The Federal Deposit Insurance Corporation (FDIC) on November 6 issued an Advisory to update information contained in the FDIC Advisory on Effective Credit Risk Management Practices for Purchased Loan Participations (FIL-38-2012). This updated Advisory addresses purchased loans and loan participations and reminds FDIC-supervised institutions of the importance of underwriting and administering these purchased credits as if the loans were originated by the purchasing institution. The updated Advisory also reminds institutions that third-party arrangements to facilitate loan and loan participation purchases should be managed by an effective third-party risk management process. The FDIC noted that:

• some institutions are relying on lead or originating institutions and nonbank third parties to perform risk management functions when purchasing: loans and loan participations, including out-of-territory loans; loans to industries or loan types unfamiliar to the bank; leveraged loans; unsecured loans; or loans underwritten using proprietary models.

• institutions should underwrite and administer loan and loan participation purchases as if the loans were originated by the purchasing institution. This includes understanding the loan type, the obligor’s market and industry, and the credit models relied on to make credit decisions.

• before purchasing a loan or participation or entering into a third-party arrangement to purchase or participate in loans, financial institutions should:- understand the terms and limitations of agreements,- obtain necessary board or committee approvals.

• – perform appropriate due diligence, and

• – ensure that loan policies address such purchases,

• the Advisory supplements existing guidance and rescinds and replaces the FDIC Advisory on Effective Credit Risk Management Practices for Purchased Loan Participations, FIL-38-2012.