diff --git a/contracts/Pool.sol b/contracts/Pool.sol
index 45c8a7ba..1d8ffb4e 100644
--- a/contracts/Pool.sol
+++ b/contracts/Pool.sol
@@ -260,9 +260,13 @@ contract Pool is IPool, ERC20 {
             "Pool: invalid loan"
         );
 
-        ILoan(loan).markDefaulted();
-        _accountings.activeLoanPrincipals -= ILoan(loan).principal();
-        emit LoanDefaulted(loan);
+        PoolLib.executeDefault(
+            asset(),
+            address(_firstLossVault),
+            loan,
+            address(this),
+            _accountings
+        );
     }
 
     /*//////////////////////////////////////////////////////////////
diff --git a/contracts/interfaces/ILoan.sol b/contracts/interfaces/ILoan.sol
index 7f38d8af..13209549 100644
--- a/contracts/interfaces/ILoan.sol
+++ b/contracts/interfaces/ILoan.sol
@@ -78,17 +78,17 @@ interface ILoan {
     /**
      * @dev Number of payments remaining
      */
-    function paymentsRemaining() external returns (uint256);
+    function paymentsRemaining() external view returns (uint256);
 
     /**
      * @dev Amount expected in each payment
      */
-    function payment() external returns (uint256);
+    function payment() external view returns (uint256);
 
     /**
      * @dev Due date for the next payment
      */
-    function paymentDueDate() external returns (uint256);
+    function paymentDueDate() external view returns (uint256);
 
     function postFungibleCollateral(address asset, uint256 amount)
         external
diff --git a/contracts/interfaces/IPool.sol b/contracts/interfaces/IPool.sol
index f726aa80..0fa2e3d2 100644
--- a/contracts/interfaces/IPool.sol
+++ b/contracts/interfaces/IPool.sol
@@ -76,6 +76,15 @@ interface IPool is IERC4626 {
      */
     event PoolSettingsUpdated(IPoolConfigurableSettings settings);
 
+    /**
+     * @dev Emitted when first loss capital is used to cover loan defaults
+     */
+    event FirstLossApplied(
+        address indexed loan,
+        uint256 amount,
+        uint256 outstandingLoss
+    );
+
     /**
      * @dev Returns the current pool lifecycle state.
      */
diff --git a/contracts/libraries/PoolLib.sol b/contracts/libraries/PoolLib.sol
index 1b35c591..c60ae3c0 100644
--- a/contracts/libraries/PoolLib.sol
+++ b/contracts/libraries/PoolLib.sol
@@ -48,6 +48,35 @@ library PoolLib {
         uint256 shares
     );
 
+    /**
+     * @dev See IPool
+     */
+    event FirstLossApplied(
+        address indexed loan,
+        uint256 amount,
+        uint256 outstandingLosses
+    );
+
+    /**
+     * @dev Determines whether an address corresponds to a pool loan
+     * @param loan address of loan
+     * @param serviceConfiguration address of service configuration
+     * @param pool address of pool
+     */
+    function isPoolLoan(
+        address loan,
+        address serviceConfiguration,
+        address pool
+    ) public view returns (bool) {
+        address factory = ILoan(loan).factory();
+        return
+            IServiceConfiguration(serviceConfiguration).isLoanFactory(
+                factory
+            ) &&
+            LoanFactory(factory).isLoan(loan) &&
+            ILoan(loan).pool() == pool;
+    }
+
     /**
      * @dev See IPool for event definition
      */
@@ -216,6 +245,47 @@ library PoolLib {
         return shares;
     }
 
+    /**
+     * @dev Executes a default, supplying first-loss to cover losses.
+     * @param asset Pool liquidity asset
+     * @param firstLossVault Vault holding first-loss capital
+     * @param loan Address of loan in default
+     * @param accountings Pool accountings to update
+     */
+    function executeDefault(
+        address asset,
+        address firstLossVault,
+        address loan,
+        address pool,
+        IPoolAccountings storage accountings
+    ) external {
+        ILoan(loan).markDefaulted();
+        accountings.activeLoanPrincipals -= ILoan(loan).principal();
+
+        uint256 firstLossBalance = IERC20(asset).balanceOf(
+            address(firstLossVault)
+        );
+
+        // TODO - handle open-term loans where principal may
+        // not be fully oustanding.
+        uint256 outstandingLoanDebt = ILoan(loan).principal() +
+            ILoan(loan).paymentsRemaining() *
+            ILoan(loan).payment();
+
+        uint256 firstLossRequired = firstLossBalance >= outstandingLoanDebt
+            ? outstandingLoanDebt
+            : firstLossBalance;
+
+        FirstLossVault(firstLossVault).withdraw(firstLossRequired, pool);
+
+        emit LoanDefaulted(loan);
+        emit FirstLossApplied(
+            loan,
+            firstLossRequired,
+            outstandingLoanDebt.sub(firstLossRequired)
+        );
+    }
+
     /*//////////////////////////////////////////////////////////////
                     Withdrawal Request Methods
     //////////////////////////////////////////////////////////////*/
@@ -245,24 +315,4 @@ library PoolLib {
     ) public view returns (uint256) {
         return currentWithdrawPeriod(activatedAt, withdrawalWindowDuration) + 1;
     }
-
-    /**
-     * @dev Determines whether an address corresponds to a pool loan
-     * @param loan address of loan
-     * @param serviceConfiguration address of service configuration
-     * @param pool address of pool
-     */
-    function isPoolLoan(
-        address loan,
-        address serviceConfiguration,
-        address pool
-    ) public view returns (bool) {
-        address factory = ILoan(loan).factory();
-        return
-            IServiceConfiguration(serviceConfiguration).isLoanFactory(
-                factory
-            ) &&
-            LoanFactory(factory).isLoan(loan) &&
-            ILoan(loan).pool() == pool;
-    }
 }
diff --git a/test/Pool.test.ts b/test/Pool.test.ts
index a7c3c9cf..f4c1f137 100644
--- a/test/Pool.test.ts
+++ b/test/Pool.test.ts
@@ -232,22 +232,49 @@ describe("Pool", () => {
       await depositToPool(pool, otherAccount, liquidityAsset, loanPrincipal);
       await fundLoan(loan, pool, poolManager);
 
+      // Confirm that pool liquidity reserve is now empty
+      expect(await liquidityAsset.balanceOf(pool.address)).to.equal(0);
+
       // Get an accounting snapshot prior to the default
       const activeLoanPrincipalBefore = (await pool.accountings())
         .activeLoanPrincipals;
+      const firstLossAvailable = await pool.firstLoss();
 
-      // Trigger default
-      await expect(pool.connect(poolManager).defaultLoan(loan.address)).to.emit(
-        pool,
-        "LoanDefaulted"
+      // Expected loan outstanding stand = principal + numberPayments * payments
+      const loanPaymentsRemaining = await loan.paymentsRemaining();
+      const loanPaymentAmount = await loan.payment();
+      const loanOustandingDebt = loanPrincipal.add(
+        loanPaymentsRemaining.mul(loanPaymentAmount)
       );
 
+      // Confirm that first loss is NOT enough to cover the oustanding loan debt
+      expect(firstLossAvailable).to.be.lessThan(loanOustandingDebt);
+
+      // Trigger default
+      // Since first-loss is not enough to cover oustanding debt, all of it is used
+      await expect(pool.connect(poolManager).defaultLoan(loan.address))
+        .to.emit(pool, "LoanDefaulted")
+        .withArgs(loan.address)
+        .to.emit(pool, "FirstLossApplied")
+        .withArgs(
+          loan.address,
+          firstLossAvailable,
+          loanOustandingDebt.sub(firstLossAvailable)
+        );
+
       // Check accountings after
-      const activeLoanPrincipalsAfter = (await pool.accountings())
-        .activeLoanPrincipals;
-      expect(activeLoanPrincipalsAfter).is.equal(
+      // Pool accountings should be updated
+      expect((await pool.accountings()).activeLoanPrincipals).is.equal(
         activeLoanPrincipalBefore.sub(loanPrincipal)
       );
+
+      // First loss vault should be empty
+      expect(await pool.firstLoss()).to.equal(0);
+
+      // Pool liquidity reserve should now contain the first loss
+      expect(await liquidityAsset.balanceOf(pool.address)).to.equal(
+        firstLossAvailable
+      );
     });
   });