There have been several financial institutions shut down by the FDIC.
In the past few weeks, we've seen the highest-profile bank failures in the United States since the financial crisis in 2008. And while things hopefully stabilize soon in the banking industry, there are some important questions on the minds of U.S. bank customers, including what will happen to their outstanding loans if their bank fails. Here's what you can expect if your financial institution gets shut down by regulators.
What happens to your loans if your bank fails?
The short answer is that if your bank fails and you have outstanding loans, you still owe the money.
For more context, when a bank "fails," it means that the FDIC has determined it cannot continue to operate independently for whatever reason (usually it is insolvent, or quickly heading in that direction). In these situations, the agency's top priority is to find a healthy bank to acquire the assets and deposits of the failed bank. After all, the FDIC is the agency that insures deposits, and it doesn't want to pay out money if it can simply find another bank to take over the old bank's operations.
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If this happens, the failed bank's entire loan book is transferred to the acquiring bank, and the loan customers will simply owe the exact same amount of money and on the same terms to the new bank. For example, during the 2008 financial crisis, Washington Mutual was placed into receivership by the FDIC in the largest bank failure in U.S. history. The bank's assets and deposits were sold to JPMorgan Chase, and all Washington Mutual branches were rebranded as Chase branches by the end of 2009. If you had a Washington-Mutual-owned loan prior to the failure, you had a Chase loan after the bank was acquired.
If the failed bank isn't acquired right away
There are some other possible scenarios that can happen. Sometimes the FDIC can't find a buyer for a failed bank in its entirety but can sell off the failed bank's assets in pieces to different institutions. For example, in the financial crisis era, buyers may have been interested in acquiring a failed institution's auto loans, credit card receivables, and top-tier mortgages, but might not have any interest in their subprime mortgages.
Another scenario is that it's entirely possible that the FDIC will place the bank in receivership in a newly created institution (controlled by the FDIC) and it will remain there for some time. For example, when Silicon Valley Bank failed on March 13, 2023, the FDIC created and operated Silicon Valley Bridge Bank and transferred all customer deposits (such as savings and checking accounts) into it, with the goal of protecting depositors' access to their money while the FDIC attempts to sell Silicon Valley Bank to a healthy institution.
Whatever the actual process is, the important takeaway is that you still owe the money. Don't use a bank failure as a reason to stop making loan payments. In all cases, you should receive communication from the new bank with instructions on how to continue to make your loan payments and where the money should be sent.
The FDIC will also post information for loan customers. For example, on the FDIC's information page about Silicon Valley Bank, there is a section of information that states: "If you had a loan, you should continue to make payments, including escrow payments, as usual; the terms of your loan will not change."
The bottom line
To sum it up, there are two important pieces of information you need to know if a bank fails while you have an outstanding loan with it:
First, you still owe the money. Your debt doesn't magically go away just because your bank does.
Second, the new owner of the loan -- either the FDIC or the acquiring bank -- must honor the original terms of the loan. In other words, it can't decide to make you pay the entire balance immediately, change your interest rate, or make any other changes to the terms.
If your bank fails, don't panic. You will receive information within a few days from the FDIC or whichever bank ends up acquiring your loan, and it will tell you where your loan payments should be directed going forward.
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FAQs
If your bank fails, any loans you have with it -- such as auto loans or personal loans -- will be sold to a new lender, and you'll make payments to that lender.
What happens to loans if a bank collapses? ›
The FDIC will either sell your loan right away or keep it temporarily. "In either case your obligation to pay has not changed. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments," according to the FDIC.
Are loans forgiven if a bank fails? ›
Unfortunately, the answer is no. For you, it's business as usual: You will still have to make payments on your loan.
Will I lose my money if my bank fails? ›
For the most part, if you keep your money at an institution that's FDIC-insured, your money is safe — at least up to $250,000 in accounts at the failing institution. You're guaranteed that $250,000, and if the bank is acquired, even amounts over the limit may be smoothly transferred to the new bank.
What happens to my mortgage if the bank defaults? ›
“The mortgage will be transferred to another bank if the first bank experiences problems and fails, and you will need to start making payments to the new lender. You might need to refinance your mortgage with the new bank, depending on the details of the transfer.”
What happens to home loans if economy collapses? ›
What Happens To Your Mortgage Rates & Payments? If you have a fixed-rate mortgage, then your monthly payments will remain the same, which can be beneficial in a high-inflation environment. However, if you have an adjustable-rate mortgage, expect your payments to increase.
What protects your money if a bank collapses? ›
If your bank fails, up to $250,000 of deposited money (per person, per account ownership type) is protected by the FDIC. When banks fail, the most common outcome is that another bank takes over the assets and your accounts are simply transferred over. If not, the FDIC will pay you out.
Do banks write off unpaid loans? ›
When a business does not expect to recover a debt, the debt becomes bad and is written off. To assume a more attractive position and reduce its tax liability, banks often write off toxic loans, the most common form of bad debt for a bank.
What happens to a construction loan if the bank fails? ›
In some cases, the bank or lender may go bankrupt, and your loan may be in default. This means that the bank or lender will try to recover as much of the outstanding balance as possible by selling off the collateral, such as the property or equipment that you put up as security for the loan.
How will I know if my loans are forgiven? ›
Your student loan servicer(s) will notify you directly after your forgiveness is processed. Make sure to keep your contact information up to date on StudentAid.gov and with your servicer(s). If you haven't yet qualified for forgiveness, you'll be able to see your exact payment counts in the future.
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
Where should I put my money if banks fail? ›
If your bank is federally insured
- Stocks.
- Bonds.
- Mutual funds.
- Annuities.
- Life insurance policies.
- Safe deposit boxes.
- US Treasury bills, bonds or notes.
- Municipal securities.
Still, the FDIC itself doesn't have unlimited money. If enough banks flounder at once, it could deplete the fund that backstops deposits. However, experts say even in that event, bank patrons shouldn't worry about losing their FDIC-insured money.
What happens if you have a loan with a bank that collapses? ›
Loans and other accounts are considered as part of those assets. That means your account will most likely be sold to another institution, which will then take over and manage your account just like your previous lender did. In most cases, these accounts or assets are packaged and sold to the same lender.
What happens if you have a loan with a bank that defaults? ›
When a loan defaults, it's sent to a debt collection agency whose job is to collect the unpaid funds from you. A loan default can drastically reduce your credit score, impact your future eligibility for credit and even lead to the lender seizing your personal property.
What happens to mortgages if US defaults? ›
A U.S. default could downgrade the country's credit rating, which means an increase in risk. With the increased risk, there would be increased interest rates. Since debt ceiling talks came into focus this month, the yield on the US 10 Year Treasury, which is the mortgage benchmark, has gone up from 3.31% to 3.74%.
Is your money protected if a bank collapses? ›
FSCS will pay compensation within seven working days of a bank or building society failing. You don't need to do anything, FSCS will compensate you automatically. More complex cases, including temporary high balance claims, will take longer and you'll need to contact us to request an application form.
What to do with your money when banks collapse? ›
For example, you can keep $250,000 at one bank and deposit additional funds at other banks that are also members of the FDIC. Be sure to use the FDIC's BankFind tool to verify that an institution is covered by the insurance. You can also open an IRA or a revocable trust account, both of which fall under FDIC coverage.
What does bank collapse mean for mortgages? ›
KEY POINTS. If your bank fails, your mortgage will be sold to another lender. It is important that you keep paying your mortgage to avoid foreclosure from the new lender.
What are the consequences of banks collapsing? ›
If the failing bank cannot pay its depositors, a bank panic might ensue, causing depositors to withdraw their money from the bank (known as a bank run). This can make the situation worse for the failing bank by shrinking its liquid assets. When a bank's assets decrease, it has less money to lend to borrowers.
