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4000 - Advisory Opinions
Regulation O: Prohibition on Preferential Loans
FDIC-80-12
June 19, 1980
Pamela E. F. LeCren, Attorney
In response to your May 6, 1980 letter requesting information as to
the basis upon which Regulation O (12 C.F.R. Part 215) prohibits
preferential loans to bank officers, please be advised that the
regulation is based upon section 22(h) of the Federal Reserve Act (12
U.S.C. § 375(b)). Section 22(h), which was added to the Federal
Reserve Act by section 104 of the Financial Institutions Regulatory and
Interest Rate Act of 1978 ("FIRIRCA") specifically provides that
a member bank may not make preferential loans to its directors,
executive officers, principal shareholders or their related interest.
Section 108 of FIRIRCA made that prohibition applicable to nonmember
insured banks to the same extent as though they were member banks.
The statute does not by its terms prohibit preferential loans to
other employees. As evidenced by the following statement taken from the
House Report accompanying FIRIRCA, the apparent intent of Congress was
to insulate banks from the harmful effects of self-dealing, i.e.,
loans to insiders.
Active officers who hold their positions at the pleasure of the
board and shareowners are subject to influence and therefore are not
usually in a position to evaluate and reject those credits on the same
basis as the credit requests of other bank customers. In a situation of
this nature, active management will often vigorously defend the unsound
loans or other self-dealing practices perpetrated upon the bank by the
owners. 1
Presumably there was little or no perceived harm in permitting
employee benefits (including preferential loans) to be extended to
persons not in a position to influence or control the bank and its
policies. The House Report reflects the fact that the Committee had
before it ample evidence linking a high incidence of bank failure with
insider abuses. Whether or not a court of law would uphold the statute
if it were challenged, as you suggest, for being discriminatory (bank
insiders are denied fringe benefits available to employees in other
industries) is a matter of speculation. In all probability the statute
would be upheld under the rational basis test normally utilized in
considering whether or not an economic measure is constitutional.
Suffice it to say that, until such time as the statute would be
successfully challenged, the regulation is fully supported by federal
law and member and nonmember insured banks are subject
thereto.
1 H.R. Rep. 95-1383, 95th Cong., 2d Sess. 10 (1978). Go Back to Text
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