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FDIC Advisory Letter on Loan Participations

December 9, 2015

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On November 6th, the FDIC issued an advisory letter discussing risk management practices that FDIC-supervised banks should implement with regards to purchased loans and loan participations. While the FDIC acknowledges the benefits accruing from the purchase of these loans and loan participations, such as achieving growth goals, diversifying credit risk, and deploying excess liquidity, the FDIC also recognizes that purchasing banks have oftentimes relied too heavily on lead institutions when administering these types of loans. In such a case, over-reliance on the lead banks has resulted in significant credit losses and failures of the purchasing institutions. Thus, while the FDIC reiterates its support for these types of investments, the FDIC also reminds banks to exercise sound judgment in administering purchased loans and participations.

A summary of the key takeaways from the FDIC’s advisory letter follows below:

  • Banks should create and utilize detailed loan policies for purchased loans and loan participations.  The loan policy should address various topics, including but not limited to: defining loan types that are acceptable for purchase; requiring independent analysis of credit and collateral; and establishing credit underwriting and administration requirements unique to these types of purchased loans.
  • Banks should perform the same level of independent credit and collateral analysis for purchased loans and participations as if they were the originating bank. This assessment should be conducted by the purchasing bank and should not be contracted out to a third party.
  • The agreement governing the loan or participation purchase should fully set out the roles and responsibilities of all parties to the agreement and should address several topics, including the requirements for obtaining timely reports and information, the remedies available upon default and bankruptcy, voting rights, dispute resolution procedures, and what, if any, limitations are placed on the purchasing bank.
  • Banks should exercise caution and conduct extensive due diligence when purchasing participations involving out-of-territory loans or borrowers in an unfamiliar industry. Banks should also exercise due diligence, including a financial analysis, prior to entering into a third-party relationship, to determine whether the third party has the capacity to meet its obligations to the purchasing bank.
  • Finally, banks should not forget to include purchased loans and loan participations in their audit and loan review programs and to obtain approval from the board before entering into any material third-party arrangements.
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Constitutional Challenge to Garnishment Statute

March 4, 2013

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This update is provided to our earlier post regarding the passage of HB 683 in 2012 permitting banks to answer garnishments without the need for an attorney.   As you may recall, we advised you then that there may subsequently be a challenge to the statute of on the grounds that the statute allegedly violates the separation of power principle set forth in the Constitution of Georgia.  As we predicted, Georgia Legal Services Program (“GLSP”) has recently challenged HB 683 on precisely this ground.

GLSP is challenging this law on the grounds that the General Assembly cannot define the practice of law and that defining the practice of law is instead reserved for the Supreme Court of Georgia.  Specifically, GLSP is seeking an advisory opinion from the Standing Committee on the Unlicensed Practice of Law of the State Bar of Georgia finding that only lawyers should be permitted to file answers in garnishment cases.

In its brief, GLSP states that “the Act is bad policy for all involved in garnishment proceedings because of the indispensable role that lawyers play in the administration of justice.”  GLSP further provides:  “[T]he Act, if unchecked, will establish precedent permitting the Georgia General Assembly to determine what constitutes the authorized practice of law – a power vested solely with the judiciary.”

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New Georgia Garnishment Reform Bill Allows Bank Employees to Answer Garnishments Directly

February 15, 2012

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Georgia Governor Nathan Deal recently signed into law HB 683, a bill that reforms the way in which banks and other corporations may respond to a garnishment summons.  Under the new law, banks may now use their own employees to respond to a garnishment summons and are no longer required to hire an attorney for this task.

This statute seeks to overrule a 2011 Georgia Supreme Court decision which held that corporations must use a Georgia-licensed attorney to answer garnishments, and that non-lawyer employees who responded to garnishments on behalf of their employers were engaging in the unauthorized practice of law.

If you decide to utilize non-attorney personnel to answer garnishments, as permitted by the new statute, you should keep in mind the following issues:

  • The new law only permits non-lawyers to file answers to garnishment summons.  If a traverse is filed in response to the answer, an attorney is then required to represent the bank.  A traverse is a statement filed by a plaintiff in response to the answer, claiming that the answer is untrue or insufficient.  Once a traverse is filed, the bank then must then hire an attorney to represent it further in the case.
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