Is your board or board committee still approving loans other than Reg O loans?
If so, you are running a higher risk of personal liability heading into a recession. Here is why.
Any time there is a significant recession, some banks will likely fail.
The heart of most of the complaints filed by the FDIC as receiver of failed banks following the Great Recession against outside directors was the accusation that the board members were negligent in approving loans recommended by management. See FDIC Director Suits: Lessons Learned 2nd Edition, which David Baris, President of AABD, authored with Loyal Horsley, available on Amazon.
“One major finding in this Report is that bank directors are at a higher risk of potential personal liability if they approve individual loans than if they do not. Almost all of the complaints assert that directors, as members of the board of directors or a director loan committee, approved [or ratified] loans on which their bank suffered losses, and that the loans should not have been made. The complaints suggest that bank directors who approve loans are held to the standard of a professional lending or credit officer. The complaints can be read to suggest that a director is at risk of being held legally responsible for losses on loans if there is a flaw in the loan analysis or in the appraisal, a ‘red flag’ that the board or board committee should have inquired about but didn’t, or similar mistakes that bank boards of directors rely reasonably on bank loan and credit officers to identify for the board and correct.
As a consequence, the Report recommends that bank directors, as board or board committee members, stop approving loans other than those required by law to be approved by a board or board committee. At the federal level, only loans subject to Regulation O are required to be approved by a bank board of directors.
AABD has previously requested the FDIC to approve a ‘safe harbor’ for directors…[who] approve or ratify loans, but the FDIC has refused. The FDIC disagreed with AABD’s advice to bank directors not to approve…loans because the FDIC believed that bank directors of community banks who know the community and the people who reside or do business there can add value by reviewing and approving loans. AABD agrees that community bank directors can add value, but not at the price of elevating potential personal liability. Once the FDIC approves a safe harbor for directors who act in good faith and without personal conflict in approving…loans, AABD will withdraw its recommendations.”