WASHINGTON -- The Federal Reserve on Wednesday proposed revising rules on bank loans to insiders, hoping to relieve some of its burden on the banking industry.
The proposal, which limits the kinds of transactions that must be considered insider loans under the Fed's Regulation 0, responds to industry complaints that the current rules are too strict and, in some cases, unclear.
Industry leaders say the new rules, if approved, will make it easier for banks to comply with insider-lending limits.
"This is a big deal," said Paul A. Smith, senior federal administrative counsel at the American Bankers Association. "They have responded to the reality of the situation and made some significant improvements in the regulation."
"This is a pretty good approach," said Fed Vice Chairman David Mullins. "I feel pretty confident we aren't compromising safety and soundness."
Reg 0 limits the credit a bank or thrift can extend to its executive officers, directors, and principal shareholders, and their related interests. It also requires lenders to report quarterly on these loans.
The Fed has proposed eight changes to the rule. Most important, it clarifies that loans only indirectly related to insiders do not meet the rule's "tangible economic benefit" test, and are therefore exempted.
Some lenders have complained that under the current rule, a car loan, for example, could be counted as an insider loan if the car dealer sat on the board. Similar cases involved directors who were real estate developers or who were trying to sell their own homes.
"The new rule makes it very clear that these types of transactions would not be considered Reg 0 loans," said Karen Thomas, regulatory counsel at the Independent Bankers Association of America.
The Fed's proposal would also free lenders from strict recordkeeping rules. Currently, they are required to keep lists of all insiders, as well as the amount and terms of each insider loan.
Under the new proposal, banks would be allowed to set their own record-keeping procedures, as long as they were strict enough to ensure compliance.
But Fed Governor John P. LaWare questioned whether the record-keeping proposal goes too far, and suggested that lenders might like more guidance.
"It's a little bit like taking the straitjacket off, sawing off the bars on the windows, and unlocking the door," he said. "I'm a little bit puzzled as to why we've gone quite so far."
In addition, the Fed proposed:
* Exempting from the aggregate limit the purchase of certain consumer installment paper.
* Excluding the discount of obligations sold by an insider to the bank without recourse.
* Increasing from $5,000 to $15,000 the threshold for considering credit card plan debt to be an extension of the credit.
* Exempting from special rules for executive directors loans collateralized by U.S. government securities or earmarked deposits for executive officers.
* Clarifying that a home mortgage refinancing is not subject to limits for executive directors.