What Is Insider Lending?
Insider lending occurs when a bank makes a loan to one or more of its own officers or directors. Many countries, including the U.S., require that the provisions of these loans match those given to comparable bank customers. This is done to ensure fairness and limit the access to bank funds by insiders.
Insider lending should not be confused with insider trading.
- Insider lending refers to when an executive or director of a bank is loaned money from the bank that they work for.
- While allowable, insider lending is subject to many restrictions including limitations on the amount based on the loan's purpose.
- Regulations also stipulate that bank insiders do not get any special treatment, incentive rates, or other benefits not offered to regular bank customers.
How Insider Lending Works
The Federal Deposit Insurance Corporation Improvement Act of 1991 also mandated new restrictions on the loan provisions offered to bank insiders. The restrictions include requiring the same loan rates, repayment terms and evaluation of the insider borrower’s ability to repay the loan as those extended to non-insider, non-employee borrowers, with the exception of special terms that are offered to all non-insider employees of the bank in question.
For example, if a bank offers a special interest rate or waives certain loan fees for all employees, then it may offer that same special consideration to an insider borrower, even though it doesn’t offer those same special rates or fee reductions to non-insider, non-employee borrowers.
Banks are limited in the amount of insider credit that they can extend. The collective amount of insider credit a bank can extend may not exceed the bank’s legal lending limit. Nor may the combined amount of all insider loans and lines of credit exceed the bank’s unimpaired surplus or unimpaired capital. It is advisable that a bank use the same loan limits for insider loans as it does for non-insider loans. Some recourse loans and secured loans may not count toward this limit.
Restrictions on Insider Loans to Executive Officers
When an insider loan will bring the combined amount of credit offered to that insider to more than $500,000, or more than the greater of $25,000, or 5 percent of the bank’s unimpaired surplus or unimpaired capital, the bank’s board of directors must vote to approve the loan. The insider seeking the loan may not participate in this vote.
A bank can loan money or extend a line of credit to its executive officer if that loan is used to finance or refinance the officer’s home or to fund the education of his or her children. Loans for other purposes cannot be made in an amount in excess of 2.5 percent of the bank’s unimpaired surplus or unimpaired capital, or $25,000, up to $100,000. This limit also applies to partnerships of executive officers, so that if one executive officer borrows $35,000, the other partner may borrow only $65,000.
A bank cannot pay an overdraft on an account at that bank made by the director, the executive officer, or an affiliate without a written plan for extension of credit or a written transfer of funds from another account at the bank.