November 03, 2014

For years, community banks have acquired loan participations to diversify their loan portfolio, deploy excess capital and manage the risks associated with individual lending relationships. As a result of the recent financial crisis and the FDIC’s loss-share program, many participating banks have found themselves participants in loans held by new and unknown lenders, i.e. the FDIC or real estate investment entities and financial institutions who purchased the debt of a failed bank through the lossshare program. For participating banks, these new “lead banks” create a climate of uncertainty, because in many cases the new lender’s goals for resolving a loan are not aligned with the participants’ goals. One particular area that has caused extensive litigation between these parties is when the new lender desires for a quick foreclosure and sale of the underlying collateral. As the “lead bank,” the new lender generally has the authority and discretion as to when and how to enforce and collect on the loan. Such a foreclosure and quick sale, however, often results in the loan participants receiving much less than their percentage of the loan obligation or the fair value of the underlying collateral. That result can have devastating effects on loan participants who do not enjoy the loss-share protection available to the lead lender. 

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