Congress enacted the Financial Institutions Regulatory and Interest Control Act in 1978. The insider lending provisions of the law were implemented as Regulation O. Historical data show that insider abuse is at the heart of many bank failures. Examiners take very seriously their mission to prevent insider abuse. They frequently cite violations of Regulation O during examinations, and often take enforcement action. Enforcement actions may take the form of civil monetary penalties , a Memorandum of Understanding, or a Cease and Desist Action.
Typical violations include illegal overdrafts to insiders or extensions of credit that exceed one of several lending limit provisions contained in the regulation. These violation generally result from a lack of adequate procedures. Simple steps to monitor overdrafts and total extensions of credit to insiders are usually sufficient to prevent such violations.
In other cases violations result from a lack of understanding of the fine details of Regulation O. The concepts are fairly straightforward, but contain enough details to cause confusion. Most banks can easily identify their directors and executive officers, but confusion occurs when trying to determine the status of the directors and executive officers of affiliated institutions. Each of the three lending limits is fairly simple, but determining how the three limits interact with one another can cause confusion. This program provides detailed coverage of these, and other, basic requirements of Regulation O.
Civil monetary penalties can be assessed against the institution or against individuals. Recently Federal regulators fined five former directors and executives for violations of insider lending rules. The fines ranged from $8,000 to $20,000 per individual.
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