[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    OVERSIGHT OF THE FEDERAL DEPOSIT 
                   INSURANCE CORPORATION'S STRUCTURED 
                          TRANSACTION PROGRAM 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-127

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 16, 2012.................................................     1
Appendix:
    May 16, 2012.................................................    41

                               WITNESSES
                        Wednesday, May 16, 2012

Edwards, Bret D., Director, Division of Resolutions and 
  Receiverships, Federal Deposit Insurance Corporation...........     2
Fogg, Edward L., Owner, Fogg Construction Company and Fogg 
  Mortgage Company...............................................    31
Leventhal, Scott L., President and Chief Executive Officer, 
  Tivoli Properties, Inc.........................................    29
Miller, Stuart, Chief Executive Officer, Lennar Corporation......     6
Rymer, Hon. Jon T., Inspector General, Office of the Inspector 
  General, Federal Deposit Insurance Corporation.................     4

                                APPENDIX

Prepared statements:
    Miller, Hon. Gary G. (with attachments)......................    42
    Edwards, Bret D..............................................    51
    Fogg, Edward L...............................................    63
    Leventhal, Scott L...........................................    91
    Miller, Stuart...............................................   105
    Rymer, Hon. Jon T............................................   111

              Additional Material Submitted for the Record

Westmoreland, Hon. Lynn A.:
    Submission from the American Land Rights Association.........   118
    Written statement of the G&M Daniel Family Limited 
      Partnership................................................   160
    Lennar Update................................................   161
    Letter from Merolla & Gold, LLP, dated May 15, 2012..........   166
    Written statement of Bransen Patch, MD Group, LLC............   178
    Written statement of Robindale Industrial Park, LLC..........   180
    Written statement of IntuitivePAC, LP........................   181
    Montgomery County grants.....................................   230
Edwards, Bret D.:
    Written responses to questions submitted by Chairman 
      Neugebauer.................................................   235
    Written responses to questions submitted by Representative 
      Capuano....................................................   239
    Written responses to questions submitted by Representative 
      Waters.....................................................   244
    Written responses to questions submitted by Representative 
      Westmoreland...............................................   250


                    OVERSIGHT OF THE FEDERAL DEPOSIT
                   INSURANCE CORPORATION'S STRUCTURED
                          TRANSACTION PROGRAM

                              ----------                              


                        Wednesday, May 16, 2012

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 3:22 p.m., in 
room 2220, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Fitzpatrick, 
Renacci; Capuano, Waters, and Carney.
    Also present: Representatives Westmoreland and Herrera 
Beutler.
    Chairman Neugebauer. The Subcommittee on Oversight and 
Investigations will come to order. This hearing is entitled, 
``Oversight of the Federal Deposit Insurance Corporation's 
(FDIC's) Structured Transaction Program.''
    Each side will be limited to 10 minutes for opening 
statements. And I want to recognize the attendance of Members 
who are not assigned to the Oversight and Investigations 
Subcommittee. Representative Jamie Herrera Beutler is here, and 
we also expect Mr. Westmoreland to attend. I ask unanimous 
consent that they be allowed to participate as if they were on 
the committee today.
    I will now recognize myself for an opening statement.
    This hearing is focused on the oversight of the FDIC's 
Structured Transaction Program. We will hear from the FDIC. We 
will also hear from some of the market participants today. The 
Structured Transaction Program was created to resolve the 
distressed assets program. It has transferred about 42,000 
assets, with an unpaid balance of about $25.5 billion, into 32 
public-private partnerships.
    One of the reasons that we are having this hearing is 
because there is not a lot of regulation that applies to 
structured transactions, and so we are going to learn more 
about the process. Also, we had an OIG audit of the Structured 
Transaction Program that found control deficiencies related to 
inadequate FDIC policies, and we will hear from the OIG on that 
as well.
    I think the goal here is to learn more about this program. 
This is a program designed to mitigate losses, ultimately, to 
the taxpayers. We want to make sure that everything is being 
handled properly.
    But the program also has impact on some of the people who 
were banking with some of these entities that found themselves 
one day without a bank. We need to know how this process is 
playing out and if there are things that we need to be looking 
at from an oversight standpoint. So I look forward to learning 
more about the Structured Transaction Program.
    With that, I will yield to the gentleman, Mr. Capuano.
    Mr. Capuano. Thank you much, Mr. Chairman.
    I don't have much of an opening statement. I am looking 
forward to the testimony from these gentlemen, and from the 
next panel, as well.
    I appreciate you calling this hearing. I think that the 
FDIC plays a very important role in this economy in protecting 
investors, and it is important that we make sure that they 
continue to be able to do that. That is their primary 
objective, and as far as I am concerned, anything that 
interferes with that is problematic to this Congress. 
Therefore, today I am looking forward to hearing testimony on 
this specific aspect of the difficulties we have recently gone 
through and I guess continue to go through in the economy and 
how it has played it out and how it has impacted the FDIC.
    Again, Mr. Chairman, thank you very much.
    Chairman Neugebauer. I would remind Members that all 
Members' opening statements will be made a part of the record.
    Now, I would like to introduce the first panel: Mr. Bret 
Edwards, Director, Division of Resolutions and Receiverships, 
Federal Deposit Insurance Corporation; the Honorable Jon T. 
Rymer, Inspector General, Federal Deposit Insurance 
Corporation; and Mr. Stuart Miller, Chief Executive Officer, 
Lennar Corporation.
    Gentlemen, your written testimony will be made a part of 
the record, and we will recognize each of you for 5 minutes for 
a summary of that.
    With that, Mr. Edwards, you are recognized for 5 minutes.

STATEMENT OF BRET D. EDWARDS, DIRECTOR, DIVISION OF RESOLUTIONS 
    AND RECEIVERSHIPS, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Edwards. Thank you, Mr. Chairman.
    Chairman Neugebauer, Ranking Member Capuano, and members of 
the subcommittee, I appreciate the opportunity to testify on 
behalf of the FDIC on our agency's Structured Transaction 
Program.
    A structured transaction is only one of the asset 
disposition strategies the FDIC employs to fulfill our 
statutory duty to maximize the net present value return from 
the disposition of assets of failed institutions and to 
minimize the amount of loss realized in the resolution of those 
institutions.
    This type of transaction has been used for approximately 4 
percent of the $670 billion in assets that the FDIC inherited 
from bank closures since January of 2008. Most of the time we 
are able to achieve the least costly resolution by transferring 
the failed banks' deposits, assets, and certain liabilities 
immediately after the bank closing to an acquiring bank.
    Unfortunately, failing banks with little franchise value 
and poor asset quality do not attract sufficient interest from 
viable bidders. In those instances, depositors are paid the 
full amount of their insured deposits. The FDIC, as receiver, 
then chooses an alternative strategy for handling these failed 
bank assets, such as cash sales, securitizations, and 
structured transactions.
    Patterned after a successful program used by the former 
RTC, the FDIC initiated a structured transaction sales program 
in May of 2008. By using structured transactions, the FDIC 
avoids selling assets in distressed markets at prices below 
their intrinsic value and saves the costs associated with 
maintaining the infrastructure needed for long-term agency 
management of the assets. We estimate that we have saved 
approximately $4 billion by using structured transactions 
instead of cash sales.
    In structured transactions, the FDIC pools a group of 
similar assets from one or more failed bank receiverships and 
transfers them to a newly formed LLC. Through a competitive 
bidding process, the FDIC offers a portion of the equity in the 
LLC to prequalified private sector experts who have experience 
managing the types of assets in the pool and who have the 
economic resources to bear the obligations and risks of the 
agreement. The highest bidder pays cash for its equity 
interests in the LLC and becomes the managing member, with 
responsibility for the day-to-day management of the LLC and its 
assets. The percentage of book value that the bidder's 
valuation represents is for the entire pool of the assets and 
cannot be attributed to any individual asset.
    Since 2009, to ensure robust bidding, many of the 
transactions have included leverage in the form of purchase 
money notes issued by an LLC to the failed bank receiverships 
as partial payment for the assets sold by the receiverships to 
the LLC. The purchase money notes represent debt owed by the 
LLC to the receiverships. In general, most transaction 
agreements require that these notes be repaid in full before 
there is any equity distribution to the members of the LLC. 
These notes do not finance the cash purchase price paid by the 
managing member for its equity interest in the LLC.
    The FDIC actively monitors these transactions through its 
staff and third-party contractors. On a regular basis, the FDIC 
and its contractors conduct on-site compliance reviews of each 
LLC's operations. Additionally, the managing member must comply 
with stringent monthly, semi-annual, and annual reporting 
requirements.
    The FDIC's Office of Inspector General has completed audits 
on two of the transactions. The FDIC agreed with all of the 
OIG's recommendations and has implemented or is in the process 
of implementing these recommendations.
    At my request, the OIG has begun audits of two LLCs managed 
by an affiliate of Rialto Capital Management. These reports are 
expected to be delivered in the late third quarter of this 
year.
    We understand that a number of borrowers and guarantors 
have raised concerns about the managing members not achieving 
the resolution of their debts as the borrower or guarantor 
would desire. The FDIC investigates every borrower or guarantor 
inquiry and works with the managing member to address any of 
the concerns raised. We fully expect the managing members to 
pursue payoffs and loan modifications when these options would 
result in the highest return to the LLC.
    With respect to single family residences, the managing 
members and their servicers are obligated to follow a 
federally-mandated loan modification program. Where a payoff, 
modification, or other loss mitigation is not feasible, the 
managing member is left with no other choice but to enforce the 
terms of the loan contracts through the courts and other legal 
means.
    To ensure that it receives the highest return on the 
assets, and that managing members treat failed bank borrowers 
fairly, the FDIC monitors compliance with transaction 
agreements, measures actual performance against projections, 
conducts regular site visitations, and thoroughly investigates 
borrower complaints with regard to the servicing and 
disposition of their loan by the managing member.
    Thank you for the invitation to testify, and I would be 
happy to answer your questions.
    [The prepared statement of Mr. Edwards can be found on page 
51 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Rymer, you are recognized for 5 minutes.

  STATEMENT OF THE HONORABLE JON T. RYMER, INSPECTOR GENERAL, 
  OFFICE OF THE INSPECTOR GENERAL, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Mr. Rymer. Thank you, Chairman Neugebauer, and Ranking 
Member Capuano. Thank you for your interest in the work 
performed by the FDIC Office of Inspector General (OIG) 
relating to the Corporation's structured asset sales program.
    The OIG is an independent office within the FDIC 
established to conduct audits and investigations to prevent 
waste, fraud, and abuse, and to improve the efficiency and 
effectiveness of FDIC programs.
    In my written statement, I provide an overview of our audit 
coverage during the current crisis. Specifically, I describe 
work that we have done related to failed financial institutions 
and the FDIC's resolution and receivership activities.
    Today, I am pleased to discuss our completed and ongoing 
work as it relates to one of those FDIC resolution approaches: 
the structured asset sale transaction.
    The OIG has completed performance audits of two structured 
asset sale transactions that we selected based on the size and 
type of assets involved. The first audit was of ANB Venture, 
which involved over 1,100 individual assets and an unpaid 
balance of about $1.2 billion. The second audit was of Corus 
Construction Venture. Corus involved 101 individuals assets and 
an unpaid balance of $4.4 billion. And Corus also contained an 
advance funding mechanism.
    My office contracted with CliftonLarsonAllen to conduct 
these audits. The objectives in both audits were to assess the 
compliance of the structured asset sales agreement and to 
assess the FDIC's monitoring of these agreements.
    In our reports, we concluded that ANB, Corus, and their 
respective managing members complied with some provisions of 
the structured asset sales agreements and that the FDIC had 
implemented certain controls for monitoring these transactions. 
We also noted that the FDIC had planned or was in the process 
of implementing significant control improvements. However, our 
audits identified a number of control deficiencies involving 
both compliance and monitoring that warranted FDIC management 
attention.
    To that end, the ANB audit report contained 10 findings and 
24 recommendations. According to the FDIC, actions have been 
taken on these recommendations. The Corus report contained 7 
findings and 10 recommendations, and corrective actions for 
these recommendations are expected to be completed by September 
30th of this year.
    My written statement describes in more detail the results 
of these audits.
    We are continuing our audit coverage of structured asset 
sales transactions with an audit of Rialto Capital Management. 
This audit, which was requested by FDIC management due to 
inquiries and complaints that it had received, will cover two 
transactions. The first transaction involves about 5,200 assets 
with an unpaid balance of approximately $2.3 billion. The 
majority of these assets pertain to residential acquisition, 
development, and construction projects. The second transaction 
involves 345 assets, primarily commercial ADC projects, with an 
unpaid principal balance of $799 million.
    The Rialto audit included the same two objectives we used 
in conducting the ANB and Corus audits, with the addition of 
two more objectives, which involved the bidding and selection 
process and the terms and conditions of the structured asset 
sales agreements themselves. In designing our audit procedures, 
we are also placing particular emphasis on the controls over 
transactions with affiliates.
    As part of this audit, we have selected a representative 
sample of assets that were subject to the inquiries and 
complaints that we were aware of at the time we initiated our 
work. We are evaluating these assets, as part of a larger 
sample, to satisfy our audit objectives.
    The inquiries and complaints that we are aware of primarily 
deal with the LLC's aggressiveness in pursuing balances owed on 
the loans, the LLC's treatment of borrowers or guarantors and 
its loan servicing, and the FDIC's handling of loans prior to 
the transfer to the LLC.
    We are scheduled to complete our field work in June of this 
year and issue a draft report in July. A final report 
incorporating FDIC management's comments will be issued near 
the end of August.
    Going forward, we intend to continue our work related to 
each of the FDIC's resolution approaches. With regard to 
structured asset sales approach, our next audit will focus on 
the FDIC's overall control of these transactions. This plan, or 
this approach, is consistent with our earlier work in examining 
failed financial institutions and our more recent work of the 
shared loss program. As our resources permit, we look forward 
to conducting a study in the next year to evaluate the risk and 
effectiveness of all of the resolution approaches.
    This concludes my prepared statement. I thank you for the 
opportunity to discuss our work, and I am prepared to answer 
your questions. Thank you.
    [The prepared statement of Inspector General Rymer can be 
found on page 111 of the appendix.]
    Chairman Neugebauer. Thank you.
    Mr. Miller, you are recognized for 5 minutes.

  STATEMENT OF STUART MILLER, CHIEF EXECUTIVE OFFICER, LENNAR 
                          CORPORATION

    Mr. Miller. Thank you, sir.
    Mr. Chairman, Mr. Ranking Member, and distinguished members 
of the subcommittee and guests, I want to thank you for the 
opportunity to speak to you here today.
    My name is Stuart Miller, and I am CEO of Lennar 
Corporation. We are the parent company of Rialto Capital, which 
is involved in the FDIC's structured transactions that are the 
subject of this committee.
    We are certainly very pleased to be here and to discuss 
these transactions. It is our policy and program to remain 
transparent, to answer questions, and to be participatory in 
all instances and inquiries relative to our business. We look 
forward to responding to any thoughts or questions that you all 
may have.
    In that regard, in my opening statement, I would like to 
make six observations and points relative to our involvement 
with the structured finance transactions.
    Number one, Rialto was awarded the partnership with the 
FDIC in a pure bid program. The FDIC defined the documents, the 
pool of assets, the structured finance terms, the fees, and the 
relationship with the manager in a comprehensive program; and 
we evaluated the program and bid on that basis, as did all of 
the other bidders. There were no renegotiations. We took the 
program as it was defined. We were required to give a 
conforming bid, and the highest bid won. Our bid in two of 
these bids was the highest.
    Number two, Rialto and Lennar have invested cash of 
approximately $250 million in the two FDIC ventures. Lennar 
will not receive any money back until the $627 million loan to 
the FDIC is paid in its entirety. After the loan is paid in 
full, Rialto/Lennar and the FDIC will split cash as it comes in 
in a 60-40 relationship--60 percent to the FDIC, and 40 percent 
to Lennar--until all invested cash is returned. Only then, 
which we expect to be 4 to 5 years from now, will Lennar begin 
to receive a return on its investment.
    Number three, the portfolios are predominantly defaulted 
loans; over 90 percent of the portfolio is defaulted loans. 
Borrowers entered into loan agreements with their banks. There 
was a default. The bank depleted capital, failed, and then was 
seized. Twenty-two institutions failed and were seized by 
regulators. The FDIC packaged a portfolio of loans from these 
22 institutions that were in FDIC receiverships into structured 
transactions in which it conducted a bid process to sell 40 
percent interest to qualified buyers/managers. We took over the 
management of these predominantly defaulted loans. We did not 
cause the defaults or negotiate the terms of the loans. It was 
and remains our job to use our expertise to find resolution.
    Number four, these assets are primarily sophisticated 
commercial transaction loans. They are not consumer residential 
loans on homes. These were loans where sophisticated business 
borrowers negotiated for a loan, generally with each side 
represented by competent counsel, to borrow, in many instances, 
millions of dollars in order to generate business profit. The 
risks and rewards were clearly allocated within the loan 
documents negotiated at the time, with both parties clearly 
understanding that all of the rewards would be concentrated in 
the borrowers' hands, and, accordingly, the various understood 
risks of the business proposition would rest with the borrower.
    Number five, because these were business transaction loans 
for the benefit of the borrower and because all of the rewards 
would go to the borrower, the bank carefully negotiated that 
the collateral for most of these loans would be both the 
business assets or properties, as well as an absolute personal 
guarantee. Borrowers, to be able to borrow, readily gave those 
guarantees to pay back the loan whether the business 
proposition was successful or not.
    Number six, we at Lennar/Rialto have over 20 years of 
experience in managing and resolving defaulted loans. Our 
process is time-tested and well-ordered. It is crafted around 
professionalism, with a high degree of respect and decency as 
we endeavor to work with each borrower individually and with 
propriety as we seek resolution. By definition, the 
relationship between a defaulted borrower and a lender seeking 
resolution is adversarial and sometimes contentious. Simply 
put, the parties have very different objectives. With that 
said, our program is to work within the four corners of every 
loan agreement individually, as well within the four corners of 
the rules and spirit of our court system and the laws.
    Thank you for your time, and I am happy to answer any 
questions.
    [The prepared statement of Mr. Miller can be found on page 
105 of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Miller.
    In consultation with the ranking member, I am going to 
recognize a couple of Members who came in and give them an 
opportunity to make a brief opening statement. I recognize Mr. 
Westmoreland for 2 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman, and I appreciate 
you holding this important hearing.
    I want to thank all the witnesses. I want to thank Mr. 
Miller for stepping up to the plate. I want to thank Mr. 
Leventhal and Mr. Fogg.
    Mr. Chairman, once again, we find the government picking 
winners and losers. Rialto, Colony Capital, Oak Tree Capital, 
and others are the winners. Builders, developers, and even 
their subcontractors and in some cases their purchasers that 
had previously purchased their product are the losers.
    Make no mistake, Rialto is the case that Mr. Miller was 
talking about, and the other managing partners are getting a 
great deal. They get financial information about their 
competitors for pennies on the dollar. In fact, Rialto only 
paid $241 million for $3 billion in loans. This is 
approximately 8 cents on the dollar. To add to this sweetheart 
deal, I think Rialto received a $600 million loan from the 
FDIC, interest free, nonrecourse, for 7 to 10 years. Now that 
is a deal that I think most of these borrowers would have taken 
if they could have bought this loan for 8 cents or put up 8 
cents on the dollar and then had the FDIC loan them the rest of 
it for 7 years with no interest and no recourse. I think the 
FDIC would have recovered a lot more money.
    But wait, there is more. Rialto and these other managing 
partners are paid a management fee. On this particular case, 
the $3 billion case, I believe the fee was $32 million for the 
first year. This is paid on the unpaid balance.
    So what incentive is there for any of these managing 
partners to settle the loan when they are getting a management 
fee on the whole deal? There is no incentive. If you take the 
$32 million and divide it by the number of loans, which I think 
was 5,200, they are being paid $6,100 per loan per year; and 
this is paid on the unpaid principal balance of the portfolio.
    In fact, many of my constituents have tried to negotiate 
with Rialto and the FDIC. The FDIC is probably the hardest 
agency that I am familiar with that is willing to negotiate 
anything.
    I will say that Rialto has stepped up in the last week or 2 
weeks to try to settle some of these things. But earlier this 
year, I gave the FDIC verifiable proof that the FDIC was not 
maximizing return for the Deposit Insurance Fund, and let me 
tell you what happened.
    We had a gentleman who had a loan with a bank and he 
borrowed the money to buy stock in another bank--if you will 
give me just 30 more seconds--$500,000. The bank he bought 
stock in went broke. Silverton Bank went broke. He had a 
modified agreement for 85 percent of the $500,000 agreed to by 
the FDIC. Then, the FDIC sold that loan to a third party for 18 
cents on the dollar. That is a problem.
    And so I hope that we will get some answers today to make 
sure that the FDIC is getting the maximum that they can for the 
money and that they are not killing small business and doing 
away with jobs.
    I yield back.
    Chairman Neugebauer. I now recognize Ms. Waters from 
California for a brief opening statement as well.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I almost don't need to give this opening statement. Mr. 
Westmoreland just spoke for me. Those are absolutely my 
concerns.
    But I want to thank you, Mr. Chairman. I welcome today's 
hearing as an opportunity to closely examine the Structured 
Transaction Program the FDIC adopted in the wake of the 2008 
financial collapse to manage and dispose of assets from failed 
institutions that may be more difficult to market and sell. 
While I understand that the FDIC has the legal responsibility 
to maximize recovery on the assets of failed banks and 
replenish the Deposit Insurance Fund, I am interested to learn 
more about the reports suggesting that FDIC's practices and 
private sector partnerships may be creating additional 
hardships for small businesses and borrowers.
    In addition to that, I would also like to hear from the 
FDIC today about the steps it has taken to ensure that small 
enterprises, minority- and women-owned businesses have the 
opportunity to purchase FDIC assets or are in some way involved 
in these structured transactions.
    In a 2010 Bloomberg article, one observer noted that the 
new FDIC strategy for managing assets seized from failed banks 
has turned the agency into a long-term investor making a 
multibillion dollar bet on the recovery of some of the most 
distressed condominium markets in the country. Instead of 
selling the assets to maximize cash in hand, the agency is 
offering its private sector partners zero percent financing, 
management fees, and new loans to complete construction of 
projects it can hold until markets recover.
    With that said, it is my understanding the regulators have 
determined that in certain situations, public-private 
structured transactions can offer a better chance to replenish 
the Deposit Insurance Fund. I therefore welcome the FDIC's 
comments today on the level of success and savings the agency 
has achieved with this program, as well as the agency's 
response to criticisms against the program.
    And, lastly, I am particularly interested in the FDIC's new 
investor match program that was designed to encourage small 
investors and asset managers to partner with larger investors 
in order to participate in the FDIC's structured transaction 
sales for loans and other assets from failed banks. In an 
effort to be inclusive of all firms, the FDIC launched the 
program to expand opportunities for participation by smaller 
investors and asset managers, including minority- and women-
owned firms. I do look forward to hearing from the agency today 
regarding whether this program is working to extend 
opportunities to these types of firms that may have been 
otherwise excluded from these transactions, and I would like 
some specifics and some numbers to document if they are going 
to represent that they have done these things.
    I yield back the balance of my time.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentlewoman, Ms. Herrera Beutler, is recognized 
for a brief statement.
    Ms. Herrera Beutler. Thank you, Mr. Chairman, and members 
of the subcommittee. Thanks for holding this hearing today.
    This topic is incredibly important, so important that I am 
here even though this isn't actually my committee. I am 
grateful to be a part of this hearing today, because this is 
very important to the folks in southwest Washington in the 
district that I serve.
    Over the last year, I worked to understand what happened 
with small business owners like Mr. Fogg, who is here today, 
who had loans with the now-collapsed Bank of Clark County in my 
district. And the answers still aren't very clear. What I do 
know is that the fallout resulted in destroyed businesses, 
bankruptcies, and the loss of livelihoods for folks in my area.
    So today, I want to find out what led the FDIC to give an 
extremely favorable deal to Rialto Capital, and consider the 
terms of the agreement between the FDIC and Rialto. In this 
``sweetheart deal'' is what comes to mind--and my colleague 
uses the same term--Rialto was allowed to pay 8 cents, and it 
is worth repeating, 8 cents on the dollar for $3 billion worth 
of assets. Further, the FDIC issued Rialto a 10-year, over $600 
million loan at zero percent interest. That is a great deal.
    I believe that had Mr. Fogg or any other home builder in my 
area been given a 10-year zero interest loan, they would have 
provided a much higher return than 8 cents on the dollar. 
Instead, most were left to deal with Rialto.
    And excuse me, Mr. Miller, I know that you said you work 
with a high degree of respect and decency, but I can give you 
case after case--I have been in office for 15 months, and this 
is the one where I have had case after case after case. My 
church came to me and said, Rialto won't negotiate with us. I 
have to tell you that they are not a for-profit entity.
    So I accept that businesses fail. That is part of the free 
enterprise system. What I don't accept is when a government or 
quasi-government agency that has a taxpayer guarantee makes a 
deal that puts small businesses at a disadvantage. That is what 
I don't accept.
    And so today, I am hoping to understand the interest not 
only that Rialto has but Lennar Homes, who has now moved into 
my area, and what your plans are in Clark County. Technically, 
I know it is not allowed for Lennar to buy from Rialto the land 
it obtained under such agreeable terms. Yet, your Web site 
shows that they have moved into Vancouver, and I am very 
interested in that relationship. I am interested in the major 
tracts of land in my largest county that are now owned by 
Rialto, and hearing what the plans are moving forward and 
making sure that the FDIC does its job with regard to 
oversight.
    So I am grateful to be here, Mr. Chairman. Thank you.
    And I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    That is all of our opening statements, and we will now go 
into a question-and-answer period. Each Member will have 5 
minutes, and the Chair recognizes himself first.
    Mr. Edwards, in some of the structured transactions deals, 
some of the people have loans and some don't. I think 22 of the 
32 had nonrecourse loans; the other 10 did not. Can you 
distinguish the difference between a transaction where someone 
does not get financing and someone else gets the financing? 
What was the basis of that?
    Mr. Edwards. Yes. Thank you, Mr. Chairman.
    It might be helpful if I could give a little background 
into how the failed bank assets are slotted into the structured 
sales program. At the FDIC, we try very, very hard when a bank 
is failing to find a financial institution to take that failing 
bank over on a whole bank basis so that they take all the loans 
and all the deposits.
    In some instances, that is not possible. There are 
instances when banks fail for liquidity reasons and we have 
very little time to market the institution. Therefore, 
investors have very little time to look at the book of loans 
that a bank has, and so we end up taking them back in our 
receivership capacity.
    In other instances, the bank simply has very little 
franchise value. The assets are of very poor quality, and there 
is just no interest in acquiring those.
    So I want to repeat it is our goal to not take any failed 
bank assets back. In a perfect world, we would transfer those 
immediately to an acquiring institution. But early on in the 
crisis, it was very difficult to do that, because we did have 
more liquidity failures.
    So with those assets that we have to take back in our 
receivership capacity, what we have done is to institute the 
structured sale program, mostly for real estate-related assets 
and, as some of the Members have said, mostly distressed 
assets. Sixty-plus percent of the real estate-related assets 
that went into these structured transactions were distressed 
assets.
    But, in any event, we try to group assets of like kind. For 
instance, in the Rialto transaction, those were all pretty much 
acquisition, development, and construction loans. We group 
those into packages. We use a financial adviser to assist us in 
figuring out the best structure for those, and then we put them 
into packages and attempt to sell them.
    There are some loans that we work ourselves. And I should 
mention that after the bank fails, there is usually a 6- to 9-
month period where we do have to work the assets ourselves 
until that structured transaction closes.
    So if that gives you a flavor for--I am sorry, go ahead, 
sir?
    Chairman Neugebauer. So the question is, of the 32 sales, 
22 of them involved in financing--
    Mr. Edwards. Yes.
    Chairman Neugebauer. --10 of them did not.
    Mr. Edwards. Yes.
    Chairman Neugebauer. I want to know why some people got 
financing and some didn't. Does that change the deal?
    Mr. Edwards. I think we have done a less-than-perfect job 
of explaining the role of financing.
    When we create a structured sale, what happens is we create 
a limited liability company. We gather up the assets that are 
slotted for that sale, and the receiverships contribute those 
assets to the limited liability company. So once they have 
contributed those to the limited liability company, we then bid 
out a percentage of the equity to capital investors.
    We do add leverage to those transactions. And we started to 
do that, I believe it was in 2009, because what we were finding 
was the bidding was not as aggressive and there were not as 
many bidders there. By adding leverage to the transaction, we 
got better bids.
    Let me make one point clear: We are not financing the cash 
contribution of the LLC to these transactions. The note is 
issued by the LLC we have created to the receiver in partial 
payment for the assets that the receiver contributed to the 
LLC.
    Chairman Neugebauer. So basically, the ones that don't have 
financing, it is because they made a bid on a certain 
percentage of the equity of that--
    Mr. Edwards. That is correct.
    Chairman Neugebauer. And they didn't leverage up. So this 
could have been a smaller pool or an investor that had--
    Mr. Edwards. Correct.
    And I will say, just from an historical perspective, early 
on in the crisis, we did not have the LLC structure. We 
actually had a partnership structure. And part of the reason we 
changed to an LLC structure was because that allowed us to 
issue the debt.
    Chairman Neugebauer. One last question. Mr. Edwards, let's 
say I was banking at bank ``X,'' I was current on my loan, but 
the bank had a bunch of other bad paper in there. My loan was 
current, and in fact I had 2 years left on my note, and I am in 
the middle of a development. What happens to me? You have 
closed my bank, but I am in the middle of a project here, and 
it is 2 more years on the note, and I have room on my line of 
credit for an advance. What happens to me?
    Mr. Edwards. Thank you for that question. That is an 
excellent question.
    It is one of the most difficult things we face when a bank 
closes. We are talking about unfunded commitments. Somebody, as 
you point out, is in the middle of the development, they 
haven't missed any of their payments. We look at each of those 
unfunded commitments--one of the first things our credit people 
do when they go in the night of the bank failure is to find out 
where we are on those. On a case-by-case basis, we look at 
those and make a decision on which ones we should fund and 
which ones we shouldn't. And really, the litmus test for that 
is if you put a dollar in, will you get a dollar back?
    This is very analogous to the situation in a bankruptcy--a 
Chapter 7 bankruptcy where the trustee is faced with the same 
kind of situation. They need to make a decision. If I put a 
dollar in, will I get that dollar back out?
    I will give you an example. Suppose in that situation you 
had 4 spec homes and they were all 75 percent complete. In that 
fact pattern, we would almost assuredly go ahead and fund 
those, absent other circumstances we haven't talked about. 
Because it makes sense. We will finish the homes. They are 
almost complete. We will continue to fund the loan. And when 
those are done, we will work with the borrower to figure out 
where to go from there. That has been our policy throughout 
this crisis.
    Chairman Neugebauer. Thank you.
    And now the gentlewoman from California, Ms. Waters, is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much.
    Mr. Chairman, there is a long history to many of our 
concerns about the resolution procedures of the FDIC. Many of 
us go back to the resolution corporation and how they disposed 
of failed assets, and what we see with the FDIC is quite 
different. Many of us are not only concerned about some of the 
issues that were raised here today about what happens to those 
banks, those individuals who are left when you take over a 
failed institution and they are in development and how they are 
going to continue to get funding, loans, etc. But many of us, 
whether we are talking about the resolution of assets and how 
you dispose of failed assets, many of us are concerned about 
how you get rid of or you put out to bid or you make available 
these assets. We are concerned about that as we are concerned 
about REOs on the housing market side.
    What we find is, too often, we get these big institutions 
or corporations who have the ability to put in smart bids and 
to leverage and to do all kinds of things. And it looks as if, 
in the case of Rialto, they had additional assistance in being 
able to be financed in some shape, form, or fashion.
    But what many of us know and understand is, to the degree 
that you break up these assets and they are put out to smaller 
corporations or organizations, it improves economic development 
in all of our communities.
    And so, when we hear about what appears to be sweetheart 
deals, we are going to have to spend a lot of time. And I think 
you are going to see that on both sides of the aisle, we really 
want to know what is happening with all of this.
    We understand that the FDIC was trying to take all of the 
assets of a failed bank and move them all at one time to 
another bank or to individuals. And we have people who came in 
to us and said, ``We put together a group from our community 
with substantial dollars, but the FDIC in this particular 
package wants us to take the barn and the equipment and the 
animals, and we don't need all of that.'' But just like with 
RTC, we could take the savings accounts, we could take this, we 
could take that.
    We can't we do that? And why are we still going down the 
same road of making available to the big guys the opportunity 
to not only be successful in these bids but to get our help in 
doing so in the way that we finance them?
    Mr. Edwards?
    Mr. Edwards. Thank you very much. I appreciate your 
question, and I do share your concern.
    I know you asked a question about inclusion of smaller 
investors. We started a small investor program. Under the 
structured sale program, 3 of the 32 sales themselves have been 
to small investors.
    We did hear the feedback of the market, as well as folks 
here on Capitol Hill about the concerns, and so we created a 
pilot program and it is out on our Web site. It is called the 
Small Investor Program, or SIP. Instead of these large, large 
packages, what we do is we limit these to just one 
receivership. We try and concentrate the assets geographically. 
We do offer technical assistance to potential buyers. And we 
lengthen the due diligence period so that they have adequate 
time to look over these packages.
    And I will have to say that the pilot has been deemed a 
success--
    Ms. Waters. Excuse me, I have to interrupt you for one 
moment, because I want to make sure I understand--
    Mr. Edwards. Sure.
    Ms. Waters. --what is in this. Are these the assets that 
you find very difficult to get rid of?
    Mr. Edwards. Yes, that is correct.
    Ms. Waters. Why would a small business want to be involved 
with getting very difficult assets to manage and to try and 
make money on?
    Mr. Edwards. There are plenty of folks who don't have the 
capital that a larger deal requires, but have the expertise.
    And I will tell you, for those of you who have a real 
estate background, working distressed real estate credits is a 
tough business. It requires a lot of technical knowledge. And 
some of these folks have that, but what they don't have are the 
funds to bid on these larger deals.
    So we have found great success in breaking these packages 
into smaller packages and bidding these out. These folks are 
very happy with these deals, and they are working on them now.
    With respect to the Investor Match Program, I know you 
mentioned that, so I just wanted to say quickly: It is the 
equivalent of, sort of, a match.com. It is a Web site where 
both investors and people with expertise, but not necessarily 
capital, can exchange emails and say, ``I have `X' amount, and 
I want to invest in one of these deals;'' or, ``I have a lot of 
expertise, or my firm has a lot of expertise, but I don't 
really have a lot of capital.''
    So we have put that Web site together. The numbers have 
really doubled since the very beginning when there was a small 
number. And there are quite a few minority- and women-owned 
businesses that have partaken in that Web site. So we hope--
    Ms. Waters. What is ``quite a few?''
    Mr. Edwards. I don't have the exact numbers, but I can 
certainly get those for you.
    Ms. Waters. Remember, that is what I said. I want to know.
    Mr. Edwards. Yes. And I can certainly get those for you.
    Ms. Waters. Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlelady.
    And now the gentleman, Mr. Fitzpatrick, the vice chairman 
of the subcommittee, is recognized for 5 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Director Edwards, have the FDIC Office of Inspector General 
audits prompted any changes or improvements to the way the FDIC 
structures the LLC transactions?
    Mr. Edwards. Yes, thank you for that question. That is an 
excellent question.
    Absolutely. Our relationship with the Inspector General is 
respectful, cordial, and professional. But we are very grateful 
for the work they have done in this area, because, as you know, 
they did one audit of the ANB transaction, another one of 
Corus. And I thought they did a very thorough and reasonable 
job.
    I would like to say that we adopted what we had done during 
the RTC days and began this program in May of 2008. We are 
constantly revising policies and procedures. We are constantly 
revising the agreement based on lessons learned and things that 
come up.
    So a lot of what Mr. Rymer's people and his contractors 
pointed out to us, we took to heart. As you see in my 
testimony, on the ANB venture, for instance, there were a large 
number of findings and recommendations. We addressed every 
single one of them with our managing member. And I expect when 
his people go in, they will find things much improved. I would 
say the same about Corus.
    In Corus, in particular, I would like to talk about one 
issue, and that has to do with the definitions that are spelled 
out in our LLC agreements. As those of you with a real estate 
background or those of you with a legal background would 
understand, these agreements are lengthy, complex, and 
difficult to administer. And we have some very fine people who 
do that. Nevertheless, the people we are dealing with on the 
other side of the table, like Mr. Miller, are very 
sophisticated, and they have their own set of attorneys and 
bright minds working on this. And reasonable people can 
interpret contracts differently.
    We work very diligently to work those differences out. And 
where we find that, in retrospect, the contract should have had 
tighter language or more clarity to it, we go ahead on a 
prospective basis and amend the contract.
    Mr. Fitzpatrick. Mr. Miller, what are some of the concerns 
that have been raised by borrowers whose loans have been 
transferred to one of the subsidiaries of your organization?
    Mr. Miller. Remembering that in these transactions 
approximately 90 percent of the loans had already defaulted, 
most of the borrowers were concerned as to how they would reach 
resolution and what the process would be. Many of them had gone 
from bank holding to--or bank as their lender to FDIC as their 
lender and then ultimately to us. So an initial concern or 
question--and we have 20 years of experience with this--is, who 
is my new lender and how will we interact? So there is some 
skepticism.
    Unfortunately, in the context of a market turn and a great 
number of defaults, there is some turmoil in the business and 
there is some reconciliation in terms of relationship that has 
to take place.
    I think that there are always questions where borrowers 
feel they have had representations made by either their bank or 
by the FDIC, and there is a discovery process that ensues. 
Those are concerns that are raised by borrowers. And the 
discovery process is, in many instances, one that comes down to 
he said/she said and trying to figure out what the actual facts 
and landscape are.
    Remember that, with us, in these 2 transactions, we very 
quickly had to take over 5,500 loans--again, 90 percent 
defaulted--very quickly read every document and define the 
landscape. So the concerns of borrowers would range anything 
from, how will my loan be administered, to how long will it 
take until we can sit down and have a conversation?
    Mr. Fitzpatrick. Attorney General Rymer, I think my time is 
about to run out, but I was wondering whether you believe that 
the structured transaction sales pose a risk to the Deposit 
Insurance Fund.
    Mr. Rymer. They certainly do, sir. They are principally the 
reason we began this audit process.
    I think we have to put it in context. There are some $668 
billion that have passed through, in various forms of 
resolution, through the failure. This program--$25 billion or 
so is in this particular program.
    We were concerned that, because this program is somewhat 
unique, there were not standing control mechanisms in place. 
That is why we did an audit early on of ANB and why we did an 
audit of Corus. In the case of ANB, we saw very little of a 
control environment to oversee that transaction. We have not 
yet done an overall audit to look at the entire control 
environment, but we did look at the controls of that particular 
transaction.
    We have seen some anecdotal evidence, not yet proven 
through an audit, but we have seen evidence that the compliance 
process is maturing. There are compliance contractors in place 
now that management is hiring to review these transactions in 
great detail and with more regularity than they were in the 
past. And in terms of corporate governance, the FDIC Audit 
Committee, which is a committee of the board of directors, 
routinely receives reports on oversight of this program.
    So oversight was minimal, I would say, early on, but we 
have seen some growth. We do plan, as I mentioned in my opening 
statement, to do a more comprehensive review of the oversight 
program a little later, probably early next year.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Ohio, Mr. Renacci, is recognized 
for 5 minutes.
    Mr. Renacci. Thank you, Mr. Chairman.
    I am trying to understand the transaction. I think I do, 
but I am going to walk through it, and maybe start with you, 
Mr. Edwards, and then ask you, Mr. Miller.
    It sounds like you bundle a group of assets from a troubled 
organization--and somebody testified 90 percent of them are 
normally defaulted already, defaulted loans--you bundle them 
together, and you put them in an LLC. And then you bid this LLC 
out, and the owner gets 40 percent of that LLC for a note taken 
back in this case, a nonrecourse note.
    But that owner of the 40 percent has to, at least in this 
case--I think it was $900,000 or whatever it was--has to 
recover $900,000 first, pay the note back, and then the 
difference is split, 60 to the FDIC and 40 to the owner of 
the--40 percent share in the LLC. Correct?
    Mr. Edwards. Yes, in most aspects.
    It might be helpful if I just--since Mr. Miller is here--
generally, the cash flows for our managing members in these LLC 
transactions are nonpublic information. But since most of those 
were in his statement, maybe I could just walk through that 
transaction for you, and hopefully I will get to it.
    First of all--
    Mr. Renacci. Before do you that, though--
    Mr. Edwards. Yes. Please.
    Mr. Renacci. --because I am really trying to stay top in--
    Mr. Edwards. Sure.
    Mr. Renacci. --but that is kind of a top--
    Mr. Edwards. Yes. You are correct. So the receivership 
contributes assets to an LLC we create. We then bid out the LLC 
to private sector entities.
    Before we do that, we specify a few things: Are we going to 
allow leverage, yes or no? If we are, what ratio of leverage? 
In the case of Rialto, it was one-to-one--
    Mr. Renacci. But those are all the procedures. I want to 
come back to you, because I only have 5 minutes.
    Mr. Edwards. Okay.
    Mr. Renacci. I want to go over to Mr. Miller, and then I am 
going to come back to you.
    Mr. Edwards. Okay.
    Mr. Renacci. Mr. Miller, when you get these, if you own 40 
percent of this LLC and you are now managing it, do you change 
the loan terms in any way? Are the loan terms the exact loan 
terms that the individuals already had signed up for, already 
had guaranteed, already had interest rates, already had terms? 
Are you changing any of that?
    Mr. Miller. Now, when you ask about the loan terms, you are 
not talking about the loan with the FDIC?
    Mr. Renacci. No, no. I am talking about the loans that are 
bundled in that LLC.
    Mr. Miller. Okay. So we, in the transactions that we have 
purchased, become the manager of--part-owner and manager of 
those loans.
    Mr. Renacci. I understand that. Are you changing the loan 
terms?
    Mr. Miller. We do. We negotiate with borrowers to sit down 
and to rethink and to find common ground as it relates to 
either extending the loan or terminating the loan or something 
like that.
    We do not have absolute authority nor do we have FDIC 
authority to alter the loan terms unilaterally. So it is only 
as a negotiation with the borrower or through the court system 
that there is any alteration to those loan terms.
    Mr. Renacci. So do you make the loan terms any worse than 
they have already signed on, or do you make them better? In 
other words, you can't say, well, you had a 15-year mortgage, 
you are only 2 years in, but I want it all paid today.
    Mr. Miller. That is correct. We cannot alter the loan terms 
to the detriment of the borrower unilaterally.
    Mr. Renacci. Okay. So the borrower still has the same loan, 
in most cases, that he had signed up for or she had signed up 
for years ago, months ago, whatever. You now have that.
    Mr. Miller. We have the same loan terms that we have 
inherited from the FDIC. The FDIC might have altered in some 
way.
    Mr. Renacci. Okay. So with that being said, my next 
question is, who decides how they are bundled? Because at this 
point in time, ultimately the borrower, in my opinion, hasn't 
been hurt just yet, because they are still signed up for the 
same debt they agreed to pay you a long time ago. So who now 
bundles them to make the decision of what goes in the LLC?
    Mr. Edwards. Thank you. We work with a financial advisor to 
figure out what the best structure for a particular loan sale 
is. So we go through the inventory of assets that we have taken 
back from the failed banks that we were unsuccessful in selling 
to an acquiring institution, and they will look through the 
portfolio with us, and we will figure out, okay, what is a 
rational way to market these loans. That is how we package them 
up.
    Your point about the loan terms is absolutely essential. 
Borrowers have the same rights and responsibilities that they 
did with the bank. We don't change the loan terms unless it is 
by mutual agreement.
    Mr. Renacci. So how do you--so then you bid these out to a 
third party. How do you decide--I know it is to the highest 
bidder, but--
    Mr. Edwards. Right.
    Mr. Renacci. --how do you decide who gets a chance to bid?
    Mr. Edwards. We have an extensive prequalification process. 
It is all laid out on our Web site. You have to have the 
financial capacity and the technical expertise. And you have to 
have a good background; you cannot have caused a loss to the 
Deposit Insurance Fund, for instance.
    And so if somebody goes through that prequalification 
process, then as specific loan packages become available, they 
are invited to bid. And if they choose to do so, they can sign 
up for due diligence and go ahead and bid.
    Mr. Renacci. Thank you.
    Now, Mr. Miller, some of those loans that you get in this 
package that you are now managing, some of them are worthless 
and some of them you are going to get more than 8, 10, 20 
percent, whatever you are buying them for?
    Mr. Miller. Yes, sir. Thank you.
    First of all, I want to correct--we don't pay 8 cents on 
the dollar for, or we haven't in this instance paid 8 cents on 
the dollar for the loans.
    And, yes, some of them will be worth absolutely zero, and 
have been. Some of them will be worth substantially worth more 
than what we paid. That is the expectation.
    Mr. Renacci. I don't know how you could pay 8 cents when 
you are--whatever you are paying, you are still going to get--
once you pay that back, you still have to contribute 60 percent 
back to the FDIC.
    Mr. Miller. That is correct, sir.
    Mr. Renacci. It looks like I am running out of time. Thank 
you.
    Chairman Neugebauer. I thank the gentleman.
    And now, Mr. Westmoreland is recognized for 5 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    Mr. Edwards, you mentioned to Ms. Waters that you were 
making these in smaller amounts. The smallest amount I have 
seen is $101 million. Is that a small amount to you?
    Mr. Edwards. It is in terms of what a potential investor 
would have to contribute, and again, that is the book value, 
perhaps, of the transaction, but not the terms of the actual 
cash contribution that somebody would have to put up. We have 
not found--
    Mr. Westmoreland. That is okay. That is just what I wanted 
you to--the smallest one so far I have seen is $100 million.
    Now, there was one made to a realty group that if you 
divide the number of assets into the amount, it came up to 
about $50,000 per asset. Couldn't you have divided those up 
into smaller things where more people could want to get in on 
this deal where they pay 8 cents down and then you loan them 
the balance at zero percent interest for 7 to 10 years with no 
recourse? Don't you think people would be interested in that?
    Mr. Edwards. Again, maybe I should talk first about the 8 
cents. The loans that Rialto ended up purchasing, the equity 
partnership, they had a book value of $3.1 billion. The 
estimated market value, the implied value based on their bid, 
was about $1.2 billion.
    Mr. Westmoreland. Who did that estimate come from?
    Mr. Edwards. We had a financial advisor who gave us--
    Mr. Westmoreland. Okay.
    Mr. Edwards. Yes.
    Mr. Westmoreland. Thank you. Who is your financial advisor?
    Mr. Edwards. We have a range of financial advisors, such 
people as Barclays, and Stifel Nicolaus. I can get you a list.
    Mr. Westmoreland. So you are the FDIC and you don't have 
anybody who can advise you on the finances?
    Mr. Edwards. No, I think that our--
    Mr. Westmoreland. You have all outside financial advisors?
    Mr. Edwards. Correct.
    Mr. Westmoreland. Now, you said that the Inspector General 
was doing a good job.
    Mr. Edwards. Yes.
    Mr. Westmoreland. Do you think he is doing it 
appropriately?
    Mr. Edwards. I have all the respect, professional respect 
in the world for Jon. You can read his background. I think he 
has a very--
    Mr. Westmoreland. Okay. Do you realize that your partner in 
this deal said that the Inspector General was being invasive? 
Do you agree with that?
    Mr. Edwards. I don't agree with it, and I am not aware that 
comment was ever made.
    Mr. Westmoreland. Okay.
    Can you give me, not right now but in writing, an example 
of where you went in to some unfinished homes and worked it out 
with the borrower to finish those homes up? I want to know 
where those are at, because I don't know of any of them. And, 
in fact, people have had a terrible time even getting in touch 
with somebody about the FDIC, and the FDIC said we are not a 
bank, we don't do that. So I would like to know where those 
are, exactly.
    But, Mr. Miller, in your testimony, you say that the 
borrowers you deal with are advised by counsel at every point 
in the negotiations. Is that correct?
    Mr. Miller. To the best of my knowledge, they are, sir.
    Mr. Westmoreland. However, we have heard from different 
people that Rialto's prenegotiation letter sent to borrowers 
includes a clause that prevents the borrower from bringing 
legal counsel to negotiations. In fact, I have heard reports 
that Rialto will not engage with borrowers who have counsel 
present.
    Is this the open process that you are claiming--that you 
are holding up as a model?
    Mr. Miller. No, sir. And thank you for your question. As 
you know, we have talked about this before.
    It is very much our policy to engage in conversation and 
communication with our borrowers. And while I respect and 
understand that you might have heard one side of the story, I 
have always found that anytime I hear one side of the story, it 
is always very compelling.
    Mr. Westmoreland. I know. And I heard your side, and that 
is the reason I went to get another side.
    Mr. Miller. Yes, sir. Thank you.
    But the reality is, from the prenegotiation letter all the 
way through to every negotiation that we have with our 
borrowers, we engage borrowers with counsel, without counsel.
    Mr. Westmoreland. Okay.
    Mr. Miller. We try to engage our borrowers properly and 
respectfully. And I think--
    Mr. Westmoreland. So if I brought you a prenegotiation 
letter that was sent to a borrower who said that they were not 
allowed to have an attorney, you would find that troubling?
    Mr. Miller. I am not sure of the context of that letter, so 
I won't speak hypothetically. What I would say is that in all 
instances, any communication with borrowers starts at point 
``A'' and is subject to discussion and negotiation. So if a 
borrower--
    Mr. Westmoreland. Okay, but if I brought--
    Mr. Miller. Excuse me, sir.
    Mr. Westmoreland. --a letter from Rialto--
    Mr. Miller. If the borrower would like to have an attorney 
present, the borrower can speak to us and say, ``I would like 
to have an attorney present, and I would like that as part of 
my written record.''
    Mr. Westmoreland. I am just asking you if you would look at 
a notification from Rialto to a borrower telling them that they 
could not have counsel during the negotiations.
    Mr. Miller. Sir, I would certainly look at a communication.
    Mr. Westmoreland. Thank you. Yes, sir.
    Now, what percentage of your negotiators are attorneys?
    Mr. Miller. I would have to get back with the real number, 
but I would say probably 30 percent.
    Mr. Westmoreland. Okay. So it is possible that somebody who 
was not being represented by counsel was actually negotiating 
with an attorney. Is that possible?
    Mr. Miller. I would venture to say probably not.
    Mr. Westmoreland. Okay.
    Mr. Miller. We generally do not--I can't speak absolutely, 
but I believe not.
    Mr. Westmoreland. Mr. Edwards, the last time we spoke on 
the record, which I think was August 2011--
    Mr. Edwards. Yes, sir.
    Mr. Westmoreland. --on structured transactions, I asked you 
if it would be best for a managing partner to go to court and 
obtain a judgment and allow the borrower to continue to accrue 
the interest in the taxes rather than foreclosing and taking 
the collateral first. Your response was that it seemed to be a 
case-specific situation.
    Do you remember that conversation?
    Mr. Edwards. Yes, I do.
    Mr. Westmoreland. So my office sent you case after case to 
prove our claim that Rialto specifically is litigating over 
negotiating. However, your answers are the equivalent of giving 
me and this Congress the finger.
    In your letter to Mr. Scott Leventhal, who will testify 
later--and I hope that all three of you gentlemen will stay 
tuned and hear some of the other side of this story--dated 
March 27, 2002, you said, the FDIC states, ``Although the FDIC 
holds an equity interest in the LLC, such as Rialto, we do not 
manage or service the assets that were conveyed to the LLCs or 
Rialto itself. Therefore, the FDIC is not in a position to 
control the resolution strategy to loans owned by the LLC.''
    So you are saying that even though you are a 60 percent 
partner in the deal, that you have fronted $642 million, that 
you have no say-so in it?
    Mr. Edwards. No, I wouldn't say that. We do exercise an 
oversight responsibility. But if you look at how and why we put 
these transactions together, it was specifically to make use of 
the private sector's expertise in working out these credits.
    It would not be a true sale if, in fact, we were involved 
in the day-to-day management of the LLC. And, in fact, that is 
exactly why we created these transactions: so that the 
government was not involved in the day-to-day aspects of those 
transactions.
    Mr. Westmoreland. Are we going to do another round, Mr. 
Chairman?
    Chairman Neugebauer. We are going to try.
    Mr. Westmoreland. I yield back, since my time is up.
    Chairman Neugebauer. Okay. Thank you for yielding back.
    Ms. Herrera Beutler is recognized for 5 minutes.
    Ms. Herrera Beutler. Thank you, Mr. Chairman.
    I have a couple of questions. Mr. Westmoreland made a very 
important point. Now, I understand that you are saying, in 
concept you set up this LLC by way of trying to protect the 
depositors, and you are working with the private sector and 
they are putting in some skin, and it is supposed to work. We 
are not opposed to that idea. The problem is, in practice, we 
have seen very different things.
    I think you have about 150--or had--loans; some were 
defaulted, some were performing. And I have instance after 
instance after instance of cases--people who did not talk, they 
were not related--I shared my church, they are nonprofits, they 
are developers, it is across-the-board--who have come to me and 
said, we cannot negotiate in good faith with Rialto, because 
they will not work, they won't negotiate. I almost laugh to 
hear you say ``negotiate.'' It is like the bully on the 
playground coming up to the skinny kid and saying, ``Give me 
your lunch.'' That is not negotiating. Yes, the kid could say 
no, but he is going to lose his lunch and get a black eye 
anyway.
    So where this comes to you, if you were operating on your 
own with your own capital, you wouldn't have me here 
questioning it. My problem is when an agency steps in and says 
to a construction loan that is performing, we are not going to 
extend any more payment to you, and then we are going to sell 
the loan to a business which has over 20 years of experience 
and understands how to develop this and has unlimited or very--
I shouldn't say unlimited, but significant access to capital 
and a tremendous sweetheart loan deal, we have a problem.
    And so, to hear you say that there is a negotiation taking 
place in good faith, I guess that is one thing that I would 
ask: Is that something you are willing to go back on? If I 
present to you cases, probably 80 of them, where people have 
not been able to negotiate--many of them are in foreclosure at 
this point or have lost it all in bankruptcy--is that something 
you are willing to work with us on?
    Mr. Miller. Is that for me?
    Ms. Herrera Beutler. Yes, Mr. Miller.
    Mr. Miller. Yes, thank you for your question.
    We have had numerous inquiries through various Members that 
we have responded to in writing over and over again. And, of 
course, we are always open to and willing to listen to, 
understand, and rethink any program or any negotiation that we 
have in place.
    The answer to your question simply is, yes, of course we 
will go back, and we want to hear any concerns that people 
have.
    Ms. Herrera Beutler. Great.
    Mr. Miller. That is why I am here today.
    Let me just say that it is very important to know that, 
number one, you might only be getting one side of a story. 
Number two, the terms and conditions of loan documents are very 
clear. The simplest answer is, the borrower is always able to 
pay off their loan. At the end of the day, they are looking for 
a compromise. And what one person might consider responsible or 
reasonable, another person might say, I need to know the 
factual landscape.
    Ms. Herrera Beutler. That is fair. And in reclaiming my 
time, part of my concern is, when someone is--by nature of home 
construction or commercial development, the way that the loan 
works is the money comes in phases. So if the FDIC says, 
``Sorry, we are going to cut you off, you don't get to finish 
it,'' it makes it very difficult then when you have the new 
owner of a loan who comes in and says, ``We want it all, we 
want it all now.'' You are, by definition, picking winners and 
losers. And the government shouldn't be in that business.
    Mr. Edwards, I have a question. It is kind of a two-parter. 
Actually, between the two of you, I have heard this now. But, 
Mr. Miller, your testimony stated that Rialto purchased the 
5,500 distressed loans with an unpaid balance of $3 billion 
with a purchase price of 1.2. However, Rialto paid the 250, 
which is 8 cents on the dollar down, and the FDIC picked up the 
remaining 600-plus million.
    So you put down 8 cents on the dollar, and I have two 
questions with that. First, how were these deals negotiated? 
And, second--perhaps this is more for Mr. Edwards--was the 
highest bidder really 8 cents? I do have folks in my neck of 
the words who maybe couldn't have hit the whole 100 percent but 
they could have hit 60 cents, they could have hit 80 cents. But 
was the highest bidder really 8 cents?
    Mr. Edwards. First of all, I will answer your question on 
the bidding. These transactions are widely, widely marketed. As 
I was indicating before, we have a prequalification process. In 
the case of the two Rialto deals, there were 16 bidders and 42 
bids on the first deal that they bought from us. They were the 
highest bidder. In the second deal, there were 11 bidders and 
18 separate bids, and they were the highest bidder. This is a 
very, very competitive process.
    Ms. Herrera Beutler. So 8 cents was the highest bid?
    Mr. Edwards. I think the issue here is, what they bid is a 
dollar amount for the percentage equity that they are getting 
in the LLC. In this case, it was 40 percent of an LLC with 
loans that are worth $1.2 billion. They paid--
    Ms. Herrera Beutler. Worth on paper.
    Mr. Edwards. No, worth with regard to our financial 
advisor's estimate, worth $1.2 billion. They paid $243 million 
for their 40 percent share of the equity portion of the deal. 
Fifty percent of the deal was debt, 50 percent was equity.
    Ms. Herrera Beutler. So--
    Mr. Edwards. So, in other words, yes, they bought--
    Ms. Herrera Beutler. --8 cents was the highest bidder in 
terms of recovering. Okay, so these--
    Mr. Edwards. If you look at this as a metric of percentage 
of book value, the 8 cents is correct, but--
    Ms. Herrera Beutler. I have to tell you--
    Mr. Edwards. Yes.
    Ms. Herrera Beutler. --one thing I keep hearing is, I ask a 
question and then sometimes it is, with the whole portfolio we 
can't pick and choose pieces of it. And then I hear, you can't 
break it down. I keep hearing different points made in response 
to questions.
    In my mind, we had willing people who could have performed, 
and it was the FDIC who stepped in. And it was one of the first 
banks that went down in our region. Granted, I don't think you 
all knew what you were doing, and we are bearing the 
consequences.
    But, with that, we will keep going. Thank you, Mr. 
Chairman.
    Mr. Miller. Mr. Chairman, should I answer my portion of the 
question?
    Chairman Neugebauer. I think we are going to try to come 
back around.
    Mr. Miller. Okay.
    Chairman Neugebauer. We are going to have to vote here in 
just a little bit.
    The Chair now recognizes Mr. Capuano, the ranking member of 
the subcommittee, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    And, gentlemen, I am kind of put off on this, because the 
truth is, I have not dealt with this, so this is kind of a new 
issue to me. My office has gotten no calls on this, so I am 
kind of learning as we go along. But I have been listening, and 
I have read the testimony. And, Mr. Inspector General, I have a 
couple of questions.
    I believe you said it in your testimony, but you also put 
it in your written statement. You said, according to the FDIC, 
actions have been taken to address the suggestions you made.
    Mr. Rymer. Yes.
    Mr. Capuano. Have you not checked with the FDIC?
    Mr. Rymer. No, sir, not yet. We have not completed the 
audit follow-ups where we would routinely get back to those.
    Mr. Capuano. Okay. But you will be doing that?
    Mr. Rymer. Yes, sir.
    Mr. Capuano. You have no reason to believe that anything 
other than what they have told you is true?
    Mr. Rymer. Not at this point, sir, but we certainly will 
verify that.
    Mr. Capuano. Okay. And when you did your audit, did you 
check any potential conflict of interest on these things? Was 
that part of the audit or no?
    Mr. Rymer. The two we completed, no, we did not, sir. But 
the one we are doing now, the Rialto work, there is a bidding 
and selection process portion of that audit that will look at 
that.
    Mr. Capuano. Okay. Great. Thank you. And you expect that to 
be done, give or take, in August?
    Mr. Rymer. Yes, sir, late August.
    Mr. Capuano. Great. Thank you.
    Mr. Edwards, most of my questions--I was going ask you 
about that 8 cents on the dollar. I think you just answered it 
as you see it. I wouldn't mind seeing that in writing at a 
later time, because it is hard to follow some of the numbers 
that get thrown around when you are not that familiar with it. 
So I would like to hear about that a bit little more, because 8 
cents on a dollar? I am in. I have 8 cents. Don't get me wrong; 
that is all you are going to get. But I will get a buck for it. 
But I understand that there are differences of opinion, and I 
would like to follow it a little bit better.
    But I would like to ask you on--actually, I am not sure if 
it was Mr. Edwards or Mr. Miller. I believe one of you, maybe 
both of you, said that of the loans in the package here, 90 
percent of them were in default. Am I right to believe that 
most of these loans that are in default are construction loans? 
They are not typical mortgage loans, they are loans that are in 
the middle of construction, so the asset you have is possibly a 
pile of dirt or a hole in the ground? Is that a fair assessment 
or not a fair assessment? Understanding, not assessment.
    Mr. Miller. Sir, if you look at the 5,500 loans, they are a 
range of loans. They are not consumer loans, they are not loans 
on homes that are occupied by families. They are generally 
either, really, land, dirt, or land that is partially 
developed, homes that are under construction, shopping centers, 
office buildings, warehouses.
    Mr. Capuano. That are mostly under construction. So these 
are mostly, for all intents and purposes, construction loans.
    Mr. Miller. Some under construction. Some of them are 
completed projects. It is a panoply of property types.
    Mr. Capuano. The reason I ask is because--I think the point 
was made--you can't pay off a construction loan. If you pull a 
loan in a middle of a construction, you just can't do it. I 
have had construction loans. They are really just bridge loans 
until have you an asset that you can then take if I ever finish 
it. So I think that is an important point to make.
    Mr. Edwards, I guess the one question that hasn't been 
asked that I am aware of is, okay, you have 4 percent of all 
the assets in this. And that 4 percent is based on book value, 
not actual value, and that is fair enough, but whatever, some 
very relatively small percentage.
    Mr. Edwards. Right.
    Mr. Capuano. There have to be other--or maybe there isn't--
but I presume there are other bad loans that don't go into this 
4 percent that you handle another way. And I am just curious, 
if you get rid of the structured asset sale transaction, what 
do you do with these assets?
    Mr. Edwards. Yes, thank you for the question.
    With respect to the $670 billion of assets that were from 
failed banks since the beginning of 2008, the lion's share of 
those have gone to acquiring institutions. In the instances 
where we cannot, as I described earlier, where we cannot pass 
those to acquiring institutions with or without a loss share 
agreement--
    Mr. Capuano. Hang on.
    Mr. Edwards. Yes.
    Mr. Capuano. I need to hear it in English. So I am going to 
translate for you, and tell me if I am right.
    Mr. Edwards. Yes.
    Mr. Capuano. Bank ``A'' fails. You want to sell most of 
bank ``A'' to bank ``B.''
    Mr. Edwards. Absolutely.
    Mr. Capuano. You go to bank ``B,'' and bank ``B'' says, 
``Wait a minute. I will take it, but I don't want these 200 
loans.''
    Mr. Edwards. Correct.
    Mr. Capuano. ``These are no good. I don't want them. I will 
take everything but those 200 loans.''
    Mr. Edwards. Yes.
    Mr. Capuano. Okay.
    Mr. Edwards. Yes. And then once we get those loans, by 
definition, since the bank fails and there is no acquirer, we 
have to start working them ourselves.
    And as I suggested, there is a percentage that we end up 
just retaining in the portfolio and working out. In other 
instances, we work them for a while and then put them into 
these Structured Transaction Programs. There are also instances 
where we can, mostly with performing loans, put them into 
securitizations.
    Really, the only other alternative is you sell them for 
cash. The whole reason that we are doing this program is 
because cash sales in a distressed market right out of the bank 
get incredibly low bids. As a matter of fact, early in the 
crisis, we did put some of these loans in a standard whole loan 
sale package, and the prices that we got were very low.
    Mr. Capuano. Have you or Mr. Rymer or anyone else, have you 
done maybe a comparison, for the sake of discussion, take 200 
of these exact same loans that maybe you did just spin them out 
right away, take the loss up front, versus the ones you have 
held? I am just curious. Your point makes sense to me, but is 
there any statistical analysis to back that up to say generally 
that is correct?
    Mr. Rymer. Sir, in my statement, we identified an audit 
that we have yet to do but that we certainly plan to do. And 
that is, if you go back to the $668 billion in total that has 
passed through the resolution process, there are three or four 
different resolution methods that have been used principally, 
and the most popular one is the purchase and assumption through 
a bank. Then, there are the loss share agreement arrangements. 
And then at the end, the smaller piece is the one we are 
talking about today, the structured asset sales.
    I believe it is very important for an independent 
assessment of the value of those three resolution methods to be 
compared to each other, and to consider the risk associated to 
the FDIC and certainly the risk or potential damage or harm 
that may be happening in a particular market--
    Mr. Capuano. And you plan on doing that, Mr. Rymer?
    Mr. Rymer. Yes, sir, we do.
    Mr. Capuano. When you do that, I presume--again, the 
different approach is one thing. But as it was explained, as I 
heard it anyway, one method is all the so-called good loans and 
the other method is all the so-called bad loans. I am sure you 
do, but I need to make sure of it: You are going to be doing 
apples to apples. Comparing the return on value for a bad loan 
to a good loan, very interesting but it doesn't help. I am sure 
I know the answer, but I need to ask.
    Mr. Rymer. Yes, sir. The point we would make is that for 
like collections of assets, we would do a comparison.
    Mr. Capuano. Thank you.
    Mr. Edwards. I think it would be helpful if I just add one 
point. Early on in the crisis, as I indicated, we tried to do 
cash sales; the prices were just very, very low. At this point 
in the crisis, as we market LLC transactions, we market them 
both as an LLC transaction and as a whole loan sale. If the 
whole loan sale price is better, we take that, because the 
market has now recovered. And, in fact, we had a transaction 
with some hotel loans last year, and that is exactly what 
happened.
    Mr. Capuano. Thank you.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlemen.
    I am going to do a very quick lightning round. I am going 
to give Mr. Westmoreland 2 minutes, and I am going to hold him 
to it.
    So, you are recognized for 2 minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman.
    I would like to ask unanimous consent to I submit for the 
record a letter from American Land Rights and any attached 
material submitted by borrowers whose loans have been 
transferred into one of these LLCs; a letter from Merolla & 
Gold, LLP; and a letter from Tom Carson, a doctor of 
appraising, really.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Westmoreland. Mr. Edwards, did you go to--or did 
anybody go to any of the specific borrowers and say, if you can 
come up with 8 percent of what the loan is, we will give you a 
loan for the remainder of it, we will be a partner with you at 
60 percent, and we will give you 7 to 10 years to do this, and 
it will be at no interest and there will be no recourse to you? 
Did you give any of those borrowers that opportunity?
    Mr. Edwards. No, we did not. What we do--
    Mr. Westmoreland. Do you think any of those borrowers would 
have taken that opportunity?
    Mr. Edwards. I am certain they would have. But I will tell 
you--
    Mr. Westmoreland. Me, too.
    Mr. Edwards. --what we do when a bank fails is, when an 
asset is put into a receivership because we haven't been able 
to pass it to an acquiring institution, we will work with the 
borrower. If they give us their current financial statements 
and we are able to get an appraisal on the collateral, we will 
try and do some kind of workout with them before we even put 
these loans in a structured sale. It is a 6- to 9-month period, 
generally, before that happens. So we do work with these 
borrowers.
    Mr. Westmoreland. You were at the hearing that we had in 
Atlanta, and Mr. Miller. We had it at noon in Georgia, and we 
had people from Washington State, California, Nevada, Texas, 
Florida, and New Jersey who came, who had problems with Rialto. 
There was not one mention of Starwood, Four Squared, Colony, or 
anybody else. These people traveled on their own dime to come 
to that hearing.
    That is just one side of the story, and I can't wait to get 
yours on some of these other things. But that is a problem, 
when you have people traveling across the country just to come 
to a hearing at which they are not even going to get to 
testify.
    Mr. Edwards, I just find it very, very troubling that the 
FDIC has not done more to make sure that at least some of these 
people have an opportunity to have the same deal you are 
offering other folks. That just makes sense.
    And, with that, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from California is recognized for 2 
minutes.
    Ms. Waters. Mr. Chairman, I think that what the FDIC is 
hearing today is our dissatisfaction with the way that they are 
disposing of these assets in one or two or three different 
ways.
    Mr. Miller, you have the ability, in negotiating with these 
borrowers, to decide whether or not you are going to demand a 
payoff, whether or not you are going to do a loan modification, 
or what have you. We have been going through this on housing, 
and so we are very concerned about the way loan modifications 
work or don't work. And we have been trying to keep people in 
their homes.
    And while we understand that you have to get the most you 
can get for these assets--that is kind of dictated to you--we 
want some balance. And we want you to be able to sell these 
assets and make a reasonable return on the sales. But we also 
want to keep these businesses and we want to give people an 
opportunity, rather than taking what they have invested in and 
giving it to somebody else for the 8 cents on the dollar that 
you have been hearing.
    So do you hear us, Mr. Edwards?
    Mr. Edwards. Yes, we do. And believe me, we are very 
concerned about how this impacts communities and borrowers. As 
you just pointed out, we have a statutory duty under our 
enabling legislation to maximize the recovery of these 
receiverships. The structured sale transactions, as I pointed 
out in my oral and my written testimony, under best estimates 
have netted the receiverships over $4 billion more than just a 
straight cash sale.
    I will tell you this, to anybody on the committee: We have 
said and we will say again, if there are individual fact-
specific borrower issues that you would like to bring to our 
attention, we spend a lot of time looking through those 
complaints and trying to make sure that our partners have not 
violated the LLC agreements in any way and are acting in a 
respectful and businesslike manner.
    Ms. Waters. Mr. Chairman, may I--Mr. Rymer, do you audit 
the negotiated arrangements with the borrowers that Mr. Miller 
is doing, and if so, are you able to determine whether some are 
more favorable than others or what have you? Do you audit that?
    Mr. Rymer. No, ma'am, we have not.
    Ms. Waters. How do you know what he is doing?
    Mr. Rymer. We audited his compliance with the terms and 
conditions of the contract. That report is not complete, ma'am, 
but it is expected to be finished in August.
    But I can tell you that the objective of that audit was to 
audit his compliance with the terms and conditions of the 
contract, to audit the FDIC's oversight of that contract, to 
audit the bidding and selection process that Rialto went 
through to--
    Ms. Waters. That is not what I am talking about, and I will 
cut you off. My time is up.
    Would you make sure that we get a copy of that report? I 
want to take a look at what has happened to all of these 
negotiations.
    Chairman Neugebauer. Absolutely. We will get those, and we 
will ask the FDIC to furnish us a copy of that report.
    Going to go back to a lightning round. Ms. Herrera Beutler?
    Ms. Herrera Beutler. All right, lightning, I am going to 
speak fast. Thank you, Mr. Chairman.
    I understand, Mr. Miller, Lennar is not actually--legally 
allowed to buy land acquired by Rialto in this agreement. 
However, Lennar has recently decided to begin buying land and 
building homes in southwest Washington, in the same area in 
which Rialto owns huge amounts of undeveloped land that remains 
deadlocked.
    Can you explain this decision? Are there laws prohibiting 
Lennar and Rialto from discussing the loans and the land that 
they own? Meaning, you have access to competitors, other 
developers; you have their financials, basically. Can you share 
that information? And, further, what is to stop Rialto from 
sitting on the undeveloped land to jack up the price of 
development Lennar is planning?
    Mr. Miller. Thank you for your question.
    Boy, there are so many things. I feel like I am sitting 
here as a villain, and I don't get to answer any of the 
questions. Let me say--
    Ms. Herrera Beutler. To a lot of broken homes in my neck of 
the woods, you are a villain. And that is not my personal--but 
I have a lot of broken homes.
    Mr. Miller. Thank you. I understand that, and we remain 
sensitive to that in our offices every day. We are engaged to 
do a business that is difficult, and sometimes it is a little 
bit--it is adversarial and uncomfortable. And there is no 
question about that. We are very sensitive to that. We 
recognize the landscape.
    I have to start by answering the question and telling you, 
we did not pay 8 cents for these loans.
    Ms. Herrera Beutler. Okay, that is not my question, Mr. 
Miller. And I have a very limited amount of time. It is more 
specific to Lennar and Rialto, the land that is held, the 
information that is shared, and the financials.
    Mr. Miller. Okay.
    Ms. Herrera Beutler. And you can provide the rest in 
writing, as far as the 8 cents. I am happy--we will all 
continue the dialogue.
    Mr. Miller. Thank you.
    We have to recognize that Lennar put $250 million of cash 
that sits behind the loan and comes out pari passu with money 
to the FDIC. We do not play games for our homebuilding business 
or anything else by investing in loans in any area of this 
country. Our homebuilding operation enters various areas of the 
country having nothing to do with the activities of Rialto.
    Ms. Herrera Beutler. Reclaiming my time, I actually find it 
interesting that when Clark County was the largest and fastest-
growing county in the State of Washington, Lennar wasn't there. 
Every homebuilder in, like, the west coast was there, but 
Lennar wasn't there until everything went down. And there are 
these holdings by a company that isn't the same but they are 
cousins, so to speak.
    Mr. Miller. At that time, it was not economically feasible 
when prices were high and it was very difficult for us to enter 
that market. We are entering that market for different reasons.
    Yes, we have loans in the Rialto portfolios and the FDIC 
portfolios in those areas. Understand that every time we end up 
through Rialto taking back a piece of land and unfortunately 
taking it back from one developer, we cannot sell that land to 
our homebuilding operation and don't intend to--
    Ms. Herrera Beutler. I understand that.
    Mr. Miller. But we are enabling a competitor, another home 
builder, to build on that piece of land at a lower basis. So we 
are actually invigorating the economy by putting the land in 
someone else's hands. We are not holding these tracts of land 
for some future date or for some other reason.
    Ms. Herrera Beutler. And there is no financial information 
that is shared between the two on the land that is held, 
financials?
    Mr. Miller. Recognize--there is no financial information 
that is shared, nor would it matter. Remember, our financial 
information as a public company is available to everyone. There 
are no trade secrets in that. And we certainly don't seek 
financial information on any of our competitors, either through 
loans that we have or through other means.
    Mr. Rymer. Ma'am, if I could quickly tell you that in the 
audit we are doing now with Rialto, we are paying particular 
attention to the controls over transactions with affiliates. 
That is an audit step that will be in the audit report that you 
should expect later this summer.
    Chairman Neugebauer. I want to thank our witnesses. I 
appreciate your testimony.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    With that, this panel is dismissed, and we will call up the 
second panel: Mr. Scott Leventhal, president of Tivoli 
Properties, Inc.; and Mr. Edward Fogg, owner of Fogg 
Construction Company and Fogg Mortgage Company. If you would 
take your places, please.
    We are trying to get these opening statements as quickly as 
we can. We think there are going to be some votes here in a 
while, and it will be a fairly lengthy vote.
    And so, with that, Mr. Leventhal, thank you for being here. 
You are recognized for 5 minutes to summarize your written 
testimony.

STATEMENT OF SCOTT L. LEVENTHAL, PRESIDENT AND CHIEF EXECUTIVE 
                OFFICER, TIVOLI PROPERTIES, INC.

    Mr. Leventhal. Thank you, Mr. Chairman, and members of the 
subcommittee. My name is Scott Leventhal. I am the president 
and CEO of Atlanta-based Tivoli Properties, Inc. Tivoli is a 
developer of high-rise condominiums, apartment projects, mixed-
use projects, subdivisions, both in-fill subdivisions, 
lifestyle communities, and entry-level communities.
    I appreciate the time to speak to this committee and would 
note that we are all here today because the world has been 
turned upsidedown. And by turning the world upsidedown, there 
is obviously some fallout and things that should be reviewed 
and addressed.
    As an Atlanta-based developer, I am particularly affected 
by the fact that Georgia has seen more bank closures than any 
other State in the country. For me, that has resulted in 
multiple banks being closed, the assets of those failed banking 
institutions being transferred through whole bank purchasing 
assumption agreements where the FDIC will backstop the losses 
sustained on those loans through a loss share, through 
structured transactions with private partners, multiple 
partners, as well as directly liquidated to private investors.
    The subcommittee and the prior witnesses talked previously 
about the methodologies and how these loans are liquidated and 
transferred, and it is important that we do analyze that.
    The whole bank purchasing assumption is a situation where 
the FDIC is capable of taking all the assets of a failed 
banking institution and transferring those assets to a 
financially solvent institution. That institution doesn't get 
to choose the good or the bad. They take the loans, they work 
the loans out. The loans that are unable to be sold through a 
whole bank purchasing assumption end up in these structured 
transactions.
    The primary difference between these two methods of 
liquidation is that when a bank fails and an acquiring bank 
purchases the assets, the borrower is dealing with the bank. 
When a bank fails and the FDIC is incapable of selling those 
assets to another acquiring bank, they end up in the hands of a 
private partner, and in most instances that private partner is 
a direct competitor of the borrower.
    These structures provide, as previously discussed, 
management fees to be paid on the unpaid balance of the loans. 
They also provide for interest-free financing for a significant 
term.
    Further, something that has not been addressed in this 
hearing is that these structures actually have a disincentive 
for the private partner to perform. Meaning that for the 
private partner to liquidate the assets in the structured 
transaction, they will get to a point where the profits that 
are being split between the private partner and the FDIC will 
actually increase to the FDIC and decrease to the private 
partner, thereby diluting the amount of asset management fees 
that are available to be collected. If you have 7 years, why 
finish anything? Why liquidate? Why deal with it?
    Another matter which has been touched on today is, when a 
bank fails and the FDIC comes in and takes over the assets of 
the failed institution through a receivership, and elects to 
not fulfill the obligations that are required under the loan 
agreement, that issue has a very specific legal term; it is 
called repudiation.
    Now, the consequences of repudiation are very significant. 
In many instances, borrowers have borrowed moneys for the 
purposes of construction projects. Depending on what point in 
time the assets or the bank fails, that borrower may be subject 
to repudiation. And the FDIC, because of other problems the 
bank may have, will elect not to proceed forward. Many 
borrowers around the country are facing this issue, and it is 
resulting in very dire consequences and dire situations.
    Now, the acquiring bank or the private partner through the 
structured transaction also then has the opportunity to pursue 
the borrower, pursue the guarantor for the full amount that has 
been drawn, except for the lender failed to perform. They 
repudiated. It is interesting that the rules are written in 
pencil in some instances.
    I think that the subcommittee should take consideration of 
the fact that structured transactions are important. They are 
important to the FDIC's ability to liquidate assets. But what 
we need to do is we need to resolve the issue where direct 
competitors are coming in and they are being given access to 
private borrowers' financial information. It creates an unfair 
advantage, particularly when the Federal Government assists and 
is driving competition out of the marketplace.
    Tremendous litigation is ensuing around the country; and 
while many borrowers have the right under the Federal 
Bankruptcy Code to seek some sort of debtor protection, they 
should not be forced to if the opportunity exists to work those 
loans out.
    I am moving very quickly. I have one last point, Mr. 
Chairman, if you would allow my indulgence. I see the clock has 
changed.
    It is very important that we recognize that in a lot of 
litigation which is going on around the country, while 
structured transaction partners are seeking to recover and get 
judgments on the obligation, meaning the note and the guarantee 
without first foreclosing on the property or the collateral 
that secures the loan, you see communities all over, 
particularly in Georgia, wasting. And that means that the 
surrounding properties have severe effects from the fact that 
the neighboring property is just wasting away because a dispute 
is going on between two different parties and it is unrelated.
    So Mr. Jones, who lives in a home that is right next door 
to a partially developed house or partially constructed house 
where the FDIC has come in and repudiated the loan, a successor 
has then come in and wants to litigate for the amount of that 
debt, that homeowner living next door's appraised value has 
declined. They can't get new financing. That borrower is now 
upside down.
    [The prepared statement of Mr. Leventhal can be found on 
page 91 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Fogg, you are recognized for 5 minutes.

 STATEMENT OF EDWARD L. FOGG, OWNER, FOGG CONSTRUCTION COMPANY 
                   AND FOGG MORTGAGE COMPANY

    Mr. Fogg. Good afternoon, Chairman Neugebauer, and members 
of the subcommittee.
    My name is Ed Fogg, and I am grateful to be here. I would 
have never in my wildest dreams believed that my company's 
ultimate failure would come directly from the governmental 
policy of the FDIC and the partners they selected--
    Mr. Westmoreland. Mr. Fogg, would you speak into the 
microphone?
    Mr. Fogg. Yes, sir--only because my bank failed. My story 
is not one of a borrower who gave up and walked away from any 
of his obligations. I am not a borrower who took out loans with 
a bank with no intention of paying them back.
    In late 2008, the Bank of Clark County approached me to 
purchase some of their distressed properties and develop rental 
homes. We closed our last construction loan on Christmas Eve, 
2008, and the bank failed 23 days later.
    Without any of the promised help from the FDIC, I still 
completed my construction projects out-of-pocket and paid every 
subcontractor. All of our loans were current at the time of the 
bank failure.
    I am one of the many borrowers whose loans were repudiated 
for no good reason, and this has created my problems. I am sure 
you know that when a loan is repudiated, it requires me to hold 
up my end of the deal, but the FDIC does not have to the hold 
up the end of the deal of the failed bank. In my case, it did 
not fund approximately $650,000 of the original loan 
commitment. To many small businesses, this is devastating.
    Put yourself in my shoes. Your bank just failed, the FDIC 
says there are no funds available to complete your project, and 
there is no construction financing in 2009. But, today, I 
really feel I am here to represent the little guy who 
unfortunately just banked with the wrong bank, and then 
eventually our loans were sold into some sort of structured 
transaction.
    I heard Ms. Sheila Bair speak about the responsibilities of 
the American public to make their mortgage payments. I have 
done this, and it has really meant nothing.
    I have also read the FDIC book called, ``Managing the 
Crisis'' and the clear message is that the FDIC recognized in 
the past the need to protect and not hurt communities by not 
cutting off credit to businesses and to work with the local 
communities. I hope in the future, they emphasize these actions 
once again.
    I do believe the FDIC needs to recover as much money as 
possible to reimburse the American taxpayer, but it should 
never be done by creating further economic harm in the 
communities where they have unfortunately closed banks. 
Structured relationships with the FDIC need to be much more 
careful in selecting their long-term partners. The partners' 
goals should not be to become the prize of Wall Street but the 
solution for Main Street.
    The FDIC's partnership with Rialto/Lennar was tricky from 
the beginning. All of the loans were basically primarily 
construction loans, land development loans, and it is obviously 
the same line of work that their parent company Lennar is in. 
Unfortunately, what incentive do they have to work out the 
problems of their competitors? It doesn't make much sense to 
hire someone that is your direct competitor to try to help you 
fix your problems.
    In my case, with Rialto, we never had missed any sort of 
payments on any programs, even after they repudiated our loans 
and we had to come up with the $650,000 out-of-pocket. They 
eventually negotiated four different settlements with us, but 
every time, they would back out of the settlement. When they 
finally did offer me a settlement, they told me to pay my 
upside down home off completely or they would foreclose on me.
    But they did come back with another option. They offered me 
a rate of 8 percent with a $10,000 up-front loan fee on a 
$250,000 loan. It took me a year-and-a-half to negotiate this 
loan extension, and the only extension they would give me was 
for an additional year-and-a-half. I am a mortgage broker, and 
if I had offered this to one of my clients it would have been 
conceived as predatory lending, as the APR in this loan is 38 
percent.
    Also, with the attractive financing the FDIC has offered 
their partners, it should be able to be passed along to the so-
called experts of the community.
    We understand what is in our projects. None of us went into 
these loans with the idea of not paying them back. We are 
experts in our local markets. We are experts in the product 
that we are putting out there. And we alone should be allowed 
to try to work with the FDIC to maximize the return to the 
American taxpayer. None of us wants to see our projects fail or 
not succeed.
    The problem also isn't just with structured transactions. I 
have five loans with another bank called Frontier Bank. It was 
acquired by Union Bank of California. We worked for years and 
years to come up with a long-term solution and provided 
thousands of pages of income documentation and assets. We 
finally did receive a denial for our modification from this 
bank a few months ago, and the most amazing part about our 
denial is they actually mailed the decline of my modifications 
to a friend of mine's P.O. Box. Union Bank cared so little that 
they could not even get my address right. The FDIC should be 
disgraced by the actions of this partner.
    We, the borrowers, did not go into these banks with the 
goal of defrauding them or not paying them back. I truly 
believe that given the time and acceptable terms, the FDIC 
would recover much more money and not force borrowers like 
myself into bankruptcy or foreclosure.
    I thank you for letting me be here.
    [The prepared statement of Mr. Fogg can be found on page 63 
of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    We now have votes, and so I am going to recess the hearing 
until after this series of votes.
    With that, we are in recess.
    [recess]
    Chairman Neugebauer. The committee will reconvene.
    We will go to questions with Members, and I will recognize 
myself for 5 minutes.
    Mr. Leventhal and Mr. Fogg, you know the basics of why FDIC 
is doing these structured transactions. There has been a pretty 
unprecedented amount of bank closures over the last few years, 
taking on a lot of assets. Some of these assets the acquiring 
banks don't want to take on, and you are familiar with that. 
Tell me what you would change about the way the FDIC is 
handling the structured asset program?
    Mr. Leventhal. Thank you, Mr. Chairman.
    As I mentioned earlier, the Structured Transaction Program 
is an important tool for the FDIC to be able to liquidate 
assets, and it is very sensible that the FDIC goes into 
partnership with private partners who are experts in the field. 
It would not make sense to get someone who is not an expert.
    I think that the primary issue that needs to be addressed 
is that borrowers should have an expectation that they are 
doing business with banks. Banks operate in a manner that 
borrowers are accustomed to. If we could divest the obligations 
of some of these individual borrowers in these structured 
transactions before they are entered into, where the private 
partner comes in and they acquire all the assets and they take 
the skill set they have and the assistance they are getting 
from the FDIC to be able to improve on the assets, I think that 
a structure could come about that would result in one, a better 
financial reward to the FDIC, and two, an improvement within 
local economies.
    Chairman Neugebauer. Mr. Fogg?
    Mr. Fogg. Why does the FDIC think that for their 40 percent 
stake in the deal, they are actually getting a better deal than 
working with the local communities? Why is somebody like Rialto 
more of an expert on my project than I am? Why do they have to 
go out and hire somebody to try to liquidate it, to try and 
recover, when I obviously have a vested interest in getting 
through it?
    We didn't go into these transactions trying to commit 
fraud. We went into them to try to make money for our families.
    So by the FDIC putting them in a big structured 
transaction, hiring some guys from who knows where in the 
country, how are they more of an expert on my piece of property 
or my particular grocery store or high-rise building than I am? 
All they do is they go out and, after they get the property, 
they come back and hire other people from our community to be 
their so-called experts when we were there to begin with.
    Chairman Neugebauer. So you heard the FDIC say that there 
is a transition period between the time when they acquire those 
assets and when they put them into the structured transaction. 
That period of time is in the neighborhood of 9 to 12 months. 
In your own experience, Mr. Leventhal, in that 12-month period 
before your loans were put into the structured transaction, 
tell me a little bit about your dealings with the FDIC.
    Mr. Leventhal. Thank you, Mr. Chairman.
    First, I think I would be remiss if I didn't let this 
committee know that I have been very fortunate, and I have 
recently settled my disputes, which I had one with Rialto. I 
have had other matters with other structured transactions which 
have not resulted in any poor experiences for me.
    And I can say that my experience with the FDIC may be a 
little bit surprising, but during the term of receivership, I 
worked well with them. Unfortunately for me, during the term of 
receivership, which I believe was approximately October or the 
fall of 2009 for about 10 or 12 months, we were facing one of 
the worst real estate recessions this country has ever seen. 
And the FDIC's willingness to compromise with me did not lead 
me to have the ability of raising the necessary capital to come 
in and acquire and resolve it. But I did have a very pleasant 
experience with the receiver during that time period.
    Chairman Neugebauer. So while they were cooperating with 
you, you were in a market where going out and getting 
additional financing to take that loan out was not available to 
you?
    Mr. Leventhal. Capital was completely scarce, in particular 
for the type of property that was the subject of that loan. It 
just was not available. And it still in large part is not 
available.
    Chairman Neugebauer. Was that a condo project?
    Mr. Leventhal. No, the FDIC receivership and Rialto 
transaction were an anomaly for the business I am actually 
involved in. It was a suburban townhome project. I had acquired 
the property because it was all presold to a major national 
builder. Three weeks after I bought the property, the builder 
canceled on it, terminated. And that is where I think the 
Lennars of the world would have an opportunity of creating 
value in partnership with the FDIC.
    Chairman Neugebauer. All right. Thank you.
    I now yield to the ranking member, Mr. Capuano.
    You pass?
    I will go to Mr. Westmoreland. You are recognized for 5 
minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman, and thank you 
for doing this. And I want to thank Mr. Edwards from the FDIC 
for sticking around.
    Mr. Leventhal, when did you have a settlement with Rialto?
    Mr. Leventhal. The settlement has occurred within the last 
7 days.
    Mr. Westmoreland. Okay.
    And, Mr. Fogg, did you have any instances where you had 
some houses--were you in the residential business?
    Mr. Fogg. I am a residential contractor. But I also build a 
number of rental properties and maintain those and keep those.
    Mr. Westmoreland. Did you have any projects that were maybe 
partially completed when the bank failed and you could not 
continue on with the construction?
    Mr. Fogg. I would like to also answer the chairman's 
question with this, because it kind of ties together.
    The bank had approached me to purchase their distressed 
properties to build rental housing, because we were experts in 
that arena, to get them off their books. The bank failed 23 
days later. We had purchased the land, bought the permits, and 
put the foundations in. And at that point, we met with the FDIC 
when they called us in on the weekend. They said, please come 
in on Monday morning and talk to us. It is a pretty unpleasant 
surprise when you sit in their meeting and they have an armed 
guard sitting next to you. It is not exactly what you expect 
from your financial institution.
    They asked me to provide them with a business plan of what 
I wanted to do to work out the problem. Being in a situation I 
could not fail, because obviously I have a lot of other real 
estate assets going on, I came up with a plan where I had loans 
of approximately $285,000 a unit. My plan was, okay, you don't 
need to give me $285,000; I will do $200,000 a unit.
    The contractor at that time thanked me for the plan and 
said it is the best business plan that they had ever written. 
Please proceed.
    I never got anything in writing. I am an honorable guy. So 
I took my own funds and any money I could scrape up to complete 
my project.
    At the time of completing the project, I brought them lien 
releases, paid bills, you name it. And at the end of the day, 
the FDIC contractor said, I am sorry, there is someone at the 
FDIC who, unfortunately, has made the business decision to not 
honor their funding commitment. I didn't have anything in 
writing; shame on me.
    During that period of time, we constantly talked to them. I 
talked to them 2 or 3 times a week, trying to see, who do I 
speak with? How do I resolve this? I have other unresolved 
issues. And they always led me down the path. They led me down 
the path every single time.
    Mr. Westmoreland. This was the FDIC? And was it a branch or 
was it the FDIC in D.C. or--
    Mr. Fogg. When you deal with the local contractor, they are 
not actually--I guess--
    Mr. Westmoreland. This was an FDIC contractor? Somebody the 
FDIC had contracted with?
    Mr. Fogg. It was called Quantum Services--Quantum 
Investments--or whatever they wanted to call themselves. But 
they are the figurehead or the face of the FDIC that you meet 
in your local community.
    Mr. Westmoreland. Okay.
    Mr. Fogg. You never get a chance to speak to anybody 
actually at the FDIC.
    Mr. Westmoreland. Mr. Leventhal, do you know of any--and I 
know you dealt with Starwood, I think. Is that not true?
    Mr. Leventhal. Yes, sir.
    Mr. Westmoreland. And that was a pretty decent experience 
there?
    Mr. Leventhal. No. I lost a great building that I had 
constructed. I turned it in from a condo project. It was at the 
worst time to have built a condo project. Made it a hundred 
percent cash flowing building at 90 percent occupancy.
    Starwood had a great deal. They came in and they foreclosed 
out the building because the building that I spent $51 million 
building was not even worth $29 million. That is a really 
staggering thought when you consider it. And I had investors 
that lost upwards of $15 million in the transaction.
    Personally, it wasn't a bad experience. It was a 
nonrecourse loan. I wasn't made to suffer, as some debt 
collection efforts would. And Starwood has since come in and 
they have taken back lots of collateral. And Atlanta is now in 
a good position because condominiums have sold so much that it 
almost makes sense to build another condo building--almost.
    Mr. Westmoreland. One last question. Are any of you 
familiar with any subdivisions that were halfway completed or 
developed, say that phase one was finished and sold out, had 22 
homes in it or whatever number, phase two was being developed, 
and all of a sudden the bank went out of business financing it, 
and the FDIC sold that to a structured loan agreement, and they 
couldn't work it out or sued immediately and it sat there? And 
the 22 finished houses suffered the loss--or at least the 
previous homeowners were suffering a loss for their equity and 
their investment.
    Mr. Fogg. I own those homes. I purchased a property from 
the Bank of Clark County, built those homes out-of-pocket, as I 
said. And then within the same subdivision, there were probably 
5 or 6 other bare lots, half-finished houses, holes cut, 
overturning weeds, houses turned into drug houses.
    I am a direct victim of that in my unfortunate situation of 
the houses that I spent $285,000 to build are not worth that 
due to the fact that they let this property languish.
    And if you drive anywhere within Clark County, you are 
going to find subdivisions car-high in weeds. It is a bad 
situation for a lot of guys.
    So, yes. Personal knowledge? I own those subdivisions. I 
own the homes in those subdivisions.
    Mr. Leventhal. I drive past many of them in Georgia.
    Chairman Neugebauer. The gentleman's time has expired.
    Ms. Herrera Beutler is recognized for 5 minutes.
    Ms. Herrera Beutler. Thank you.
    I am glad you asked that question, because I wanted to 
reiterate that it is not that you got out over your skis. You 
did it in good faith, you put your own money up, and then the 
FDIC was the one, from my understanding, that came in and said, 
okay, that is not a deal.
    So one of the things that I heard Mr. Edwards talk about 
was that period of time, the transition period. And I 
understand that during our transition period in some of the 
cases I have worked with people were getting good back and 
forth, there was a negotiation taking place, and people--
borrowers actually felt like they were in a good place. But 
then they made the sale, and those deals were all null and 
void. If they weren't completed before it went to Rialto, 
whatever the FDIC had negotiated was voided.
    But it sounds like in your case Quantum told you--
    Mr. Fogg. Yes.
    Ms. Herrera Beutler. --before--
    Mr. Fogg. We have lots of different issues.
    So the first thing is, yes, Quantum did tell me that they 
would have no problem getting the approvals from the FDIC for 
me to get a reduced amount of funds to finish my construction 
project. When that didn't happen, obviously, I spent hundreds 
of phone calls and meetings with those contractors to try to 
resolve something. The gentleman at the FDIC I think felt so 
bad at the end, or the Quantum, of unable to resolve anything 
with the FDIC that they actually, on one of my notes at the 
time of being prepared for sale to Rialto, they actually 
prepared a 1-year extension on one of my notes that had matured 
so that I would have adequate time to hopefully work with 
Rialto.
    When my attorney and I brought that note to Rialto, 
Rialto's response was, that note is not signed. That is not 
valid. You are in maturity default.
    I am like, I have gone this far. Do you really believe that 
I would fake a note from the FDIC to try to gain a six-more-
months extension?
    The only reason we had done it at that time was so that 
once we did get somebody in place that could hopefully make 
some sort of a decision to help us get through these assets, we 
would be able to show we were still in good standing. Because 
we had never missed a payment on one loan at that time.
    Ms. Herrera Beutler. This brings me to the point--from your 
first to final communication with Rialto, the first one that 
you got, was it a letter saying that you cannot use a lawyer? 
Were those precondition notices that they sent out? Was that 
how they started it with you? Or were you already in that?
    Mr. Fogg. It has been so long ago on that. The only thing I 
remember from those conversations was I was supposed to sign a 
pre-negotiation agreement that said I could not bring any legal 
action against them for any reason. They wanted, obviously, all 
my financial data and all my documentation. But that was kind 
of the first hello, I am your lender, give me all your 
information. That was basically it. We never signed the 
agreement. At that point, I felt I wasn't going to sign my 
rights away in the beginning.
    Ms. Herrera Beutler. Very good.
    With that, I yield back.
    Actually, if I could ask one more quick question?
    Chairman Neugebauer. Sure.
    Ms. Herrera Beutler. Thank you, Mr. Chairman.
    In meeting with some folks--and I will say this is more for 
the record--I have had a number of folks who were in similar 
situations in our area who will not--do not want me to use 
their names or their companies, because they are terrified of 
repercussions, because Rialto now owns part or all of them, and 
they don't want to go on record.
    But I have had them talk to me, and one of the ones brought 
up the question of--and I don't know if you can even answer 
this question--two Quantums. There is a Quantum contractor 
through the FDIC, but I believe there is another Quantum that 
is in or a subsidiary of Rialto. And there is confusion. The 
borrowers don't know who they are talking to. Can you bring--
    Mr. Fogg. Yes. Initially, when the FDIC closed the bank, 
they brought in Quantum--I don't know--Quantum somebody. And 
their job was to unwind the operations of the daily bank who 
collects your information and gets your loans off to whoever at 
the FDIC.
    When Rialto took over the loans, they hired a company 
called Quantum Servicing, and they are the ones who are 
supposed to do your payment processing of your checks. I would 
say it is probably one of the poorest organizations I have ever 
dealt with. I had never missed a payment to those guys, until, 
unfortunately, we had to file Chapter 11 last week. But they 
could not track your payments. They didn't have billing 
statements.
    So there are two distinct Quantums, and neither of them are 
very good.
    Ms. Herrera Beutler. Thank you. I yield back.
    Chairman Neugebauer. Thank you.
    And I thank the witnesses for coming. I think we had two 
good panels.
    My takeaway is that, while this process probably has some 
merit to it and it is helping work through a tremendous amount 
of inventory, we have heard concerns. We have folks from the 
FDIC who stayed over, and we appreciate that. Hopefully, they 
are listening to those concerns.
    And the Inspector General is doing an audit and has done an 
audit. I think we will want to review the findings of that.
    It is unfortunate that we had these kind of market 
conditions that created the need for these kinds of activities. 
But we appreciate the thoughtful testimony that the witnesses 
gave.
    If there are no other--
    Mr. Westmoreland. Could I ask one question?
    Chairman Neugebauer. Yes.
    Mr. Westmoreland. Mr. Fogg, could you furnish a letter for 
the record of the first letter you received? Do you still have 
that?
    Mr. Fogg. I am sure my attorneys have it.
    Mr. Westmoreland. Okay.
    Mr. Fogg. I can get that for you.
    Mr. Westmoreland. If you could just get that to us, I would 
like to put that in the record, if there is no objection.
    Chairman Neugebauer. Without objection, it is so ordered. 
If there are no other questions, this committee is adjourned.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    [Whereupon, at 5:58 p.m., the hearing was adjourned.]



                            A P P E N D I X



                              May 16, 2012

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