Insider lending rules, which strike terror in the hearts of many compliance officers, may get a little less scary.

A Federal Reserve Board proposal would exempt from Regulation O directors at bank affiliates who do not hold policy-making jobs at the lending institution.

Bank officers who do not make policy already are exempt from the rule. The Fed defines policymakers as those who exert influence over major institutional decisions, such as directors, the chief executive, and chief operating officer.

Exempted officials wouldn't be subject to lending limits or restrictions on overdraft protections. Also, the bank's board of directors wouldn't have to approve their loans.

The Fed proposal also would redefine who can receive preferential loan terms. Any employee, except directors and top officials with policymaking jobs at either the bank or the affiliate, could receive preferential terms.

Comments on the proposal are due June 17. The Fed did not have any figures on the number of newly exempted officials.

Industry representatives hailed the proposed changes as causing a substantial reduction in paperwork.

"These rules just seemed to be a case of statutory overkill," said Paul A. Smith, senior counsel with the American Bankers Association. "These changes reduce the record keeping burden with no real increase in risk."

Much of the paperwork tracks which directors and employees are subject to the rule. Many banks list these officials on a form, which they distribute to all loan officers. The list must constantly be updated to make sure the institution doesn't accidentally violate the rule.

At huge banks with numerous subsidiaries, tracking these officials is a major burden, said Richard Schenk, compliance officer at Norwest Bank in Omaha. He said the proposal would help ease bankers' workloads by reducing the number of people subject to the loan limits.

Running afoul of these rules can be costly. Fines can run as high as $1 million a day, and regulators have permanently banned top bank officials from the industry for particularly egregious violations.

Some institutions proscribe lending to any insiders. "It might keep us from earning some profit, but it also keeps us safe," said Donna Robey- Sullivan, compliance officer at Cenfed Bank in Pasadena, Calif.

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