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Ombudsman Report to the Industry

   •  Message from the FDIC Ombudsman
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Vol. 6, No. 1
April 2009
Ombudsman Report to the Industry
Message from Cottrell L. Webster, FDIC Ombudsman

I am pleased to present the latest in our series of online reports to the financial services industry about issues and concerns raised to the FDIC Office of the Ombudsman (OO). This report covers the period July 1, 2008 through December 31, 2008.

During the second half of the year, 643 bankers contacted the OO requesting assistance. In addition, OO staff spoke about banking matters with 65 financial industry representatives through outreach visits, telephone calls and industry-sponsored conferences. Bankers continued to express overall satisfaction with the FDIC. Their areas of concern shifted from fear of overreaction by Congress regarding subprime lending to the economy in general and the effect of increasing premiums for FDIC-insured institutions.

During this reporting period, the FDIC resolved 21 bank failures, which further elevated public concern about deposit insurance coverage. In response to this concern, Congress - with the enactment of the Emergency Economic Stabilization Act (EESA) - temporarily increased deposit insurance coverage to $250,000. In addition, the FDIC simplified deposit insurance rules and implemented the Temporary Liquidity Guarantee Program. These actions as well as other relevant banking issues are discussed in greater detail in this report.

We welcome institutions' suggestions and concerns about the FDIC in its supervisory role. The OO summarizes these comments for FDIC senior management's review - without attribution to the institutions - to eliminate the possibility of retaliation. In addition to Regional Ombudsmen, OO specialists in Washington, D.C., can provide assistance, regardless of your location. Please visit our Web site (www.fdic.gov/regulations/resources/ombudsman) for more information.

  Cottrell L. Webster
Office of the Ombudsman

Concern about the Economy

The worsening economy was the greatest single concern for bankers during the second half of 2008. The federal government has taken extraordinary steps to revive the financial services industry and the economy as a whole, some of which directly involve the FDIC.

Increased Deposit Insurance Coverage

With the enactment of the EESA, deposit insurance coverage for all deposit accounts at FDIC-insured institutions was temporarily increased to $250,000 until December 31, 2009. Temporarily raising the deposit insurance limits has bolstered public confidence in the banking system and successfully provided additional liquidity to FDIC-insured institutions.

For more information about FDIC deposit insurance visit www.fdic.gov/deposit.

Temporary Liquidity Guarantee Program

On November 21, the FDIC Board of Directors adopted a final rule for a new Temporary Liquidity Guarantee Program (TLGP) to unlock inter-bank credit markets and restore rationality to credit spreads. This voluntary program is designed to free up funding for banks to make loans to creditworthy businesses and consumers.

The program has two key features. The first is a guarantee for new, senior unsecured debt issued by banks, thrifts, bank holding companies and most thrift holding companies, which will help institutions fund their operations. The second feature of the 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 that chose not to opt out of the program.

For more information about the FDIC's Temporary Liquidity Guarantee Program visit www.fdic.gov/tlgp.

IndyMac Federal Bank Loan Modification Program

The former IndyMac Bank, F.S.B., Pasadena, California, was closed July 11, 2008, and the FDIC was appointed conservator for a new institution, IndyMac Federal Bank, F.S.B. (IndyMac Federal), which continued the depository, mortgage servicing and other operations of the former IndyMac Bank, F.S.B. until IndyMac Federal’s sale in March 2009. On August 20, 2008, while still acting as conservator, the FDIC announced a loan modification program to systematically modify troubled residential loans for borrowers with mortgages owned or serviced by IndyMac Federal. As of March 27, 2009, 13,822 loans had been modified since the program’s inception.

The program used a model to achieve mortgage payments for qualified borrowers that were both affordable and sustainable, thereby reducing future defaults, improving the value of the mortgages, and cutting servicing costs. The streamlined modification program will achieve improved recoveries on loans in default or in danger of default, and improve the return to uninsured depositors, the Deposit Insurance Fund, and other creditors of the failed institution. At the same time, many troubled borrowers can remain in their homes. Modifications were only offered where doing so would result in an improved value for IndyMac Federal or for investors in securitized or whole loans (over foreclosure), and where consistent with relevant servicing agreements.

For more information about proposals and programs put forth by the FDIC and federal government since May 2008 regarding loan modification programs visit www.fdic.gov/loanmod.

Increasing Cost of Deposit Insurance

Since the Deposit Insurance Fund (DIF) has fallen below the 1.15 percent threshold of insured deposits, the FDIC has a statutory requirement to restore the DIF to 1.15 percent within five years (absent extraordinary circumstances). Consequently, on February 27, 2009, the FDIC Board approved increases in deposit insurance premiums across all risk assessment categories, as well as a special assessment subject to public comment. While FDIC-insured institution executives typically understand the need for increased premiums for deposit insurance, they are concerned about its negative effect on earnings, capital and availability of credit.

Credit Availability

Bankers discussed two areas in which they believed that FDIC activities may cause negative pressure on credit availability, which is counter to the current need. The first area is some bankers’ perception that the FDIC has been more critical concerning the credit quality of borrowers. The second area cited by bankers is the FDIC’s encouragement of loan modifications, which bankers worry, could be viewed as a decrease in asset quality and put negative pressure on earnings.

The federal financial institution regulatory agencies responded to the first concern in the “Interagency Statement on Meeting the Needs of Creditworthy Borrowers,” issued on November 12, 2008. In this statement, the regulatory agencies emphasize that 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.” The agencies caution the banking industry about excessive tightening of credit by stating “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 well as the long-term interests and profitability of individual banking organizations.” The agencies acknowledge that institutions must strike a balance between prudent lending practices and excessive tightening of credit. To view this statement you can visit www.fdic.gov/news/news/press/2008/pr08115.html.

The FDIC’s loan modification program implemented at Indymac Federal Bank as well as the loan modification programs encouraged by the FDIC call for modifying mortgages with asset quality impairments. Therefore, these loan modification programs should be viewed as a systemic response to already existing asset quality problems and not a cause related to the existing problems.

NOTE: If you have comments or suggestions about this semiannual report, please contact FDIC Ombudsman Cottrell Webster at (703) 562-6040, or by e-mail at cwebster@fdic.gov. To receive e-mail notifications of future OO semiannual reports as soon as they are posted to the FDIC's Web site, follow the instructions at E-Mail updates.

Last Updated 04/13/2009 ombudsman@fdic.gov

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