The FDIC uses two forms of loss share. The first form is for commercial assets and the second for residential mortgages.
For commercial assets, the SLAs cover an eight-year period with the first five years for losses and recoveries and the final three years for recoveries only. The FDIC typically will reimburse 80 percent of losses incurred by the acquirer on covered assets up to a stated threshold amount (generally the FDIC's dollar estimate of the total projected losses on loss share assets), with the assuming bank absorbing 20 percent.
Loss coverage may also be provided for loan or note sales, but such sales require prior approval by the FDIC. Recoveries on loans which experience loss events are split, in most instances, with 20% of the recovery going to the assuming bank and 80% to the FDIC.
For single-family mortgages, the SLAs are for ten years and have the same 80/20 split as the commercial assets. The FDIC provides coverage on three basic single-family first lien mortgage loss events: modification, short sale, and when the property is sold after foreclosure. Second liens are permitted to be charged off according to regulatory criteria when the first lien is not held by the assuming bank.
Since the inception of SLAs, the basis for sharing losses with an assuming bank has undergone some change. Until March 26, 2010, the FDIC shared losses with assuming banks on an 80/20 basis until the losses exceeded an established threshold defined in the SLA, after which the basis for sharing losses shifted to a 95/5 basis. Sharing losses on a 95/5 basis was eliminated for all SLAs executed after March 26, 2010.