Utah First CU Battles FDIC Over Loan Participations From Failed Bank

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SALT LAKE CITY – In the latest dispute over loan participations, Utah First FCU is asking a court to stop a packaged loan sale by the FDIC that includes loan participations the credit union held in a failed bank so Utah First can buy the outstanding balances on the loans.

The dispute shows how the growing number of credit union and bank failures are creating turmoil in the market for loan participations, pitting surviving credit unions and banks against failing sellers of loans; credit unions against NCUA; even credit unions against the bank regulators as they try to get their arms around the carcasses of shuttered institutions.

In a suit filed in federal court here, Utah First CU claims the FDIC misled it over a deal to buy back participation shares the Salt Lake City credit union held in a speculative Utah real estate development from America West Bank, which the banking regulator shuttered a year ago. The Utah credit union is asking the court to compel the FDIC to give it an opportunity in public auction to buy the outstanding portion of the loans.

But the FDIC , which is saddled with billions of dollars in loans from a growing stable of bank failures, says its too late to stop the packaged loan deal, which the banking regulator favors over a loan–by-loan sale to interested parties.

The FDIC argues in court documents that Congress gave it and other financial regulators extraordinary powers “depriving courts of the power to grant injunctions, specific performance, rescission and other orders that affect the receiver’s exercise of its statutory powers.”

“In the case at hand,” said the FDIC. “there is no question that the FDIC-R is “exercising” its “power and functions” as a “receiver” of the failed America West Bank in selling the (failed bank’s) loans at issue in a pooled asset sale, as opposed to allowing Plaintiff to bid specifically on them in separate online auctions.”

The suit comes amid a growing number of legal disputes surrounding loan participations. Disputes involving participations sold by failed credit unions Cal State 9 CU and Eastern Financial Florida CU. Over Norlarco FCU. Over defunct subprime auto lender Centrix Financial.

Just last week NCUA sued LorMet Community FCU to prevent the Ohio credit union from assuming servicing rights over an $11 million participation interest it bought from St. Paul’s Croation FCU, a Cleveland credit union that was closed down in May.

A lawyer for LorMet Community said Friday NCUA’s suit prevented the credit union’s dispute from going to binding arbitration, a typical procedure in such disputes. LorMet has also filed a claim with NCUA as liquidating agent for return of some $8 million of principal remaining on the loan, the lawyer said.

The growing number of disputes is raising new questions about the popular market for participations–known in banking as syndications–especially who is responsible for loans gone bad once a credit union or bank seller has been taken over by regulators. In the Ohio case, for example, NCUA claims its rights as conservator of the failed St. Paul’s Croatian FCU give it powers exceeding those enunciated in the participation agreement signed with LorMet Community. The lawyer representing NCUA in the case did not respond to a request for comment.

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