DANA POINT, Calif. - Bankers had better take the insider lending rules seriously.

The vast turnover in senior management caused by consolidation and downsizing means compliance officers no longer can assume that executive officers are reporting their lending activities, according to Elaine Leadlove-Plant, a regulatory consultant in Alemeda, Calif.

Compliance officers at the California Bankers Association's conference here said examiners are just waiting to cite institutions that fall into one of Regulation O's many pitfalls.

"Examiners take it very seriously," said Michael D. Maher, vice president and manager of bank regulatory compliance at First Bank System Inc. of Minneapolis. "It is almost a zero tolerance we are being held to."

Mr. Maher's two training sessions on the subject were packed with compliance officers.

Mr. Leadlove-Plant, co-leader of the conference, said compliance officers' interest in Reg O isn't surprising.

"It is more necessary for the line compliance officer to understand the nuances," she said, and that's why she added the Reg O session to this year's conference.

Banks are falling into many of the same traps, violating Reg O's provisions on overdrafts, loans to spouses, credit from affiliated institutions, and executive officer designation, said Mr. Maher, who teaches Reg O compliance for the American Bankers Association.

Reg O, created by the Financial Institutions Regulatory and Interest Rate Control Act of 1978, prevents banks from offering preferential loan terms to directors or officers who set bank policy. It also requires prior approval by the board of directors for many loans to insiders.

Violations can be expensive. Bankers can face millions of dollars in fines and jail time. Also, the mere mention of insider loan problems can rattle a bank's customer base, conjuring up memories of the S&L disaster.

Banks run into the biggest problem when they cover overdrafts. The rules consider this action a loan that requires prior approval from the board of directors.

"The insider is the cause of the problem, but the bank is on the hook," Mr. Maher said.

The solution is to notify the executive officer or director when the check is presented that he must deposit more money is his account immediately, he said. Or banks can encourage these officials to participate in overdraft programs, which allow the bank to automatically withdraw funds from a savings account to cover a check they would otherwise have to reject.

Bankers also flub the rules governing loans to spouses. They must count these loans against the insider's lending limit if they will benefit the officer or director. That means all home equity loans count, but a car loan to a spouse that will be repaid from the spouse's income is exempt.

Institutions also have trouble keeping straight which loans from affiliates are considered insider loans.

Credit from a mortgage company affiliate of a bank holding company is exempt, he said. But loans from a finance company affiliate of a bank are not, he said.

"You can see where there is confusion," he said.

Bankers also break the rule by either including too many executives or not enough. An institution must include only people who set policy, he said. "Titles and salary are irrelevant," he said.

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