WASHINGTON - Small banks are forcefully pushing their case for a permanent exemption from limits on loans to executive officers, directors and shareholders.

Community bankers from across the country have flooded the Fed with letters explaining the need for the higher limits: They can't hold onto directors, they can't make good loans, and they find tracking the lower limit confusing and burdensome.

In fact, with one exception, all those who have responded in writing to the Fed's proposal strongly support relaxing the limit for small banks.

Temporary Exemption in Place

The Fed welcomes these comments, because it needs help to prove the change is needed. By law, if the Fed wants to permanently raise the aggregate lending limit for insiders at small banks from 100% of unimpaired capital and surplus to 200%, it must prove that it is "important to avoid constricting the availability of credit in small communities or to attract directors of such banks."

A temporary exemption has been in place since May 1992. But the Fed has not found it popular.

Only 45 of the 8,600 eligible small banks - those with deposits under $100 million in deposits - have told regulators they are using the exemption, as they are required, according to the Fed.

Nonetheless, when the Fed introduced the proposal to adopt a permanent exemption in May, board members said said they expected to approve it this Fall. The temporary exemption expires Nov. 18.

New Rule Is Question

Only one commenter - Virginia's Bureau of Financial Institutions - told the Fed it had not seen sufficient proof that the new rule is needed.

"The bureau has not found, nor has it been presented with any evidence indicating the 200% limit is important to avoid constricting the availability of credit in small Virginia communities or to attract directors to smaller banks," wrote John M. Crockett, deputy commissioner of financial institutions.

But others, including the American Bankers Association, disagree.

Few Use Exemption

"While only a few banks have actually used the exemption, ABA believes that the statute requires only one bank to need to use the exemption, in order for the Federal Reserve Board to make it permanent," wrote Paul Alan Smith, senior federal administrative counsel.

"The low number of banks actually using the exemption does not reflect that the exemption is not necessary, but rather indicates how responsible bankers are with respect to insider lending," he added.

The Independent Bankers Association of America has also been lobbying heavily for the exemption. It recently presented a member survey to the board showing that while few banks had taken advantage of the temporary provision, many say they may use it in the future.

"The survey responses and comments submitted by bankers show that there is quite a high level of banker anxiety regarding regulation and loans to insiders," wrote IBAA president James R. Laufer. "In the current regulatory environment, a significant number of banks fear attracting the attention of regulators and examiners if they engage in insider lending."

Paul K. Ediger, president of Home State Bank and Trust, told the Fed that if the exemption is not extended to choose between making manufacturing, housing, and other important community lending, and keeping highly competent directors.

"To discontinue the types of credits that I have described would seem to be exactly counter to the programs of the current administration in promoting credit, jobs and economic growth," he said.

And, Richard J. Pamperin, president of Marion State Bank, Wis., said that the last time his bank added a director, three declined because of both liability fears and Regulation O.

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