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4000 - Advisory Opinions

Extensions of Credit to Insiders


July 14, 1981

Carol J. Galbraith, Attorney

Your letter of April 29, 1981 to Mr. Roy E. Jackson, FDIC's Regional Director in Dallas, has been forwarded to me. Your letter requests a ruling and clarification of how a majority of a bank's board of directors "can approve a loan, when the interested parties who are required to abstain from voting results in less than a majority remaining to vote on the issue."

Section 104 of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (Pub. L. No. 95-630) ("FIRIRCA") amends section 22 of the Federal Reserve Act. Section 22(h) of the Federal Reserve Act prohibits extensions of credit to an insider (and related interests) which aggregate more than $25,000 without prior approval "by a majority of the entire board of directors with the interested party abstaining from participating directly or indirectly in the voting."

Section 108 of FIRIRCA amends § 18(j) of the Federal Deposit Insurance Act and thereby makes § 22(h) of the Federal Reserve Act apply to nonmember banks.

The question you raise is how § 22(h) is to be construed in the case in which a number of insiders who are interested parties together seek an extension of credit such that there is not a disinterested majority of the entire board remaining to vote on prior approval of the loan.

The legislative history of § 104 of FIRIRCA does not directly dispose of your question. However, the purpose of § 22(h) is, by substantive restrictions, to prevent banks from incurring excessive risks from making large loans to insiders by imposing lending limits as well as civil penalties for their violation [S. Rep. No. 95-323, 95th Cong., 1st Sess. 18 (1977)].

The House Report, in summarizing Title I of FIRIRCA, paraphrases the statutory language without reference to, or discussion of, the phrase "with the interested party abstaining." The Report's discussion of loans to insiders focuses upon the need for restrictions to prevent an insider or group of insiders from using an institution's funds for their own purposes rather than providing services for a wider community by borrowing almost unlimited amounts of funds on terms and conditions not available to nonaffiliated individuals. Thus, the principal concerns are with lending limits and non-preferential treatment of insiders. [See H.R. Rep. No. 95-1383, 95th Cong., 2d Sess. 10, 11, and 39 (1979).]

It is the FDIC's opinion that § 22(h) may be read as requiring prior approval by a majority of disinterested members of the entire board of directors. Thus, for example, a nine-member board of which four members are interested and must therefore abstain from approving a loan, may approve such loan by a 3-2 majority of the disinterested members.

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