districts. our states, and nationally that 

FDIC's proposed rulcmaking could make it materially more difficult for community banks to 

attract needed funding for Jocal Joans from local sources. We understand that you have received 

about 3,000 comments from bankers and banking organiz.ations who raise serious concerns about 

the proposal, which could impose a higher insurance assessment on deposits that arc currently · 

included in the definition of "brokered deposits," even though these deposits are not invested by 

a traditional deposit broker, but rather are exchanged among banks on a reciprocal basis. The 

bankers argue that reciprocaJ deposits placed through a banking network comprehensively differ 

from traditional brokered deposits in significant and meaningful ways and shouJd not be subject 

to special premiums placed on volatile brokered deposits. In light of those concerns, this 

proposal should be weighed carefully. 

We arc deeply supportive of the role that community banks play locally and in the economy 

generally. Community banks make needed loans to households, to the small businesses that arc 

the engines of economic growth. to houses of worship and to other local borrowers. To make 

these loans, community banks need to. be able to attract stable large-dollar deposits available 

locally. Reciprocal deposit placement services that enable them to do so should not be treated or 

stigmatized as "bot money." 

The bankers' concerns should be taken seriously when the FDIC Board of Directors weighs the 

proposal. 

Sincerely, 

Chair 

Subcommittee on financial Institutions 

and Consumer Credit 

Committee on Financial Services 

U.S. House of Representatives 

· gMcmbcr 

Subcommittee on Financial Institutions 

and Consumer Credit 

Committee on Financial Services 

U.S. House of Representatives 
FDII 

Federal De0osit Insurance Cor0oratlon 

550 171h Slreel tm, Washington, DC 20429 

Honorable Tim Johnson 

United States Senate 

Washington, D.C. 20510 

Dear Senator Johnson: 

Office of legislative Affan 

December 17, 2008 -

Thank you for your comments concerning the Federal Deposit Insurance Corporation's 

Proposed Rule on Risk-Based Assessments. I can assure you we will carefully consider your 

concerns and those of the other commenters. 

We appreciate for your interest in this important issue. If you have further questions, the 

Office of Legislative Affairs tan be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
8 FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, DC 20429 

SHEILA C. BAIR December 17. 2008 

CHAIRMAN 

Honorable :Mike Thc;,mpson 

House of Representatives 

Washington, D. C. 20515 

Dear Congressman Thompson: 

Thank you for your letter regarding the Federal Deposit Jnsmance Corporation's 

Temporary Liquidity Guarantee Program (TLGP). Since the announcement of the TLGP on 

October 13. 2008, the FDIC has refined the program to address industry con_cems and has 

implemented a Final Rule as well as internal policies and procedures. 

The Final Rule regarding the TLGP became effective on November 21, 2008. The 

Preamble addresses the over 700 comments that the FDIC received regarding the TLGP Interim 

Rule and Amended Interim Rule. The FDIC made numerous changes to the Final Rule to 

address the greatest concerns and problems id~tified with the TLGP as first proposed. 

The Final Rule provides that the FDIC will publish a list on its website of the eligible 

banks, thrifts, and holding companies that opt-out of the TLGP. A number ofbankers who 

commented on the Amended Interim Rule expressed the view that the FDIC's website 

publication of institutions that are not participating in the TLGP will "cast a ~ow" on such 

institutions as not having full FDIC insurance and will result in a marketing disadvantage for 

those institutions. One of the bankers noted that this result would be unfair to institutions that 

had no liquidity issues. 

., 

The FDIC continues to believe, however, that it is important that both lenders and 

depositors be able to ascertam, from one central source (the FDIC's website), whether entities 

eligi"ble to participate in the TLGP are participating in either or both components of the Program. 

The FDIC further believes that any customer confusion that might otherwise disadvantage same 

institutions could be addressed in customer disclosures provided by the institutions. Thus, the 

Final Rule concluded that the public interest is best served by publication of such a list 

Additionally. you expressed concern regarding the November 12, 2008 deadline for 

eligi"ble entitles to decide whether to participate in the TLGP. The FDIC addressed these 

concems in the Amended Interim Rule that was published on November 7, 2008. The Amended 

Interim Rule extended the deadline.to opt-out of the TLGP until December 5, 2008. The FDIC 

believes that this new deadline provides eligible entities sufficient time to evaluate the Final Rule 

that was published on November 21, 2008, and ma.kc an educated decision regarding the TLGP. 

Under the Interim Rule, if an entity decided to opt out by November 12, 2008, it would 

not be charged an assessment for participatioμ in the TLGP during this initial period Under the 
Amended Interim Rule, an eligible entity that chooses to opt out of the TLGP by the new 

deadline of December 5, 2008, would not be assessed for its participation in the program. 

However, if an eligi"ble entity chooses to remain in the program after December 5, 2008, the 

entity will be subject to certain assessments retroactive to November 13, 2008. This is 

unchanged in the Final Rule. 

You also noted that some bankers expressed concern about the fee for guaranteeing 

federal funds under the TLGP. In response to many comments, the FDIC excluded all debt with 

a maturity of 30 days or less f mcluding overnight fed funds) from the debt guarantee program 

effective December 6, 2008. We realized that the 75 basis point guarantee fee was probably too 

high for short-term money market instruments such as overnight federal funds or Eurodollars in 

relation to prevailing overnight interest rates. Furthennorc, recent market data has suggested less 

significant disruption in short-term money markets, particularly as the Federal Reserve Board 

lowers short-term interest rates and actively provides liquidity. 

The FDIC recognizes that the TLGP can only succe6d if it is implemented properly and is 

understood by the industry. Since the announcement of the TLGP, the FDIC has taken a number 

of actions to educate all necessary parties about its operation. The FDIC has created a dedicated 

webpage at www.fdic.gov/rcgulations/resources/TLGP/ to house all the TLGP information 

including a "Frequently Asked Questions" page that is updated routm.ely. These questions 

include updates from the many emails and phone calls that FDIC has answered since the 

program's inception. In addition, the FDIC has held industry, wide question and answer phone 

calls to educate the industry as to the parameters of the TLGP. The FDIC will continue these_ 

education efforts to assure that participating entities understand the FDIC's expectations for 

participants under the program and to continue to monitor the safety and solllldness of the 

institutions utilizing the program. 

I appreciate your sharing the concerns of community banks regarding the initial details 

published in the Interim Rule. I believe that the Final Rule resolves many of the industry's 

concerns and presents a more complete program to encourage liquidity in the markets. If you 

have additional questions, please contact me at (202) 898-6974 or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
MIKE TIIOMPSON 

COMMITI'EE ON WAYS AND ME.ANS 

SUac:DMNDTEE a,, HF..u.ra 

SlllK:OMMit'tEEONSELl!CT 

REvEMIE ~ues 

PERMANENT SELECT 

COMMrITEE ON INl'ElJ.lGENCE 

CHA.nu,WI, SVac:at,n,tm9! OH Tl!MOJflSM, 

HLJMAH ltm!l..lJaENcZ ANALYSIS AND 

CONGRESS OF • TIIB UNITED ST 

HOUSE OF REPRESENTATIVES 

WASHINGTON, DC 20515 

lll«)M .... sia-.sumtror 

~CAMll, 

(1117)226-9191 

317-r-STurr. Sum 1 

EuusA.CA,.S,CII 

(1117)26f."9S 

SUBc:oMMllTf.F. 

~ 

Oil bmiWoEHCI! CoMMuNm' 

MAHAGEIDIT October 31, 2008 OFFICE OF LH::!'1. UIVE AFFJ 1~) 

The Honorable Ben S. Bernanke 

Chairman 

Federal Reserve 

Twentieth and Constitution Avenue. NW 

Washington, DC 20551 

Dear Chairman Bemanke and Chainvoman Bair: 

The Honorable Sheila C. Bair 

Oiairman 

Federal Deposit Insurance Corporation 

550 Seventeenth Street, NW, Room 6076 

Washington, DC 20429 

Community banks and bankers' banks in my district have expressed concern that some recent 

actions by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) may 

actually restrict liquidity in their sector of tlie banking industry. It is critical that as the federal 

government examines ways to put the banking sector back on firm footing that you consider the 

needs of c;;ommunity _banks. · . -. , ,. 

First, th~y have questions regarding the reporting requin:ments for the In~ Final Rule to 

Federal Reserve Regulati.on D that was issued on October 9th. They support allowing pass~ 

through interest to be paid on excess reserves by oorre.wondent banks, but arc unclear how this 

xμust be reported.. What steps are ypu- going to: take t() ~larlfy this and how quickly wU}.a, -

solution be in place so that community banks can be fully informed prior to taking advantage of 

this provision? .... 

Second, the community banks and bclers• banks in my. district have expressed concern that the 

FDIC Temporary Liquidity Guarantee Program publicly lists banks that opt out of the program 

on the FDIC website. _There are a number of strong community banks that have maintained more 

than adequate e3pital levels and therefore may wish to opt out of this program. Concern has 

been expressed among these institutions that opting o~ of tb,e program may be interpreted 

negatively by depositors and local investors. This could lead to an outflow of otherwise stable 

deposits. Have you considered the impact that publicly listing banks that opt out of the program 

may have on those :financial institutions and what steps will you take to mitigate any negative 

impact? 

,. ; ·.. . ·.. . ...... ' . . . .. ; :·. . ... . 

Third, tb,e community-banks strongly support-the FDIC ~e of overnight f-ed~_Funds in 

the event-Qf.faih,lle·through November 12. However, they believe that the changes-·to the , 

guarantee program an~ the requirements for b,anks ~ ~pt-in-aftcrNovember·l-2 are overly 

complex. These banks arc rapidly approaching the Novembcr-12~ deadline but uc uaable to 

make a decision on future participation due to the complexity of the program as well as the high 

fee (which-is cutrcntly barely below the current Target Fed funds rate.) Can you please explain . . 

..... . . . . . : .. ..... 

• • • I 

. . '> ••• 

', 

. ,. :: 
why the guarantee program is scheduled to change after November 12 instead of continuing 

under the same parameters in place today? Additionally, what steps arc you taking to ensure 

community banks have all of the information they need to properly evaluate this program? 

Thank you for your attention to these issues and I look forward to your response. 

cc: Rep. Barney Frank 

MIKEmo 

Member of Congress 
FDII 

Federal DeDosit Insurance Corooration 

55017th Slreel t.lW, Washinglon, DC 20429 

Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

Washington. D.C. 20515 

D~ar Congressman Bachus: 

Office of Legislative Affairs 

December 17. 2008 

Thank you for your comments concerning the Federal Deposit Insurance Corporation's 

Proposed Ruic on Risk-Based Assessments. I can assure you we will carefully consider your 

concerns and those of the other commcnters. 

We appreciate for your interest in this important issue. lfyou have further questions, the 

Office of Legislative Affairs can be reached at (202) 898-1055: 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
~•J•JI/IJIJ,! 

LAo'6 --,qt.o 

IAANEY FR.t..NIC. MA,.C~RM.t.j,I 'li.~. J,owtt of ~tprt.5tttfatib~ Sl'El"Eff 8"04US ... L RANKING MEIIIIBER 

VTA FACSIMll.E· 

Mr. Robert E. Feldman 

_Executive Secretary 

(ammitftt on jfimmri.1 I fstrbicts 

2129 i'\.aplrum J,0111:c emcr Bu,tbiniz 

llllubmritan. me 2os1s 

December 17, 2008 

FDIC .-· 

,, 

DEC l 7 ~:::~ 

Federal Deposit Insurance Corporation 

550 Seventeenth Street, N. W. 

Wasbington,D.C. 29429 OFFICE OF LEGISLATl' E AfH,iRS I 

Re: RIN No. 3064-AD35, DEODSit Insurance Assessments 

Dear Mr. Feldman: 

In 2006, Congress passed and the President signed into law deposit insurance reform 

legislation that. together with other recent statutory changes, underpins the FDIC's proposed rule 

to update its deposit premium assessment system. I am writing to express my concern that pan 

of the FDIC's proposal may adversely affect Federal Home Loan Banlc (FHLBank) member 

institutions and customers. · 

Among other things, the FDlC's proposed rule would impose higher assessments on 

institutions that hold certain levels of FHLBank advances. This aspect of the proposal was not 

specifically authorized by the deposit insurance refonn legislation and, in fact, was the subject of 

Congressional concern. During congressional debate on the House version of deposit insurance 

reform legislation, which I authored, I voiced my concern that the FDlC's "development and 

implementation of a. new risk-based assessment system not negatively impact the cost of 

homeownership or community credit by charging higher premiums to prudently managed and 

sufficiently capitalized institutions simply because they fund mortgages iJJld other types of 

lending through advances from Federal Home Loan Banks." Cong, Record, Dec. 19, 2005, p. 

E2624. 

The FDIC proposal would charge progressively higher premiums to institutions with 

FHLB advances that equal or exc~ed 153⁄4 of their domestic deposits. Such a system assumes 

that the more advances an institution may hold, the higher the risk it poses to the Deposit 

Insurance Fund. Advances are authorized under a 1932 law, the Federal Home loan Bank Act, 

to provide .funding for housing and related credit. The Gramm-leach-BJiley Act of 1999 

affinned that mandate with regard to smaller community institutions by expanding their access to 

advances. 

The idea that asset growth through advances is risky and, therefore, should be the subject 

of increased assessments seems questionable. Some banks may not need advances but others, 

especially community banks, rely on advances to fund their appropriate lending activities 

because they simply do not have access to sufficient deposits. · 

_____ , 
Mr. Robert E. Feldman 

Pagc2 

December 17, 2008 

In the current economJc crisis, the legitimate use of advances should not be unnecessarily 

discouraged or penalized. Reasonably priced advances 'lhith shon-, medium- and long-tenn 

ma.turities are stable sources of liabilities for FHLBanlc members. In many cases institutions ar.e 

better able to match loan maturities to advances than thc_y are to deposits. ,, 

For all of these reasons. I would urge you to reconsider the wisdom of imposing higher 

deposit insurance premiums on institutions based upon their reliance on FHLB advances. 

Thank you for considering my views in this matter. 
FDII 

Federal Deooslt Insurance Corooration 

55017th Street fM, Washinglon, DC 20429 

Honorable Charles A. Gonzalez 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Gonzalez: 

6trice of Legislative Affairs 

December 17, 2()08 

Thank you for your Jetter to Chairman Bair concerning the impact of providing unlimited 

insurance coverage to noninterest-bearing transaction accounts under the Federal Deposit 

Insurance Corporation's Temporary Liquidity Guarantee Program (TLGP). The FDIC received a 

number of simi]ar comments during the rulemaking process. 

The Final Rule governing the TLGP, issued on November 20, 2008, provides that, assuming the 

other requirements of the Transaction Account Guarantee Program are met by a participating 

entity and irrespective of the standard maximum deposit insurance amount defined in the FDIC's 

regulations (presently $250,000), IOL T As will be guaranteed by the FDIC in full as noninterestbearing transaction accounts. 

Your interest in this matter is appreciated. Jf you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
;r ar:nngrt.s.s nf tlf .e lltnit.ell .§fates 

maslfington, f!lfil 20515 

November 12, 2008 

Sheila C. Bair 

Chair 

Federal Deposit Insurance Corporation 

550 Seventeenth St, NW 

Washington, D.C. 20429 

Dear Chairman Bair: . 

We are writing to respectfully request you review the Temporary Liquidity Guarantee 

Program's (TLGP) inclusion and coverage for Interest on Lawyer Trust Accounts (IOLTA). 

Created by various state supreme courts and state legislatures, and made possible by 

chh ,:es in federal banking and IRS laws, IOL TA programs provide an essential public good at 

no cc.. ' to taxpayers. These programs currently operate in all fifty states and in the District of 

Columoia and the Virgin Islands, and they are mandated in 3 7 states. Client funds that are too 

small in amount or held for too brief a period to earn interest for the client, net of bank charges 

or administrative fees, are placed in a pooled interest-bearing trust account, termed an IOLTA. 

Bank fees are paid from the interest earned on these pooled accounts, and the remainder 

of the interest generated by IOLTA accounts is distributed through local grant processes to notfor-profit organizations in each state, funding invaluable legal aid services for victims of 

domestic violence, families facing foreclosure, those affected by consumer fraud, and others, as 

well as legal education pro~ams. According to the American Bar Association, IOLTA grants 

totaled $240 million in 2007. 

However, because IOLTAs do pay interest, the TLGP Interim Rule as issued on October 

23 would not extend unlimited FDIC insurance to these accounts. We believe however, that the 

public benefit generated by IOLTAs, and the fact that the interest they pay is dedicated only to 

third-party non-profit IOL TA programs, rather than to attorney account holders or their clients, 

merits an exception in the final rule. 

We are concerned that should the interim final rule not be modified to guarantee IOLTAs 

under TLGP, lawyers would instead place their client funds exceeding $250,000 in non-interest 

bearing deposit transaction accounts in order to secure FDIC insurance, and that the muchneeded public service activities funded by IOLTA-generated interest would suffer. 

PRINTED ON RECYCLED PAPER 
Page 2 

November 12, 2008 

To preserve the benefits of the IOLTA program, we strongly urge you to provide an 

exception in the Final Rule specifying that IOLTA accounts are guaranteed unlimited deposit 

insurance through TLGP. 

Thank you for your consideration of this matter. 

Charles A. Gonzalez 

Member of Congress 

CAG: gp 

Sincerely, 

Member of Congress 
FDl8 

Federal Deoosit Insurance Corooratlon 

550 17th Slreel ~. Washington, DC 20429 

Honorable Luis V. Gutierrez 

Chairman 

Subcommittee on Domestic and International 

Monetary Policy. Trade and Technology 

Committee on Financial Services 

House of Representatives 

Washington, D.C. 20515 

Dear Mr. Chainnan: 

Office ol legislalive Affaiis 

December 18, 2008 

Thank you for your comments concerning the Federal Deposit Insurance Corporation's 

Proposed Rule on Risk-Based Assessments. I can assure you we wilJ carefully consider your 

concerns and those of the other commenters. 

We appreciate for your i~terest in this important issue. lfyou have further questions, the 

Office of Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
OE:-17-2008 18:4-<i From:LUIS U GUTIERREZ 20cZ257810 To:202 89B 3745 

LUIS V GUTIERREZ 

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December t 7. 2008 

~ongrtss of tht 1:1.nittd ;omtr.s 

t\onst or llqirrsmratint1 

DJaahingmn, 'B~ ~li-1,01 

The Hono1rable Sheila C. Bair 

Chairman 

Federal Dc:posit Insurance Corporation 

550 17th Street, N.W. 

Washingtcm, DC 20429 

Re; FDIC Notice of Proposed Rukmaking RIN 3064-AD)S 

Dear Chairman B.iir: 

HNAHCl,t,L. 

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DEC 1 7 2008 

OFFICE Of LEGISLATIVE AFFAIR~ 

I am writil:ig to express my concerns about an FDIC proposal to impose a higher insurance 

· assessment on depoi.its eurrenlly includcil in !he definition or .. brokc:rcd deposits.,. As tUITcntly 

written,. the proposal has the potential to undennine the efforts of community development ban.ks 

to improve~ the quality of life for 0pc;ople in acdit-starved neighborhoods throughout the country. 

One type C)f depo:5it being currently defined as a ... brokered deposit" is a deposit received 

through a network of banlcs on a. reciprocal basis. This type of reciprocal deposit bas proven to 

be essentiJu in providing funds needed by community development banks to make loans in 

understn'1:d eomm\mities. In no functional way iJ this type of reciprocal deposit similar to 

brokered cleposits, which can be described as volatile "hot money .. chasing the highest interest 

rates in a national market. 

As writt.CI1l. the FDIC's proposal could make it significantly more difficult for community 

dcvclopm1i:nt banks to attract needed funding. It is my understanding that the Community 

Ocvclopmient B~rs Association (CDBA) has already conveyed its concerns 10 the FDIC. 

"lbrec of Oie association's 25 members are banks in llJinois, including Shori:Bank in Chicago, the 

country's oldest and largest community development-bank. ShoreBank bilS also written the 

FDIC iodividuaUy to c:xprts~ its specific concerns. 

-lbe Promontocy lnterfinancial Network provides reciprocnl depo.~it placement through the 

Certificate: of Deposit Account Registry Service, (CDARS). The Networlc has 2,725 member 

banks acr<>ss the nation. Almost all of its members are community banks, and nearly all the 

m~mbers 11>fthc CDBA arc members of the Promontory Network as well. 

The CDBA letter noted that community development banks "m.u:e a difference - perhaps the 

difference - in the lives of tens of thousands of people in the communities we serve~ Our 
DEC-17-2008 18:44 From:LLJIS V GUTIEP.REZ 

Chairman Bair Letter 

Page2 

2022257810 To:202 998 3745 

members arc often the only source of credit and financial services in these communities. We 

make loans to build and renovate housing so that people have a decent place to live. Our 

· housing lending. in tum, spam revitalization of other housing in our neighborhoods. We mak.e 

loans to small busiJlesses so that people will have joh:l." -

The CDBA letter also explained that, to fund themselves. community development banks ·must 

frequently raise deposits from civic-minded and socially-motivated individuals and institlltions 

and that these investors invest much larger deposits when they arc assured the deposits arc 

secured. The CDBA stressed the following: "CDARS provides that assurance. .. Wilhout COARS 

as a magnet Cor attracting socially motivaled investors, we will not be able to originate loans at a 

scale sufficient to have a positive !ocial impact" 

Shore Bank wrote of its experience: "Defining CDARS Reciprocal deposits as brokered deposits 

is illogical. Tradition.al brokered deposits, in contrast to our CDARS Reciproc-.tl funds. originate 

from third parties whose customcn arc seeking to place funds at the highest rates available. 

Brokered deposits IUC a national market and banks must "pay up" to play. In contrast. no one is 

st.inding between us and our customers that choose to use CDARS. In addition, our CDARS 

deposits arc priced at or below market rates of interest .... Since CDARS cleposits act like core 

deposits. they should be treated as core deposit~, not brokered depo~ ... 

In asking whether a deposit received through a networlc of bankJ on a reciprocal basis should be. 

excluded from the definition of<'brokercd deposit" for the purposes of the proposed rule. the 

proposal pointed out that call reports do not di1tiJlsuish between CDARS Reciprocal deposits 

and brokered deposits. To that point, SboreB:mk noted: "It would be a simple matter for our 

bank to separately report its CDARS holdings if this would focilitate an exemptlon ofCDARS 

Reciprocal deposits from the brokered deposit definition." 

I st.r:ongly urge you to exempt CDARS Reciproc.al deposits from the definition of"brokered 

deposits" in this rule .. Ifthc FDIC is able to exclude CDARS Reciprocal deposits from the 

definition of brokered dcposil;;, CDJ\RS can continue to play iL" significant role in providing 

credit to neighborhood! that are starved for it. across the country and in my dislric~ and 

community development banks could continue to serve as engines of economic inclusion. 

Cbainnan 

financial Scrvice!l Subcommittee on 

Domestic and International Monetary Policy, 

Trade and Technology 
FDII 

Federal Deoosit Insurance Corporation 

55017th Street NW, Washington, DC 20429 

Honorable Dennis Moore 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman Moore: 

Office of Legislative Affairs 

December 18, 2008 

Thank you for your comments concerning the Federal Deposit Insurance Corporation's 

Proposed Rule on Risk-Based Assessments. I can assure you we wilJ carefully consider your 

concerns and those of the other commenters. 

We appreciate for your interest in this important issue. If you have further questions, the 

Office of Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

· Eric J. Spitler 

Director 

Office of Legislative Affairs 
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DENNIS MOORE 

Third District. Kansas 

http://rnoore.hauH.QOY 

December 17, 2008 

THE HONORABLE SHEILA C. BAIR. 

CHAIR.MAN 

FEDER."L DEPOSIT L"1S1.JRANCE CORPORATION 

550 17TH STREET, NW 

WASHINGTON, DC 20429-0002 

Re: FDIC Notice of Prop:md Rulemalcirig RIN 3064-ADJS 

Dear Chainnan Bair: 

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As you know. the Federal Drposit lnsumm: Corporation (FDIC) has proposed imposing a higher insurance 

assessment on dq,osiu th;tt are currently included in the clcfmition of brokered deposiu. Soll'IC of these deposits arc not 

placed by a traditional deposit broker, but rather are exchanged among banks in a network on a fully reciprocal buis. 

Deposits n:ciproQlly e:icchangcd unong a network would be considered brolccred deposits for the purposeJ of the 

FDIC proposal, whkh would mare I new system of deposit insurance premiums. The new ,ysrern would impose a 

premium S\IJ'Charge on banks using brokered deposiu .in certain til'C'umstances. The Promontory Jnterfinaneial Network 

, provides reciprocal placement of deposiu through the Ccnificate of Deposit Account 'Registry Service. More than 80 

Kansas banks are mc:tnbm of the Promontory NctWork. l understand that the FDIC has n:cei,.·cd thousands of letters, 

including l_ettcn fi-om more thu, 30 Kansas bankers, on the proposal urging the agency to exclude Certificate of Deposit 

Account Registry Servicr (CDARS) Reciprocal deposiu from the brokered deposit definition. In addition, the Kansas 

Banlcm Associatiou wrott a l~CT that expressed iu support for excluding CDARS ftom the definition. 

If imposed, the ?roposal could make it significantly more difficult for banks, and puticularly for louJ community 

banks, to obtain much-needed funding for local loans. And it would make it 111ore difficult for depositors - including 

111unicipal depositor, - to keep money in their local ~mmunitir:s. The proposal, as written, doe$ not distinguish CDAR.S 

Reciprocal deposits from standard brokered funds, even though they behave nothing like standard brokered dq>asits. 

CDAR.S deposits C'Omc !Tom local, not national, dcpositon. la fact, 10 percent of all CDARS plaC'rmenu are madi: by 

cintomm within 25 miJr:s ofcheir banlc's location. Also, the cost to "bank for CDARS R.cciproc:al deposits i1 substantially 

lcu chan stmdaTd brokc::-ed funding. CDAR.S dcposilS have a high reinvestment rate - - ?Dote than 83 percent across the 

ProIDOntory Network - unlike a standard brolceR<l deposit. 

Finally, J hope the FDIC also will take iuto acCQunt today's extraordinacy economic circumstances when finalizing. 

irs rule on deposit a.c.se:c:.ments. As you arc well aware, several of onr nation• s largest financial institutions have failed or 

bavc almost failed. Depositot$ are fearful and are seeking secure options lilcc CDARS Reciprocal in a difficult time. 1 

wou.1d mcourage the f[)JC to 1U011Sider this pro and exclude recipronl deposit services such a.s CDARS fi-om the 

defmition ofbrolccro:d deposit£. 

cO 'd nnnnnnnnnn ·nu vu , 
FDl8 

Federal Deoosit Insurance Comoration 

550 17th Slreel lffl, Washington, DC 20429 

Honorable Mel Martinez 

United States Senate 

Washington, D.C. 20510 

Dear Senator Martinez: 

Offx;e of Legislative Affairs 

December 19, 2008 

Th.ank you for your letter t6 Chairman Bair regarding an application for deposit insurance filed 

. on behalf of Florida. 

As you know. the FDIC is required to assess each application for deposit insurance relative to the 

seven statutory factors enumerated in section 6 of the Federal Deposit Insurance Act Although 

this assessment must consider the unique nature and complexity of each proposal, please be 

assured the FDIC strives to process applications within a reasonable time, given the facts and 

circumstances of the application. 

Your interest in this matter is appreciated. If you have further questions, the Office of 

Legislative Affairs can be reached at (202) 898-7055. 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
MEL MARTINEZ 

FlDRll>A 

1202) 224-3041 

The Honorable Shelia Bair 

Chairman 

ilnittd -~ratt.s oSmatt 

WASJ,flNGTON, DC 20510--0906 

November 24, 2008 

Federal Deposit Insunmcc Corporation 

550 17th Street, NW 

Washington, DC 20429 

Dear Chairman Bair: 

~ 

ARMED SERVICES 

ENERGY AND NATURAL RESOURCES 

SPECIAL COMMITTEE ON AGING 

BANICING, HOUSING. AND 

URBAN AFFAIRS 

I am writing in regards to an application submitted to the FDIC bJ. 

filed a charter for a State of Florida chartered ~~unity bank on March 

4, 2 , was nT!li,nT11•

11 conditional approval. {j Ji:> currently awaiting approval by 

the FDIC and has tW informi}y a case manager that the earliest that approval may come is 

December 31,200 Offering Circular expires on January 31, 2009. Given the 

statutory requirement to provide ten days notice prior to a shareholder's meeting, the latest the 

bank could receive approval without running the risk of their Offering failing would be January 

19, 2009. 

I would appreciate any information you could pro~de on the ~ . i ~ application. I understand the extraordinary circumstances the FDIC is cw-re y operating under, 

and I know we share the common goal of cnsming a safe and sound banking system. I look 

forward to your update. 

Sincerely, 

Mel Martinez 

United States Senator 
SHEILA C. BAIR 

CHAIRMAN 

Honorable Vernon J. Ehlers 

House of Representatives 

Washington, D.C. 2051 S 

Dear Congressman Ehlers: 

FEDERAL DEPOSIT INSURANCE CORPORATION, Washington. oc 20429 

December 30, 2008 

~v l~:Yl 

L."" 

Thank you for contacting me about application to the Troubled 

Asset Relief Program's (TARP) Capital Purchase Program. As you may know, the Federal Deposit 

Insurance Co'l'Oration is actively engaged with the U.S. Department of Treasury (Treasury) and the other 

federal banking agencies in considering TARP applications filed by banking institutions. In our role as 

primary federal supervisor for state nonmember·institutions, the FD[C makes a recommendation on each 

! ARP application it receives to the Treasury which ultimately determines if an institution may participate ~-

m the Program. ;:) L".\ / </, 

The FDIC has received a TARP applicaiion from which is being l\l :-)\) 

processed by our Chicago Region~! Office. Our Chicago stafTis evaluating the application and has been L\1 

in communication with Bank management. However, we have not completed our review or arrived at a 

recommendation to forward to Treasury. When our Chicago staff completes its analysis of the Bank's 

application. the results of this analysis will )?c _considered by the FDIC's Washington Office which makes 

a recommendation lo the Treasury. Once a determination has been reached, the Bank will be notified of 

the disposition of its applicatitm. · 

I agree with you that TARP program capital subscriptions arc necessary during this challenging 

time to keep credit available for consumers and businesses in Michigan and across the nation, The FDIC 

expects banks will use these funds to au~t capital and responsibly make loans in their communities as 

a means of stimulating economic growth. 

The FDIC's executive coordinator of our TARP project, Steven Fritts, met with the Michigan 

Bankers on December 5, 2008 in Dearborn. Michigan. I understand that Mr. Fritts had a good dialogue 

with your constituent banks and provided useful information about this program. 

If you have additional questions, please contact me at (202) 898-6974 or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
12-04 08;03:27PM, 

• 

J..Aog-,zo 

Q1Jngrms afthr: 'linittd ~mtm of 2lmmEa----

'!tnDJr of 'Rcprrsrnl:Btiors [ FDIC 

Heery M. Paulson, Jr. 

Secretary of the Treasury 

Department of the T.reasUIY 

1500 Pennsylvania Avenue NW 

Washington, D.C. 20220-0002 

VL4 FACSIMIJJE 

D=mbcr 4. 2008 . _ DEC _ • 1JIE r . 

OFFICE Of lEGISLATfVf AFFAIRS 

Sheila C. Bair 

Chairman 

Federal Deposit Insurance Corporation 

550 1yh Street, NW. MB-6028 

Washington. D.C. 20429 

v.t4 FACSIMILIE 

Dear Scactary Paulson and Chainnan Bair. 

(_~Ji) · Chairman .and Chid Executive Officer of 

located in•••••••• filed an application with the Federal Deposit Jnstuancc 

Coq,oration (FDIC) for assistance from the Capital Purchase Plan (CPP) Wlder the Troub]cd 

Asset Recovery Plan (TARP). The application was denied. I wzi1E.. to rcspcctfully request this 

application be reconsidered. ~It J 

The FDIC provided a verbal response to Mr. Illa.bout 0,. the denial ·. of his application. I I l,l ~ understand one of the reasons for - is conce:m about the Mic.ltlgan "J'-' 

economy. I certainly understand the FDIC cone~ because the Michigan economy is indeed in l\J' ~ l~ 

dire straights. However, if institutions arc denied the credit they need to operate in Michigan. I \t I 

there will be ~tended comequcnccs. ln fact, one of the s1atcd pmposcs of TARP is to provide '-

stability to and prevent dismption in the economy and financjal system. 

· s primarily a commercial lending institution and. as sucb, a number of 

small businesses in West Michigan rcJy upon-foi their lines of credit and 

business loans. Many banks in Michigan have~ lines of credit md loans for small 

busmcsses. ~ the final life line for many 'Sm.all businesses. The failure of 

more small ~ ~an•s economic situation. I urge you to consider 

this argument in reviewing~pplication. 

SCIUICSANIITEOtNGUICl'f'Cl:t-. ,.__,..._TIDN_Cll~c:o-mu ~~':lDN~ 

Eouc,.'DQM Nm Luall c-n.. 
,~-04-0a:03:27PU; 

Henry M. Paulson, Jr. 

December 4, 2008 

Pagel 

Smaller, locally focused banks are in dire need of assistance from .the TARP program. I 

hope we can work together to provide the necessary liquidity to~ the 

businesses it services to prevent further disruption in the Michigan economy. 

I look forward to your reply. 

Sincerely, 

Vrmo~ 

Member of Congress 

VJE:jd 

' 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, oc 20429 

SHEILA C. BAIR December 30, 2008 

CHAIRMAN 

Honorable Vernon J. Ehlers 

House of Representatives 

V,rashington, D.C. 20515 

Dear Congressman Ehlers: 

Thank you for contacting me about~ofMichigan's application to the Troubled 

Asset Relief Program's (TARP) Capital Pu~ As you may know, the Federal Deposit 

Insurance Corporation is actively engaged with the U.S. Department of Treasury (Treasury) and the other 

federal banking agencies in considering TARP applications filed by banking institutions. In our role as 

primary federal supervisor for state nonmember institutions, the FDIC makes a recommendation on each 

TARP application it receives to the Treasury which ultimately determines if an institution may participate 

in the Program. 

The FDIC has received a TARP application fromE llli\ofMichigan which is being 

processed by our Chicago Regional Office. Our Chicago s is evaluai?n'g the application and has been 

in communication with Bank management. However, we have not completed our review or arrived at a 

recommendation to forward to Treasury. When our Chic:ago staff completes its analysis of the Bank's 

application, the results of this analysis will be considered by the FD IC' s Washington Office which makes 

a recommendation to the Treasury. Once a determination has been reached, the Bank will be notified of 

the: disposition of its application. 

I agree with you that TARP program capital subscriptions are necessary during this challenging 

time to keep credit available for consumers and businesses in Michigan and across the nation. The FPIC 

expects banks will use these funds to augment capital and responsibly make loans in their communities as 

. a means of stimulating economic growth. 

TI1e FDJC's executive coordinator of our TARP project, Steven Fritts, met with the Michigan 

Bankers on December 5, 2008 in Dearborn, Michigan. I understand that Mr. Fritts had a good dialogue 

with your constituent banks and provided useful infonnation about this program. 

If you have additional questions, please contact me at (202) 898-6974 or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
12-04-08,D3!27PU; # ✓ 3 

• 

Lllog-,z.o 

~grr.ss of thr 1:lnittd ~tarts of ~mmm-----

iRno.st of 'RrprmntatiDts fDJC 

Henry M. Paulson. Jr. 

De~ber 4, 2008 

Sheila C. Baic 

Chairman 

OFFICE OF LEGISLATIVE AFFArRS 

Secretary of the Treasury 

Department of the Treasury 

1500 Pennsylvania Avenue NW 

Washington, D.C. 20220-0002 

VIA FACSIMlLIE 

Federal Deposit hmmmcc Corporation 

550 17111 S1Iect, NW, MB-6028 

Washington,D.C.20429 

Ji'1A FACSIMILIE 

Deal" Secretary Paulson and Chairman Bair, 

r......i Chairman and Chief Executive Officer 

locat~ Michi~ filed an application with the Federal Deposit Insurance 

Coipotation (FDIC) for assistance from the Capital Purchase Plan (CPP) uru:ler the Troubled 

Asset Recovery Plan (TARP). The application was denied. I write to respectfully requcd: this 

application be reconsidered. 

The FDIC provided a verbal response ~bout the denial of his application. I 

understand one of the reasons rent••••· demal is conccm about the Michigan 

economy. I certainly understand FDIC concerns, beca:usc the Michigan economy is indeed in 

due straights. However, if institutions are denied the credit they need to operate in Michigan. · 

there will be unintended consequences. In fact. one of the s1atcd pU1pOscs of TARP is to provide 

stability to and prevent disruption in the economy and financial system. 

Tl i is primarily a commgiaI lending institution and, as ~ch, a number of . 

small im'.:messes in West Michigan rely upo~ J for their lines of credit and · 

business loans. Many banks in Michigan have already called m lines of credit and loans for small 

businesses. ....... remains the final life line for many small businesses. The failure of 

more small wincsses will t improve Michigan's economic situation. I urge you to consider 

this argument in reviewing --• application.. 

· The FDIC also mentioned tbicc other reasons for the denial o~ 

application. These include a concern about high evcl of brokered .deposits. It is my 

undC{Stallding the cxaminatiom by the FDIC o has been consistently positive .. 

Farther, the FDIC was concerned wit1l'- quality.-curiently has 

non-perlbrming assets approximately ~ 2.25%. ease elaborate ~teila used to 

detern,ine asset qualif& and bow it aey!ies to the decision FDIC has made in this instance. The 

final matter concern ~ ~ p.-ofitabili1 f!!I j · !ldicatcd he expects a profit for 

the third and fourth quartezs of this year. 

Scn;;NCE NIDTECHNCII.DI.YO>MMmn TIIANSr'OIITAT!CN AND I~ Ct,w,tmu H~~"llCIN COMMri 

EDUC4110N AN!) LuDA CoNMrn& 
12-04-0S;03:27PM: 

Henry M. Paulson, Jr. 

Decc:mhcc 41 2008 

Pagc2 

Small.er. locally focused banb arc in dire need of ass· e from the TARP program. I 

hope we can WOik togethcc to provide the necessary liqllidity to 

businesses it services to prevent further disruption in the Mi~·., ...... 

the 

r· look forward to your reply. 

Vernon J. 

Member of Congress 

VJE:jd 

' 

... 3/ 
- FEDERAL DEPOSIT INSURANCE CORPORATION, Washington. DC 20429 

SHEILA C. BAIR 

CHAIRMAN 

Honorable Randy Neugebauer 

House of Representatives 

Washington, D.C. 20515 

Dear Congressman N eugebauez:: 

December 31, 2008 

Thank you for your letter regarding the potential taxpayer exposure arising from 

· the federal government's recent efforts to stabilize the financial system. I appreciate your 

concern about the very serious problems facing the economy and financial markets and 

about the need for the government to fully and clearly account for actual and potential 

costs to taxpayers. 

Your letter asked for information on seven items. Four of the seven requests 

concerned issues that would be most appropriately answered by the Treasury Department 

or Federal Reserve (items 1, 2, 3, and 6). This letter provides information on the 

rcmaii:μng items in your letter. 

Q4. Exposure to the FDIC for the increase in the deposit insurance limit in the 

EESA, as well as exposure from the Temporary Liquidity Guarantee Program as it 

is implemented. 

A4: The FDIC roughly estimates that the Emergency Economic Stabilization Act 

(EES.,-\) provision raising the general coverage limit to $250,000 through the end of2009 

will temporarily increase in.sured cieposits by about 15 percent (or about $680 billion, 

based on September 30, 2008 data). As you know, EESA. also prolnoits the FDIC from 

considering this temporary increase in deposit insurance when setting risk-based 

asses~cnts for the Deposit Insurance Fund (DJF). 

With regard to the FDIC's Temporary Liquidity Guarantee Program (TLGP), the 

program has two key features. The first feature is a guarantee for new, senior unsecured 

debt issued by banks, thrifts, bank holding companies, and most thrift holding companies 

that will help institutions fund their operations. Eligi"ble entities include: 1) FDICinsured depository institutions; 2) U.S. bank holding companies; and 3) U.S. savings and 

loan holding companies that either engage only in activities that are permissible for 

financial holding companies under section 4(k) of the Bank Holding Company Act 

(BHCA) or have an insured depository institution subsidiary that is the subject of an 

application under section 4(c}(8) of the BHCA regarding activities closely related to 

banking. Bank and savings and loan holding companies must own at least one insured 

and operating depository institution. The FDIC may allow other affiliates of an insured 

depository institution to be eligible on a case-by-case basis, after written request and 

positive recommendation by the appropriate federal banking agency. 
The guarantee applies to all senior llllSecured debt issued by participating entities 

on or after October 14, 2008, through and including June 30, 2009. Short-term debt 

issued for one month or less, including overnight federal funds, will not be eligible for 

the program. Issuers will be limited in the amount of guaranteed debt they raise, which 

generally may not exceed 125 percent of senior unsecured debt that was outstanding as of 

September 30, 2008, and scheduled to mature before June 30, 2009. For eligible debt 

issued on or before June 30, 2009, coverage is only provided until the earlier of the date 

of maturity of the debt or June 30, 2012. 

The second feature. of the new program provides insurance coverage for all 

deposits in non-interest-bearing transaction accounts, as well as NOW accounts that pay 

minimal interest, at insured depository institutions unless they choose to opt out. These 

accounts are mainly payment processing accounts such as payroll accounts used by 

businesses. Frequently, such accounts exceed the current maximum insurance limit of 

S250,000. Many smaller, healthy banks bad expressed concerns about deposit outflows 

based on market conditions. 

Our current estimate of the temporary increase in deposits covered by the TLGP's 

guarantee of non-interest bearing transaction deposits is $400 billion to $S00 billion. Our 

current estimate of senior unsecured debt that could be covered under the TLGP is $500 

billion to $700 billion. The current estimate is based on the amount of senior unsecured 

debt outstanding as of September 30, 2008, as reported by entities that have opted into 

the debt guarantee program and the information the FDIC has gathered through 

discussions with participating entities. 

It is important to note that FDIC-insured institutions, not taxpayers, bear the costs 

of bank failures through the premiums that they pay to the DIF. Furthermore, the TLGP 

does not rely either on taxpayer .funding or on the DIF. Instead, program costs will be 

paid for by direct user fees and, ifncc~ary, systemic risk assessments on the industry . 

.Prc:miums for the debt guarantee are charged on a sliding scale depending on the 

length of the debt maturity. The range will be 50 basis points on debt of 180 days or less, 

and a maximum of 100 basis points for debt with maturities of one year or longer, on an 

annualized basis. 

With regard to the temporary increase in coverage for deposits in non-interest 

bearing accounts, a 10 basis point surcharge will be applied to deposits in non-interest 

bearing transaction deposit accounts not otherwise covered by the existing deposit 

insurance limit of $250,000. This surcharge will be added to the participating banks' 

existing risk-based deposit insurance premium paid on those deposits. 

QS. Costs to the FDIC for resolving failed institutions this year. 

AS. As of December 15, 25 institutions have failed this year. These institutions had 

assets just prior to their failure totaling $372 billion. Their estimated cost to the DIF is 

approximately $16 billion. 
Q7. Are there any further initiatives planned by [the Treasury, the Fed, and] the 

FDIC? 

A7: The FDIC believes that the credit guarantee provisions ofEESA can and should be 

μsed to create a program to promote systematic loan modifications, along the lines of 

those the FDIC is currently undertaking at IndyMac Federal Bank. 

The FDIC has proposed a loss sharing guarantee program whereby the 

government wil1 share up to 50 percent of the losses with lenders or investors if a 

mortgage-modified under the sustainable guidelines used at IndyMac Federal-later 

redefaults. With the government sharing the risk of future redefaults, we propose to 

reduce this risk even further by modifying the mortgages to an even more affordable 31 

percent ratio of first mortgage debt to gross income. We are open to discussion of other 

approaches to implementation with a loss sharing guarantee program, but believe that 

strong incentives are now necessary to achieve the level of modifications needed to stem 

the growth in unnecessary foreclosures. 

Over the next two years, an estimated 4 to 5 million mortgage loans will enter 

foreclosure if nothing is done. We believe that this program has the potential to reduce 

the number of foreclosures by up to 1.5 million, thereby helping to reduce the overhang 

of excess vacant homes that is driving down U.S. home prices. In addition, this approach 

keeps modified mortgages within existing securitization transactions, does not require 

approval by second lienholders, ensures that lenders and investors retain some risk of 

loss, and protects servicers from the putative risks oflitigation by providing a clear 

benefit from the modifications. 

We estimate that the cost of this program would be just under $25 billion. 

However, if this program can keep home prices from falling by just three percentage 

points less than would otherwise be the case, over half a trillion dollars would remain in 

homeowners' pockets. Even a CO!}Servative estimate of the "wealth effect'' this could 

have on consumer spending would exceed $40 billion, resulting· in a significant stimulus 

for the economy and nearly double the investment in the program. 

We appreciate your concern regarding these important efforts. If you have 

additional questions, please contact me at (202) 898-6974 or Eric Spitler, Director of 

Legislative Affairs, at (202) 898-3837. 

Sincerely, 

Sheila C. Bair 
RANDY NEUGEBAUER 

1!huDs1NcT, TDA& 

lbN429 

C..-fb.-0..UBul.DNa 

w---, DC 20515-4319 

P>aa:: (2IIZ) 2Z5-«Xl5 

F..: (2112) Z25-H1S 

_.......,. ........ -9"¥ 

,.,,.,,erwalL-.gcrv 

(:ongrtss of tbt fflnittb ~tates 

~UJt of lltpri.stntatibts 

November 14, 2008 

The Honorable Ben Be.manke 

111 ~ ... _ 

SunPZ211 

~"IX7P401 

(106) 783-1511 

15 ID SC.--, S--, 

Slm'I 

lies-TIC7V720 

(C32)214.o722 

saoc.er,.,.. 

Sumi 1111 ,,___ TIC T!H!02 

(32:J)~~· 

The Honorable Henry Paulson 

Secretary of 1he Treasury 

W asbington. DC 20220 

Cba1rman, Federal Reserve Board of Governors · 

Washington. DC 20551 

The Honorable Shelia Bair 

Chairman, Federal Deposit Insurance Corporation 

Washington, DC 20429 

Dear Secretary Paulson. Chairman Bcmank~ and Chairman Bair: 

As I prepare for the Honse Financial Services Committee hearing next week regarding oversight 

of the Emergency Economic Stabilization Act (EESA), I ask for your assistance in accounting 

foT the total exposure taxpayers now f~e due to the federal gove~nt's interventions in our 

nation's financial markets during the past year. · 

Taxpayers I represent are extremely concemed about the level of debt their government has 

taken on and financial commitments their government has made, which go far beyond the $700 

billion authorized in the EE.SA. With debate in Congress regarding further spending ."stimulus,•• 

costs could increase further. We owe it to taxpayers to present a thorough accounting of the 

exposure they face due to federal actions in an easily accessiolc and understandable format 

Certainly our financial markets and Qur economy arc facing troubling times, and our markets are 

not functioning I10rmally. However, our government's interventions in the marketplace have 

created a situation in which future generations will pay a significant price and a situation in 

which a large portion of our country's economic activity is now backstopped by the federal 

govemmenL 

I ask for your assistance in compiling a full accounting of the actual costs and taxpayer exposure 

created by the increased federal involvement in OUT economy, including: 

l) Average daily amount outstanding through the Federal Reserve's lending facilities, 

including the Discount Window. Term Auction Facility, Term Securities Lending 

Facility, Primary Dealer Credit Facility, Commercial Paper Funding Facility. Money 

Market Investor Funding Facility, actions related to the former Bear Stearns and lending 

to American International Group; 

2) Projected amount outstanding by the end of calendar year 2008 through the Federal 

R.cscrve's lending facilities listed above; 
The Honorable Paulson, Bcmanke and Bair 

November 14, 2~ 

Page2 

3) Costs and potential liabilities to the Treasury Department related to Fannie Mae and 

Freddie Mac with regard to purchases of their mortgage backed securities, purchase of 

senior pref erred stock, and the credit facility; 

4) Exposure to the FDIC for the increase in the deposit insurance limit in the EES~ as well 

as exposure from the Temporary Liquidity Guarantee Program as it is implemented; 

5) Costs to the FDIC for resolving failed financial institntions this year, 

6) Treasury's plans for using the uncommitted $410 billion from the EESA; and 

7) Any further initiatives planned by Treasury, the Fed and the FDIC. 

While we may have different views on the best policies to support our financial markets and 

economy, I think we can agree America"s taxpayers must have all the infonnation about the 

cmrent costs and future liabilities thc.§C policies have crcat.ed. Moving forward, we must all 

work together on an effective strategy to extricate the federal government from these 

commitments and empower the· marketplace to again function without a government backstop. 

Thank you for you assistance in pIO\'.iding a full accounting of the costs of oar actions. 

Randy Neugebauer 

Member of Congress 
1../l () ff- Oo I 

'lllnittd ),tBtr.s 1=t0n.st of 'Rrprcscnmtina 

~ommit~c on ;financial oStroicrH 

Tba Honorable Sheila C. Bair 

Chairman 

2U9 l\11p&11rn J,Jour emrr JJuilbina 

U111uln.nt11n, EHt 20m 

December 31, 2008 

f 

FDIC 

Federal Deposit Insuranco Corporation ,_ 560 17th Street, NW 

Washington, DC 20429 

I 

OfFJC£ OF l.EGISLATIV£ AFFAJRS 

Dear Chairman Bair: 

. The Committee on Financial Sa-vices will hold 11. meet.ing to discuas •Priorities for 

the Next Admin.ial:ration:· Use of TARP Funds mid.er EESA• at 1D a.rn. on Wednesday, 

Janwuy 7, 2009, in room 2128 Rayburn House Office Bwlding, I am writing to conimn your 

invitation to participate at this public proceeding. 

The meeting will examine the lea.aom laarnod from the Bush Adrninistration'a use of 

TARP funds, and how those leS110J1S can inmrm. decisions on TARP deployment by the 

incoming Administration. Th.a meeting will focus on the ncod to n.sa TARP funds to 

prevent mortgage forecloaures; the need to focus TARP recipients on using federal fonds to 

increase lending activity to boost the economy; proposals to provide greater accountability 

in the u.so of TARP funding; and the need for additional l;axpayar protections. such as more 

comprehensive exeautive compensation roslrlctions. 

Please address the following in your testimony, as appropriate: 

1. What additional measures ahould be talcan, through ad:minist.ra.t.ive action or 

legislatively if need be, to erunu-e that TARP funds facilitate economic recovery? 

2. Plasse provide apecifi.ca regarding how the next .Arlminiafntion might most 

affectively uae TARP funding to mitigate foreclosure• and help struggling 

homeownors. · 

3. Which additional accountability moaaures should be employod to ensure that TARP 

recipients are using fodcral funda far t.he purposes intendod by Congress? 

4. What additional conditiana (such a.a mm-e comprehensive restrictions on oxecutive 

compmaaLion and other corporat.e activities) should be placod on TARP funding to 

emu.re that the interaabl of taxpayers 8J'8 adequat.ely protected? 

Please :read tho following mat.erial carefully. It ia intended aa a guide to your rights 

and obligations as a witness under the rules of the Commit.tee on Financial Servicea. 

The Form of yo'IZr Testimony. Under the Rules or the Committee on Financio.l 

Services, each witneH who is to testify baforo th.a Committee ar its subcommittees mUBt file 

with the Clerk of the Comrnittoe a written statemont of proposed testimony of any 

reasonable length. Ple&E!e also include with the testimony a current resume summarizing 

education, experience and affiliations pertinent to th.a subject matter of the hearing. 'n:ua 

muaL be filed a.t laaat two business days before your appearance. Please not.e that changes 
The Honorable Sheila C. Bair 

Page2 

t.o the written. statement will not ba p81"l1litted after the meeting begins. Failure to comply 

with this requirement may result in the exclusion of your written testimony from. tha 

record. Your oral testimony should not exceed fiva minutes and should .smnmarlze your 

written remarks. The Chair reserves the right to oxclude from the printed reconi any 

supplmnental materials submitted with a written statement diie to ~pace limitations or 

printing ~IlSB, 

Submu~ian of your 'l'estiman.:,. Please aubmit at least 100 copies of your proposed 

written statement to tha Clark of the_ Committee .not lesa than two buaincsa deya in 

advance of your appearance. 'Iheae copies .should bo delivered to: Clerk, Committ.ea on 

Financial Servicos, 2129 Rayburn House Offic:e Building, Washington, D.C. 20516. 

Due to heightened security restrictions, many common forms of delivery experience 

significant delays in delivery to the Committee. Thia includes packages sent v:ia the U.S. 

Poatal Service, Federal Expross, UPS, and other similar carriers, which typically arrive 3 to 

5 days mter than ~rm.al. 'J'he United States Capitol Police have speci6cally requested that 

the Committee ref'uae deliveries by courior. The bast method for delivery of your testimony 

is to have an employee £ram your organization deliver yoUl' testimony in an unsoaled 

package to the address above. If you aro unable to comply wit:h this procedure, please · 

contact the Committee to discuss alternative methods for delivery of your testimony. 

The Itules of the Committee Tequire, f;o thB extent practicable, that you also submit 

your written testimony in electronic form. The preferred method of submission of testimony 

in eloctronic form is to send it via electronic mail to fsctestimony@ma.il.house.gov. The 

elec~c copy of yolll' testimony may bo in any iμajor file format, :including WordPerfecL, 

Microaoft Word, or /lSCII toxt f'or either Wm.dawa or MacintoRli. Your electromc mail 

message ahould apecify in tho subject lina the date and t:he Committee or mbcommittee 

before which you are scheduled to testify. You may also submit testimony in electronic form 

on a disk or CD-ROM at the time of d"&livery of the .copies of your written testimony. 

Submission of testimony in electronic fonn facilitates the product.ion of the printed hearing 

record and poat.ing of your teatim~r on tho Committee's Internet. site. 

Your Righta CR a Witnua. Under the Rules of the House, witnesses may be 

accompanied by their own counsel to advise them concerning their constitutional righb. I 

rosarve tho right to place any witneaa under oath. Finally, a witnosa may obtain a 

transcript copy of his testimony given in open, public seaaion, or in a closed session only 

when- authorized by tho Committee or aubcommitt.ee. However, by appearing bafure the 

Committoo or it.a IIUbcommitt.eea, you authorize the Committee to malca tec:hnical, 

grammatical, and typographical eorrections to the transcript in accordance with the rules of 

the Committee and the House. 

The Rules of the Committee on Financial Services, and the applicable rules of the 

House, are available on tho Committea'1 websit.c at http://financieJeervicea.bouso.gov. 

Copies can also be sent to you upan .request. 

The Committee on F'inonci11l Services endeavors b> make ita facilities acce3Bible to 

penons with disabilities. If :you al'8 m need of special accommodations, or have any 
Tho Honorable Sheila C. Bair 

Pages 

questions regarding special accommodations generally, please contact the Committee in 

advance of tho acheduled event (4 business days noti~ is requested) at (202) 225-4247; 

TTY: 202-226-1591; or write to the Committ.ee at the address above. 

Please, nots that space in the Committeo'a hoaring rooin is extremely limit.ad. 

Therefore, the Committee will only reaerve 1 seat for staff accompanying you durmg your 

appeanmca (a total of 2 aoats). I'n order to maintain our obligation under the Rules of the 

Houae to onsure that Committee hearings are opon to the public, we cannot deviate from 

tbia policy. 

Should you er your ata:ffhave any qu.eationa or need additional infmmation, p]oase 

contact Michael Beresik at (202) 226-4247. · 

Sincerely, 

BF/mb 

~ Tha Honorable Span.car Bachus 
FDII 

Federal Deoosit Insurance Corooration 

550 171h Slreel NW, Washilgton, DC 20429 

Honorable Carl Levin 

United States Senate 

Washington, D.C. 20510 

Dear Senator Levin: 

December 31, 2008 

Thank you for your letter to Chairman Bair regardini:1....-.application to the 

Troubled Asset Relief Program's (TARP) Capital P~ As you know, the Federal 

Deposit Insurance Corporation is actively engaged with the U.S. Department of Treasury 

(Treasury) and the other federal banking agencies in considering TARP applications filed by 

~ 

banking institutions. · 

~y 

headquartered in Troy, Michigan, is a federally chartered savings bank, 

the Office of Thrift Supervision. As the OTS will process this TARP 

application, we have taken the liberty of foiwa.rding your inquiry to the OTS. 

cc: Congressional Affairs 

Office of Thrift Supervision 

1700 G Street, N.W. 

Washington, D.C. 20552 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
DEC. 4. 2008 5: 59PM 

mnitro ~tatts £,rnatr 

The Honorable Sheila Bair 

Chauwoman 

WASHINGTON. DC 20S11H?D2 

ne"ccmbcr4,200S 

Federal Deposit Insurance Corporation 

sso 17th St._NW 

Washington. DC 20429-9990 

VIA F~mile (2D2-898-3745} 

Dear Chairwoman Bair. 

HO. 0028 P. 1 

I 

FDIC 

I 

! 

DEC - 5 ---........ i. ... • • .1.; 

-.F lEGISlATIVE AFFAlfi2j 

I tmdcrstand that the FDIC will be evaluating the application submitted by 

Inc r~· g participation in the Treasury's Ci"tal Purchase 

gr ( ") untied . is headquartered it :J! 

Michigan. At a time when ga,;i's eeonom is in dire need of inve cnt access 

to capital, it is critical that financial institutions that set'I/~ our state receive support from 

theCPP. 

Community banb such a.! [ j >lay a critical role in Micbigan•s 

ec(lnomy by supporting small bUSllleu ventares and individual cnneprcneurs who are key 

to our economic rebound. The CPP $hottld treat all ~ci.al institutions equitably, . 

regardless of their size or geographic location. For the program to be a success, it $hould 

provide stability and liquidity to a large number of smaller financial institutions, not just 

~ 

to the larger banks. That also means prompt action should be given to their requests and 

put at the end of the line behind the bigger banks. I urge you 1o give 

~appHcation all due and prompt consideration. 
FDII 

Federal Oeaosit Insurance Corooratlon 

S.."-0 17!h Siled NW, Washington. DC 20429 

Honorable Carl Levin 

United States Senate 

Washington, D.C. 20510 

Dear Senator Levin: 

December 3 l, 2008 

1) 

~\Y \.\? 

Thank you for your leucr to Chaim,an Bair regarding pplication to the 

Troubled Asset Relief Program's (TARP) Capital Purchase Program. As you know, the Federal 

Deposit Insurance Corponllion is actively engaged with the U.S. Department of Treasury 

(Treasury) and the other federal banking agencies in considering TARP applications liled by 

banking institutions. · 

• is a federally chartered savings bank, 

which is regulated by the Office of Thn upcrv1s1on. As the OTS will process this TARP 

applicaLion, we have taken the liberty of forwarding your inquiry lo the OTS. 

cc: Congressional Affairs 

Office of Thrift Supervision 

1700 G Street, N.W. 

Washington. D.C. 20552 

Sincerely, 

Eric J. Spitler 

Director 

Office of Legislative Affairs 
DEC. 9. 2008 5: 39PM 

CAI\L LEViN 

HO. 0032 '· I u 

LI} or --1v 1 

MICMIG.UI 

iinittd ~tatt.s >:,matt 

The Honorable Sheila. Bair 

Chairwoman 

WASHINGTON. DC 2051e>-22D2 

December 9, 2008 

Federal Deposit Insuranca ColJ)Ontion 

550 17th St. NW 

Washington, DC 20429-9990 

Dear Chairwoman Bair. 

I DDderst3n.d that the FDIC ma.y be involved in reviewing an application submitted 1 ~ b II!!!' -• I • . • . . ... • • thcT C "ta!Pattbas p L\;iY 

Commuoitybaoks such ·as_,lay a critic.al role in Michigan's economy. 

The CPP should treat all financial inmtUtioos equitably, regardless oftbcir size or 

geographic location. For the program to be a. success. it should provide stability and 

liquidity to a large number of smaller financial institutions. not just 1o the larger banks. 

That also means prompt action should be given to their requests and that they not be put 

at the end of the line behind the bigger banks. I urge you to give -application 

all due and prompt consideration. ·- _. . 

Sincerely, 

Carl Levin 
The ilonornhlc Shciia C. Bnir 

Chairman 

fi:1.kr.11 UepClsil lnsunmee Corporation 

:i50 17th Street. NW. 

\Va.o.;hingll)n. DC ]0429 

Dc.:ir !v1s. B::i.ir: 

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N1.m:mber 26. 2008 

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Thank you for testifying before the Committee on Banking. ! lousing. acd Urban Affairs 

on Oc1obcr 13. 2008. In 0rdcr to complete the hearing record, we would app.rcciatc your answers 

to the enclosed quc!-Tions as soon as possible. 

l'lcasc repeal the 4uestion. then your answer. single: spacing both queslilin ~nJ ans,\·er. 

Piea.se do not use ail capitals. 

Send your reply to Ms. l),1\\11 L. Ratliff. the committcc·s Chief Clerk. She w1II u::msmit 

c11pi~·s lo the appwpriate ollices. including the commill~e•s publications oftii.:e. Oue to n1m.:nt 

procedures regarding, Senate mail, it is rccomm('nJeJ Liiat you send n:plie-s via e-mail in a MS 

~.-on.I.. \Vor<lPL·rlcct or .pdf attachment lo Daw11_Ratliff£i·b:mking.sL·n:-:tc.L?11\.. 

11':,;ou hav(' any questions about this h.·tkr. pkase contact \,ls. R.1tliff a1 (202)224-3043. 

I 

CHRTSTOPHIJ{ J. DODD 

Chaim1an 

C.10/dr 
Questions for the Hearing on HTurmoil in the U.S. Credit Markets: Examining 

Recent Regulatory Responses" 

October 23, 2008 

Questions for The Honorable Sheila C. Bair, Chairman, Federal Deposit Insur.mcc 

Corporation, from Senator En7J: 

l. l was happy to note in your testimony that yot. discussc.:d the need to stop unnl!cessary 

foreclosures. You mentiont:d the fl1IC"s work as conservator oflndyMac and your 

partkipation in rhc l lope for [ lmneownership program as recent examples of your el"fort. 

Does the FDIC plan to develop a new program Lo extend loan modi lications to :i hruadcr 

pool uf mortgages than those held by IndyMac.:? I low would such a program work and 

what would its impact be on mortgage investors'! Where would the fDlC daivc 

authority for such a program'! 

' 1 las ,he FDIC givt:n any further consideration to the FDiC's own Home O-.rnership 

PrcSi:rvatiun Loan program? I helicvc this program is a good way Lo avoid foreclosures 

and !>cvcre mortgage modifications at the same time. lfthis program is no longer being 

considered. why? 
Questions for the Hearing on •'Turmoil in the U.S. Credit Markets: Examining 

Recent Regulatory Responses" 

October 23, 2008 

Questions for The Honorable Sheila C. Bair. Chairman, Federal Dtposit Insurance 

Corporation. from Senator Dodd: 

I. Pkasi: provide thl! legal justification for csLablishing. the Temporary Liquidity Guarantee 

Progr:im under the systemic risk exception [n the Federal Dcposil lnsumnce Acl. 

2. Acc.)rding to press rt::ports. the emergency actions taken by the FDIC to g1.1arantee 

unsccun:d senior debt issued hy FDIC-insured depository institi;tions h~s had 6c 

uninten<lt::d consequence of driving up the costs of borrowing for Fanni!.'. :\-foe. Fn:d<lic 

~fac and the h!deral Home Loan l:fank.s (FHI.Bs). Was U1is takl.!n into accou111 as a 

poss:ble consequence as you formulated this course of ac1ion'? 

:;_ The FFIEC has proposed a rule that ,..,·ould lower the capital risk weighting that banks 

assign to Fannie Mat: and Freddie Mac <l~bl fr~m :!Oto 10 p¢rccnl. but docs not change 

th(' treatment for Fl ILB debt. Has any e-onsider.ition been given _lo giving the same 

tn:at.ment to FHI .8 de-bt? Will FDIC-gu.rr-• .mtc¢d unsecured bank debt have a comparahlc 

risk weight? 

<l. I c01-:1mend you for ag1-rressivcly pursuing Joun modifications o!"thc lndyMat: loans that 

the fDIC now services. Please elaborate on the follov.ing three points that you make in 

your tc~timony that I want to ex.pion~ further: 

ll You state that you have established a program to sysle-matically moJify troubled 

loans that IndyMac serviced. Pie~ give us more detail,-; ahnut :his approach anJ 

!lllw it <li!Tcrs from modifying loans on a 1:ase-by-casc oasis. Is there really such a 

thing us a systematic approach to loan modification, or do you have Lo touch 

t:vc.:ry loan as you •H>uld on a case-by-cusc basis? 

o Your testimony says tha1 moJiiications arc only olforcd where ,hey arc: protitab!I'.' 

Lo lndyM~\c or investors in se~uritiz.ed or ,,..·hok loans. /\.re you finding that mtist 

nrndilications arc profitable. and if so. please t'Xplain lmw you dt'tern,ine that they 

:m: more prnfita!,lt: than for.:closun:s·? 

• You state that securiti7.ation agr~mems typically provide ser:i(.;crs \\'ilh suffi<:il!llt 

llcxibility to apply the mo<lilication approach you arc taking for the IndyMac 

lo::111~. Given this Oe.xibility. why are ~o few Joan modifications being mmk'? 

2 
Questions for the Hearing on ••Turmoil in the U.S. Credit Markets: Examining 

Recent Regulatory Rcsponsesn 

October 23, 2008 

5. Ea1.:h agency represented at the hearing has aggressively used the tools 3l thc:ir disposal in 

dealing with the crisis. However. sometimL-s the use of Lhosl! tools has led to unintended 

consequences. For instance, when the Treasury Department guaranteed :noney market 

funds. it leJ to a concern on deposit insurdllce and bank accounts. Whc:n the FDIC 

guaranteed bank debt, it had an ellect on GSE borrowing costs. which in tum directly 

affeds mortgage rates. 

Acknowledging that th!!rl! is ofll!n a need to act quickly in th!!st:: circumstances, pkas..: 

explain \\-·h~H skps and procl~sscs you have cmployed lo infom1 other ag.:nci..:s aboul 

significant actions you undertake to ensure that there arc not serious ad'\·~rse unimendcd 

c:on~quL-nccs and that your actions arc working in concert with thdrs. 

3