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FDIC Insurance Coverage

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Question: 
Customer A has a $300,000 line of credit with a $200,000 balance that is secured by $300,000 in bank CDs. The bank is closed by FDIC. How does the FDIC consider the CDs securing a loan when figuring out insurance payouts? In this case, would the FDIC use the CDs to pay off the loan and pay the customer $50,000 in proceeds, or would they pay out $100,000 (net of CDs after the loan was paid off)?
Answer: 

See http://www.fdic.gov/consumers/banking/facts/borrowers.html, which says:

Borrowers
What happens to my loan now that my bank has failed?Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments.

In the case of a delinquent loan, the FDIC will “set off” the loan against the borrower’s deposits (if any) before paying deposit insurance. In the case of a non-delinquent loan, the depositor might elect to “set off” the loan against his/her deposits in order to receive full value for any uninsured funds (i.e., funds in excess of the $250,000 insurance limit). In either case, no “offset” is possible unless the obligations are “mutual” - meaning that the borrower and the depositor must be the same person or legal entity acting in the same legal capacity.

What happens if the FDIC sells my loan?
Loans are negotiable instruments that are routinely sold in the financial markets. When a loan is sold, the borrower retains all the rights and obligations associated with the note. The borrower will be notified by the new holder of the note and given payment instructions.

Look at FDIC 91-11. I remember this because it was interesting to me that you could have on deposit, and effectively FDIC insured, the maximum for the deposits, plus whatever was equal to a loan. The loan is setoff and then the deposits are reviewed for insurance limits. That isn't your question, but it is why I remembered this.

First published on BankersOnline.com 12/13/10

First published on 12/13/2010

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