First BanCorp in Puerto Rico Reduces Exposure to Doral

First BanCorp (FBP) in San Juan, Puerto Rico, has resolved a large outstanding loan to Doral Financial (DRL) by taking on $242 million on mortgages that were used as collateral for the loan.

The loans include nearly $234 million of first mortgages, purchased at par, and $8.4 million in second mortgages purchased at 5% of their outstanding balances, First BanCorp said in a regulatory filing late Monday. Doral, also based in San Juan, had pledged the loans as collateral for secured borrowings tied to a series of May 2006 credit agreements.

First BanCorp noted in its filing that the transaction eliminates its largest loan to a single borrower.

As consideration, FirstBancorp credited roughly $234 million as full satisfaction of the credit agreement and paid about $5,000 in cash to Doral. First BanCorp said in its filing that it is in process of determining the accounting impact of the transaction, including whether the purchases will result in a loss based on the fair values of the loans.

FirstBank said it conducted "usual and customary diligence" of the loans, including title searches, credit and collateral file reviews, and tax reviews, and the company said it hired an outside firm to conduct an extensive loan review. The agreement also includes certain protections for loans that do not conform to Doral's representations and warranties, though Doral's obligation to substitute or repurchase defective mortgages is limited to $10 million.

Doral will service the loans for up to 90 days after the deal's completion.

Doral faces an uncertain future after the Federal Deposit Insurance Corp. ordered the company to shore up capital or provide a plan for its sale or liquidation. Doral has been fighting with the Puerto Rican government over a claim to roughly $230 million in overpaid taxes. So far, the Puerto Rican government has rebuffed those claims.