Borrowers at Failed FDIC-Insured Institutions: FAQs

15 March 2023 | 2:49 p.m. CT Innovative Technology Insights Blog
Author(s): Patricia J. Lane Trevor A. Mullin

On March 10, 2023, the California Department of Financial Protection and Innovation (DFPI) closed Silicon Valley Bank (SVB). Upon closure, the DFPI appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara, to which the FDIC transferred all insured SVB deposits on Friday, March 10, 2023. Subsequently on March 13, 2023, the FDIC created Silicon Valley Bank, N.A. (SVB Bridge Bank) and transferred to SVB Bridge Bank all deposits and substantially all assets and obligations of SVB. All deposits were accessible to account holders as of March 13, 2023.

In a joint statement released on March 12, 2023, the Department of the Treasury, FDIC, and Federal Reserve indicated they will make additional funding available to ensure all SVB deposits, both insured and uninsured, will be paid in full. The FDIC has indicated that all contracts entered into with SVB before its failure were transferred to SVB Bridge Bank under the receivership. Thus, borrowers and any third-party vendors remain bound by the terms of their agreements with SVB.

In the same joint statement, U.S. government regulators announced a similar systemic risk exception for Signature Bank, New York, New York (SNYB), which was closed by its state chartering authority and relaunched as Signature Bridge Bank, N.A. (SNYB Bridge Bank). The FDIC has transferred all deposits and substantially all assets and obligations of SNYB to SNYB Bridge Bank. All deposits are now accessible through SNYB Bridge Bank, and all contractual obligations with borrowers and third-party vendors of SNYB have been transferred to SNYB Bridge Bank as well.

Here are some frequently asked questions and responses:

1. I had a loan with SVB or SNYB; do I still have to make my usual payments?

The FDIC has transferred all SVB contracts to SVB Bridge Bank and has transferred all SNYB contracts to SNYB Bridge Bank. Borrowers are still bound by the terms of their contracts with SVB and SNYB. Thus, borrowers should continue to make payments and perform any other obligations with respect thereto in the same manner as they did prior to the closure of each failed bank. The FDIC has essentially “stepped into the shoes” of SVB and SNYB. The FDIC has indicated that payments may be delivered to the same address each borrower previously used. payments by check for obligations to SVB should be made payable to “Silicon Valley Bank,” and Payments by check for obligations to SNYB should be made payable to “Signature Bank.” The FDIC will send written notice for any changes in payment instructions and points-of-contact for borrowers.

The FDIC will continue to seek out potential acquirer(s) for SVB Bridge Bank and SNYB Bridge Bank. The potential acquisition or series of acquisitions of each bridge bank would likely include the sale of the loan portfolio previously held by their respective predecessor. The FDIC will notify you if your loan has been sold and assigned to a new lender.

2. What should I do if I become delinquent on loan payments?

If you become delinquent in making your loan payments or can otherwise show financial hardship, you should contact the FDIC to inquire about a loan workout program. A loan workout program proposal can be made in writing and requires you to submit current financial information and other documents requested by the FDIC as part of the proposal.

In the event a loan modification is not feasible, the FDIC reserves the right to consider a reasonable proposal to settle the debt for less than the amount currently owed. Any loan forgiveness will be reported to the IRS.

3. What is the status of my letter of credit?

The FDIC has indicated that SVB Bridge Bank and SNYB Bridge Bank remain obligated to and have the full ability to perform obligations of their predecessor’s contracts. Further, the FDIC has indicated that they intend to “continue to honor commitments…to creditworthy customers.”

It is unclear whether SVB Bridge Bank or SNYB Bridge Bank will have the ability to repudiate any existing letters of credit. Typically under a receivership, the FDIC may determine an obligation required by a letter of credit is “burdensome,” and it may elect to repudiate that letter of credit. Given this uncertainty, it may be beneficial for you to obtain a standby letter of credit backing SVB’s or SNYB’s obligations as the primary letter of credit issuer. Costs incurred from obtaining a back-to-back standby letter of credit may be included in a claim filed against SVB or SNYB.

4. Will I be able to draw on my existing line of credit?

Generally, during a receivership, the FDIC will not continue funding loans. The FDIC states on its website, “[T]he role of receiver generally precludes continuing the lending operations of a failed bank; however, the FDIC will consider advancing funds if it determines an advance is in the best interest of the receivership, such as to protect or enhance collateral, or to ensure maximum recovery to the receivership. In very limited circumstances, the FDIC will consider emergency funding needs required to ensure the short-term viability of a borrower, to protect or enhance collateral value, or for public safety.”

In a Financial Institution Letter issued by the FDIC on March 14, 2023, the FDIC indicated both SVB Bridge Bank and SNYB Bridge Bank would assume and continue to perform the contractual obligations of their respective predecessors. The FDIC has also specified that all lines of credit have been transferred from each failed bank to their respective bridge bank. Generally, borrowers have reported that they have been successful in drawing on existing lines of credit with SVB and SNYB.

5. Should I find a new lender or wait to see if my loan is sold?

It may be valuable to identify potential lenders to replace SVB or SNYB as your lender, regardless of whether your loan is sold. While the FDIC plans to sell both SVB’s and SNYB’s current loan portfolios, the terms and timelines of such sales remain uncertain.

6. What is the status of my investment account previously held through SVB?

The FDIC does not insure any nondeposit accounts and investments in other financial products that were held at or through SVB or SNYB. Under the FDIC’s receivership, the treatment of any money held in nondeposit accounts or other investments will vary depending on the terms and conditions of your underlying agreements with SVB or SNYB, as well as each failed bank’s agreements with any third-party financial institutions. Please note third-party financial institutions and other contracting party remain bound to their existing contractual obligations.

In general, if either failed bank only held assets of your investment account as custodian, you may claim a right to those assets. To have a valid claim, the underlying agreement must have clearly indicated that SVB or SNYB was only serving as custodian on your behalf. Most notably, money market mutual funds with third-party financial institutions would not be subject to the FDIC’s receivership.

7. What is the status of my money market account at SVB or SNYB?

The status of any funds held in a money market account will depend upon whether you maintain a money market deposit account or own shares of a money market mutual fund. For money market deposit accounts, funds deposited remain obligations of the bank, would be subject to the FDIC’s receivership, and would be paid in full. For money market mutual funds, any funds contributed are not considered obligations of SVB or SNYB and would not be subject to the FDIC’s receivership. If either failed bank was custodian for your money market mutual fund, you are entitled to those mutual fund shares. However, please note there may be an extensive delay before a third-party financial institution can grant you access to these mutual fund shares. If you are uncertain whether you have money market mutual fund shares or maintain a money market deposit account, you can confirm this distinction using account statements previously issued to you by SVB or SNYB. Further, individuals with money market deposit accounts likely have a separate deposit account agreement with SVB or SNYB.

8. If my deposits were subject to SVB’s cash sweep programs, can I access my money?

SVB maintained certain cash sweep programs that would regularly “sweep” cash from individual customer deposit accounts to an aggregate SVB account on a daily basis for investment purposes. If you had funds swept in the aggregate to an SVB account, you have the option to withdraw those funds.

9. How do I submit a claim as an unsecured creditor?

Submit a claim electronically through the FDIC website, by fax, or by mail to 600 N. Pearl St., Suite 700, Dallas, Texas, 75201. Address claims against SVB to the FDIC as Receiver for Silicon Valley Bank, and address claims against SNYB as to the FDIC as Receiver for Signature Bank. While certain form proofs of claim are currently available on the FDIC website, the FDIC often creates a specific form with respect to each FDIC receivership. Any such form should be made available on the FDIC website once deadlines for claims against SVB and SNYB have each been set.

10. What can my claim include?

If your claim arises in respect of replacing a letter of credit or obtaining a back-to-back letter of credit, you may be able to include in your damages claim costs incurred to obtain the new letter of credit, including associated legal fees.

11. When do I have to file my claim?

The FDIC has not yet published a filing deadline for claims against SVB or SNYB. When the FDIC does publish a deadline for claims, by statute, that deadline will not be less than 90 days after the date of that publication.

12. Will I actually get anything from my claim?

As the FDIC is currently exploring potential buyers for the assets and obligations now held by SVB Bridge Bank and SNYB Bridge Bank, it is unclear how much funding will be available to repay all claims against SVB and SNYB.

Please reach out to members of the Bank Receivership Task Force or to your Foley relationship partner if we can provide assistance.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.