There is a common misconception among borrowers that the application of Loss-Share Agreements may result in “windfalls” to institutions that acquire assets of failed banks from the FDIC. They reason that the acquiring institution will receive both reimbursement for its losses from the FDIC and recovery from the borrowers.” However, this inaccurately depicts how Loss-Share Agreements operate.

Florida’s Second District Court of Appeal’s decision in Branch Bank and Trust Company v. Kraz, LLC provides a thorough and instructive explanation of this issue.

There, BB&T purchased Kraz, LLC’s commercial construction loan from the FDIC, which was acting as the receiver of the failed bank that originated the loan. The Loss-Share Agreement between BB&T and the FDIC provided for a stated percentage by the FDIC for BB&T’s losses on the loan, as well as a sharing of a percent of BB&T’s net recovery on that loan with the FDIC. At the conclusion of the foreclosure trial, the trial court, among other things, ordered BB&T to credit the principal of the loan with the Loss-Share payments that BB&T had allegedly received on the loan pursuant to the Loss-Share Agreement.

On appeal, the Second District reversed, noting that even if “BB&T in fact received [the alleged funds] from the FDIC for charge-offs on the Kraz loan, BB&T will not receive a windfall when Kraz makes payments on the loan because BB&T will be required to reimburse the FDIC to the extent of those payments” and that the Loss-Share Agreement “prevents such double-dipping by its own terms.” Most importantly, the Second District recognized that if borrowers were permitted to reduce principal loan balances based on Loss-Share payments, “the FDIC-regulated sales of closed banks’ assets would come to a halt” and that allowing borrowers to set-off these payments “actually results in double-dipping in reverse—with the purchasing bank being compelled to both forgive the debtor for that portion of the debt paid by the FDIC and also repay the FDIC for the forgiven amount.”