08/05/26

The Federal Reserve and Federal Deposit Insurance Corporation have issued coordinated proposals to modernize the rules governing loans to bank directors, executive officers, principal shareholders and their related interests.

The Federal Reserve’s proposal would comprehensively update Regulation O, which has not undergone a major revision since 1979. At the same time, the FDIC Board approved a parallel proposal to raise and index corresponding insider-lending thresholds for FDIC-supervised institutions. The FDIC explained that its changes are intended to keep the limits applicable to state nonmember banks and state savings associations aligned with those proposed by the Federal Reserve.

For bankers, the practical question is straightforward: How would these proposals affect the bank’s ability to make ordinary personal and business loans to directors, executive officers, principal shareholders and people or businesses connected to them?

The proposals would not eliminate Regulation O’s central protections. Insider loans would still need to be made on substantially the same terms as comparable transactions with non-insiders, follow equally rigorous underwriting standards, present no more than the normal risk of repayment and remain within applicable individual and aggregate lending limits.

The proposed changes would, however, modernize thresholds that have not kept pace with the economy and clarify when loans to spouses, trusts, businesses and existing customers who later become insiders are subject to the rule. The Federal Reserve describes the proposal as an effort to reduce unnecessary burdens while preserving safeguards against preferential treatment.

Several Longstanding Thresholds Would Quadruple

The most immediate change for lenders would be a fourfold increase in several dollar-based thresholds:

• Prior board approval: The maximum dollar ceiling would increase from $500,000 to $2 million.
• Other-purpose credit to executive officers: The maximum dollar ceiling would increase from $100,000 to $400,000.
• Credit cards: The qualifying credit-card threshold would increase from $15,000 to $60,000.
• Overdraft protection: The threshold for qualifying preauthorized, interest-bearing overdraft plans would increase from $5,000 to $20,000.
• Inadvertent overdrafts: The permitted amount would increase from $1,000 to $4,000.
• Public disclosure: The threshold applicable to certain public disclosures involving loans to executive officers and principal shareholders would increase from $500,000 to $2 million.

The FDIC’s parallel proposal would make corresponding changes for FDIC-supervised institutions so that banks are not subject to materially different insider-lending thresholds simply because of their charter or primary federal regulator.

These increases could provide meaningful relief for routine lending. A credit card, overdraft line or personal loan that currently triggers special treatment solely because of an outdated dollar threshold could fall within a modernized exception.

The proposed $2 million amount, however, would not mean that every insider loan below $2 million could be approved without board action. Prior board approval would still depend in part on the bank’s unimpaired capital and surplus. A smaller bank could therefore reach the approval trigger well before an insider’s aggregate borrowing reaches $2 million.

Likewise, the proposed $400,000 amount would not create an unrestricted $400,000 allowance for unsecured loans to executive officers. Banks would still need to apply the full capital-based formula, aggregate all applicable credit and comply with the rule’s underwriting and nonpreferential-treatment requirements.

Future Thresholds Would Adjust Automatically

The proposals would establish a mechanism for periodically indexing the dollar thresholds to changes in the economy. This would prevent the limits from again remaining frozen for several decades while inflation, property values, business costs and ordinary credit needs continue to increase.

For banks, automatic indexing would eliminate the need to wait for a new rulemaking each time the limits become outdated. It would also require institutions to update lending systems, policies, board-approval procedures and insider-lending worksheets when adjusted thresholds take effect.

Banks Would Still Need to Determine Who Is an Insider

Higher dollar thresholds only help after the bank correctly determines whether a borrower is covered by Regulation O.

The Federal Reserve’s broader proposal would modernize the positions presumed to be executive officers. It would remove the automatic presumption for every vice president, cashier and secretary while expressly including positions such as chief executive officer, chief financial officer, chief lending officer and chief investment officer.

This could reduce unnecessary coverage of employees who hold a vice president title but do not participate in major policymaking. Titles alone, however, would not control. An employee who actually participates in major policymaking could still be considered an executive officer regardless of title.

Banks should therefore maintain insider lists based on both titles and actual responsibilities. Compliance, human resources, legal and lending personnel should have a process for identifying when a promotion, reorganization or expansion of responsibilities changes an employee’s Regulation O status.

A Loan to an Insider’s Spouse May Still Be Attributed to the Insider

One of the most important operational issues involves loans that are not made directly to the insider.

A loan to an insider’s spouse—or to a business controlled by the spouse—may be treated as credit to the insider. The Federal Reserve’s proposal would provide clearer circumstances under which the loan would not be attributed to the insider, including when the spouse is independently creditworthy and repayment does not depend on the insider’s income or assets.

For a loan to the spouse’s business, the bank may also need to determine whether the insider has an ownership interest, participates in management or receives an economic benefit from the transaction.

Before concluding that a spouse’s loan falls outside Regulation O, the lender should ask:

• Can the spouse independently repay the debt?
• Does the underwriting rely on the insider’s income, assets or guarantee?
• Does the insider own or manage any part of the borrower’s business?
• Will the proceeds directly or indirectly benefit the insider?

The proposal could make it easier to lend to independently creditworthy spouses while continuing to prevent institutions from routing preferential loans through family members.

Trusts, Estates and Related Businesses Require Similar Attention

The Federal Reserve’s proposal would also clarify how Regulation O applies to trusts, estates and other entities connected to insiders.

A bank may need to review:

• Who serves as trustee;
• Who can appoint or remove the trustee;
• The insider’s present or contingent beneficial interest;
• Whether the insider controls the borrowing entity;
• The source of repayment; and
• Who ultimately benefits from the loan proceeds.

The central lesson for lenders is that Regulation O does not stop with the name appearing on the promissory note. The bank must look through the transaction to determine who controls the borrower, who benefits economically and whether the entity is a related interest of an insider.

Existing Customers Who Become Directors or Executives

The Federal Reserve’s proposal would provide clearer treatment for an existing borrower who later becomes an insider—for example, a local business owner with substantial bank debt who is recruited to join the board.

An existing loan generally would not need to be immediately terminated or rewritten simply because the borrower becomes an insider. It would, however, begin counting toward the applicable insider-lending limits. When the loan is renewed, revised or extended, it would need to comply with Regulation O. Existing lines of credit would receive a limited transition period.

Before appointing an existing customer to the board or hiring the customer as an executive officer, the bank should inventory the individual’s:

• Personal loans and credit cards;
• Business loans and lines of credit;
• Guarantees and indirect obligations;
• Spouse-owned businesses;
• Trust and estate interests; and
• Other companies that may be related interests.

That review can identify whether the appointment would cause the bank to exceed an individual or aggregate limit, require board approval or complicate the renewal of an existing facility.

Potential Relief for Director and Executive Recruitment

The proposals could be particularly helpful for community banks, where directors and executives are often local business owners with legitimate ongoing credit needs.

An otherwise qualified director may hesitate to join a bank board when doing so could complicate access to routine business financing. The Federal Reserve specifically identified board and executive recruitment as a challenge for community banks, noting that local business and civic leaders provide valuable knowledge of the institution’s market and economy.

The proposals would not allow preferential credit. They could, however, reduce unnecessary friction when a bank wants to maintain an arm’s-length lending relationship with an otherwise qualified director or executive.

A Narrow Change for Passive Investment Funds

The Federal Reserve’s proposal also addresses situations in which an investment fund owns enough bank stock to be treated as a principal shareholder.

Under the current framework, unrelated companies held in the same investment portfolio can become subject to Regulation O even when the fund does not exercise meaningful influence over the bank’s lending decisions. The proposal would provide targeted relief for certain passive investment structures while retaining restrictions where ownership or control creates an actual risk of insider influence.

What Banks Should Do Now

Both the Federal Reserve and FDIC actions remain proposals. Banks must continue following the existing, lower Regulation O and FDIC insider-lending thresholds until final rules become effective.

Banks should consider reviewing their:

• Regulation O and insider-lending policies;
• Insider and related-interest lists;
• Board-approval calculations and procedures;
• Processes for identifying spouses, trusts and related businesses;
• Director and executive recruitment questionnaires;
• Treatment of customers who subsequently become insiders;
• Systems used to aggregate direct and indirect exposure; and
• Procedures for determining which agency rule applies based on the bank’s charter and primary federal regulator.

The coordinated Federal Reserve and FDIC proposals could create meaningful flexibility for legitimate lending to people and businesses connected to a bank. The benefit, however, will depend on bankers understanding that higher thresholds do not replace the underlying analysis. Lenders must still identify the correct insider, aggregate related credit, apply the institution’s capital-based limits and ensure that each transaction is independently underwritten on nonpreferential terms.

OBL is reviewing both proposals and welcomes member feedback concerning how the changes would affect lending decisions, director recruitment, compliance systems and bank governance.