Government regulators shut down insolvent banks, but loans owed to failed institutions by borrowers do not cease to exist when the bank closes. Generally, you must continue to pay loans as you did before the bank failed. However, in some situations the terms of certain kinds of debt may change because of a bank failure.
Regulators Seize Control
Most U.S. banks are members of the Federal Deposit Insurance Corporation. The FDIC seizes control of the assets of failed member banks, and the day after a bank closes it reopens under the control of the FDIC. Borrowers can continue to make loan payments at local branches and through other channels, although the FDIC often limits online access in the immediate aftermath of a bank failure. Eventually the FDIC sells the loans to other financial institutions. When this occurs, borrowers receive notification to make payments directly to the company that bought the debt. State insurance funds handle non-FDIC bank failures in the same way.
U.S. lenders sell the majority of mortgages they write to federally sponsored Freddie Mac and Fannie Mae. These companies package mortgages in funds sold to investors. Homeowners still make mortgage payments at the bank that wrote the loan, which passes them on to investors. The mortgage lien remains on the house until payoff. Some banks fail because high numbers of borrowers default on mortgages, but defaulters eventually face foreclosure regardless of whether the lender fails or stays solvent.
Home Equity Lines
Home equity lines of credit are mortgages that work like credit cards. Neither the FDIC nor any other entity can require you to pay back funds drawn on a HELOC immediately if the lender fails. However, most HELOCs allow the lender to reduce or close the revolving line at any time. A financial institution buying the debt may decide to close the line for further use, in which case you must pay the balance owed as required by the original agreement.
Other Revolving Debts
There are many other types of revolving debt available through banks such as unsecured business lines of credit, credit cards and overdraft credit lines. These products normally have variable interest rates. A new bank taking control of the debt must notify you about any upcoming changes and usually cannot change payment terms on existing balances. However, banks can raise interest rates on revolving debt and reduce credit lines. Therefore, if you have revolving debt at a failed bank, consider opening a backup line of credit elsewhere.