WASHINGTON - An irate Senate Banking Committee chairman and several of his colleagues accused banking agency officials last week of abusing a legal doctrine that lets them void failed bank's oral contracts.

The 53-year old D'Oench Duhme doctrine - a combination of laws and court decisions - is supposed to protect taxpayers and the insurance funds from bankers who hide below-market-rate loan terms and side agreements from regulators.

It says the receiver of a failed institution generally must honor contracts that are in writing and are properly recorded at the bank. All other agreements generally can be canceled.

Chairman Alfonse D'Amato, R-N.Y., said the Resolution Trust Corp. and the Federal Deposit Insurance Corp. have used D'Oench Duhme to rob "innocent consumers" of their property and money.

The agencies void oral contracts regardless of circumstances, he said. That means contractors who fixed machines at the bank on a handshake deal or consumers defrauded by the failed bank are left in the lurch, he said.

"Don't you use any discretion?" Sen. D'Amato asked the regulators at a June 14 hearing. "Do you just say, 'We can crush someone'? ... Whose arrogance is this?"

"The agencies have received a windfall in the past because D'Oench Duhme has improperly barred so many claims," agreed Sen. William Cohen, R-Maine. "It is time to redress this unfairness."

Despite the harsh words and the intense questioning, the regulators and the senators appeared to agree on most aspects of a D'Oench Duhme reform measure now pending.

The bill, sponsored by Sen. Cohen, leaves most of the doctrine intact. The FDIC and RTC would still be able to void most oral contracts.

But the legislation includes several new loopholes. For example, the agency wouldn't be allowed to invoke D'Oench against vendors who provided the failed bank with goods or services, such as a gardener who planted flowers. This closely mirrors an internal guideline the FDIC adopted late last year.

The FDIC and RTC were far less receptive to other exemptions. One would prevent the use of D'Oench against anyone who claims the failed bank defrauded them.

Mark P. Hileman, assistant general counsel at the RTC, said that everyone - including those guilty of collusion - would allege fraud to take advantage of the loophole. "Plaintiffs with spurious claims would receive unintended windfalls," he said.

The agencies also objected a provision that would exempt liabilities from D'Oench. Regulators said this would allow bankers to establish secret side agreements for officer indemnification or other purposes that could cost the insurance funds millions of dollars.

One observer who follows D'Oench Duhme said he finds the current debate rather ironic. "You had 1989 legislation saying, 'Kill these people,'" the observer said of the thrift bailout bill, which encouraged the RTC and FDIC to use D'Oench. "Now, they are going the opposite way."

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