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A summary of the new S&L bailout legislation.

A summary of the new S&L bailout legislation The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) is the most comprehensive restructure of the United States banking system since the creation of deposit insurance. Born in an era of massive savings and loan and bank failures, congressional ethics investigations, and cries to help the homeless, FIRREA changes much more than savings and loan guidelines.

Some of the stated goals of the legislation are to promote affordable housing, improve supervision of financial institutions, curtail investments and activities that provide excessive risk to financial institution insurance funds, and provide funding to resolve the financial institution crisis. Numerous additions to an modifications of existing law will have a direct effect on the entire real estate industry.

New names you will be seeing and their functions include:

* The Savings Association Insurance Fund (SAIF), a new part of the Federal Deposit Insurance Corporation (FDIC), replaces the Federal Savings and Loan Insurance Corporation (FSLIC) as the deposit insurer for savings and loan associations. The bank insurance portion of the FDIC is the Bank Insurance Fund (BIF). Separate accounting to Congress is required for the two insurance funds.

* The Resolution Trust Corporation (RTC) is established to resolve cases of institutions that were formerly FSLIC-insured, dissolve the Federal Asset Disposition Association (FADA), and maximize recovery of acquired assets.

The RTC will contract with the FDIC for the use of FDIC employees, and the FDIC will form a Real Estate Asset Division (READ) to assist the RTC. The FDIC will operate as the exclusive manager of the RTC unless removed by the oversight board. The RTC will exist until December 31, 1996, at which time its remaining assets will be transferred to the FSLIC Resolution Fund.

* The FSLIC Resolution Fund is created to manage and hold all assets of the FSLIC that are not transferred to the Resolution Trust Corporation. The FSLIC Resolution Fund is administered by the FDIC.

* An Oversight Board composed of the Secretary of the Treasury, the Secretary of HUD, the Chairman of the Board of Governors of the Federal Reserve, and two appointed members is created to oversee the operation of the RTC.

* The Resolution Funding Corporation (REFCORP) was formed to borrow funds for the RTC. It is permitted to borrow up to $50 billion plus 85 percent of the assets of the RTC.

* The Federal Home Loan Bank Board is dissolved and replaced by the Office of Thrift Supervision, which answers to the Department of the Treasury.

By some estimates, the FDIC and the RTC will be the largest real estate owners in the United States other than the United States government itself. The dissolution of the FADA by early February 1989 and the replacement of the FSLIC with the FDIC creates one of the greatest opportunities ever for property management and other real estate professionals.

However, many new pitfalls have been created for the unwary. As a result of continual complaints from members of Congress and individuals about the operation of FADA, lack of open bidding for contracts, and self-dealing by some savings and loan personnel, language is included in FIRREA to increase fairness in contract assignment and dispositon of assets.

The RTC is required to immedaitely develop rules and guidelines to exclude conflicts of interest by contractors and insure fair-dealing in asset dispositon. Emphasis is placed on advertising, competitive bidding, and, where possible, assignment of individual properties rather than portfolios of properties to individual managers.

The contract

Before entering a contract with the RTC or the FDIC, each professional should clearly understand the new disclosure and conflict of interest rules. It may be wise to review the exact language and meaning of these rules with your attorney. Some of the rules include:

* Any contractor for the RTC is prohibited from acquiring an interest in an institution for which it has provided services. This may include acquisition of individual properties.

* Every contractor is required to take all reasonable measures to avoid unintentional or inadvertent disclosure of non-public information.

* A contractor is prohibited from using any non-public information for private gain by itself or "any person with whom it has an ongoing relationship." Special mention is made of advisers to contractors, such as their attorneys.

* The contractor must treat all information learned from its work with the RTC as non-public unless authorized in writing by the RTC. This information remains non-public until it becomes public from a source other than the contractor.

Depending upon on how broadly these regulations are interpreted, a management firm, for instance, may be barred from being the sales agent of a property that it managed or analyzed for the RTC, FDIC, or a financial institution. Release of information about any property or assignment to a potential purchaser, an appraiser, a litigant in a suit involving the property, or to the news media could be grounds for prosecution or ban from future work for the RTC, FDIC, or any federally regulated financial institution by the contracting firm.

FIRREA makes it very clear that almost any contractor who works for the FDIC, RTC, or a financial institution is "the functional equivalent of a government employee and shall be subject to the full range of sanctions that are applicable to federal government employees." As a contractor, you are considered to be an employee of the United States government for the purposes of ethics, prosecution, and criminal law.

The onerous RICO (Racketeer-Influenced and Corrupt Organizations) statutes are specifically applied to any fraudulent activity involving a financial institution. RICO was originally intended by Congress to allow law enforcement agencies to seize personal and business assets of organized crime figures in criminal cases. Exactly what constitutes a "Corrupt Organization" was not clearly defined in the law and is open to interpretation by the courts.

Within the past several years, the application of this law has been broadened with some success to include civil matters. A recent RICO suit has been filed against Charles H. Keating III, a former Lincoln Savings and Loan executive, seeking approximately $1 billion in damages.

Housing the poor

To promote low-cost housing for the underprivileged and homeless, restrictions have been placed upon the sale of both single-family and multifamily properties. Information is to be provided to a clearing house (defined to be any non-profit or public entity interested in low-income housing) as soon as possible. This announcement may be made before the property is actually placed on the market for sale.

For a period of at least 90 days after the property is placed on the market for sale, but prior to offering a residential property for sale to the general public, the RTC must offer the property to both low-income individuals and public or non-profit organizations that provide housing for low-income individuals. If no bona fide offer is received during that period, the property is then offered for sale in the open market at fairmarket value.

If a multifamily property is purchased to provide housing for low-income individuals, the law specifies that the property shall have a restriction in "the deed or other recorded instrument" requiring that the property be used to provide low-income housing for the remaining useful life of the property. This language is strengthened by the statement, "The remaining useful life of the property is not determined by tax law principles but is intended to cover the property as long as it is habitable and assumes good faith efforts by the purchaser to maintain the property and to rehabilitate it as necessary."

The sales price of a property can be "net realizable market value," which is defined to be a price reduced to reflect holding cost and other foregone costs like real estate taxes, brokerage commissions, repairs, and security costs. Seller financing can be provided by the RTC at market rate for an ordinary purchaser, and below-market rate financing can be provided to facilitate the purchase of single-family or multifamily properties for low-income individuals.

There is a restriction that requires that a property be sold at a price of at least 95 percent of market value in distressed areas. Currently, six states are classified as distressed areas. This designation is subject to change.

An appraisal subcommittee of the Federal Financial Institutions Examinations Council (FFIEC) was created by FIRREA. The subcommittee is directed to work with individual states to establish standards and other requirements for appraisals. The appraisal guidelines must meet those of the Appraisal Foundation, and guidelines for the use of each appraiser must be developed by the RTC within six months and enacted within 12 months.

The only two categories of appraisers acceptable for government valuations are defined as "state certified" and "state licensed" appraisers. State licenced appraisers are required for all financial institution transactions of less than $1 million in value, and a state certified appraiser is required for all larger appraisals.


Although the legislation has been completed and the bill has become law, it will be several months before many issues are defined or clarified. The first job assigned by Congress to the RTC is development of a business plan and adoption of regulations and standards. The plan and procedures will take time to develop and implement.

There has been a transfer of control from the old entities like the FSLIC and FADA to the FDIC. Although it appears likely that many of the personnel will be transferred to the new organizations, methods of operation and chains of command will be significantly different. There will be a long delay before the new entities are fully operational.

The massive reallocation of United States financial and real estate assets brought about by FIRREA provides almost unlimited opportunity for real estate and asset managers, financial consultants, and other professionals. The RTC and FDIC will need substantial help in cataloging, valuing, managing, and marketing their assets.

Congress has specifically indicated in the legislation that use of independent contractors is anticipated and promoted. However, government contractors must meet new standards of operation and have safeguards in place to insure that mandatory guidelines are met and compliance with the new legislative standards is documented.

Bruce Meiklejohn is an independent consultant in banking and real estate based in Fairport, N.Y., and Boulder, Colo. His activities include conducting feasibility studies, developing management plans for the restructuring of loans and real estate investments, recommending improvements in management, and evaluating the advisability of extending loans and investments. Mr. Meiklejohn holds an M.B.A. degree and a B.S. degree in accounting and is a certified public accountant.
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Title Annotation:Tax Corner; a summary of the Financial Institutions Reform, Recovery, and Enforcement Act; savings and loan
Author:Meiklejohn, Bruce
Publication:Journal of Property Management
Date:Nov 1, 1989
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