July 24, 2012
Authored by: Michael Shumaker
The board of directors and its loan committee play critical roles in formulating and supervising a bank’s risk management policies, particularly with regard to a bank’s lending function. However, as we have recently noted, while all bank directors must be involved in the loan approval process and take seriously their significant responsibilities as bank directors, there continues to be debate regarding the role of bank directors in the review and approval of loans.
Until the revision of the North Carolina Banking Code (previously codified at Chapter 53 of the General Statutes of North Carolina), which was signed into law on June 21, 2012, Section 53-78 required the board’s loan committee, or other designated committee, to “approve or disapprove all such loans and investments as may be required…” Although this statute provided a “black and white” interpretation of the responsibility of the board of directors in a bank’s lending function, it also may have had the effect of painting a target on the backs of loan committee members, especially when considering the focus of many of the lawsuits brought by the FDIC against directors of failed financial institutions.
In contrast, the recent revision to the North Carolina Banking Code eliminates the specific requirement for a board committee to approve or disapprove loans. Although Section 53C-4-3 of the Regulation of Banks and Other Financial Services (as the revised Banking Code is now known) does require the board of directors to establish a loan committee, the loan committee, in conjunction with the board and other committees, is required only “to provide for the safe and sound operation of the bank in a manner consistent with applicable laws and regulations.”
For boards of directors that have previously formally approved loans in compliance with the statute, the revised code eliminates this specific responsibility. At the same time, the revised statute does not alleviate the need for directors to continue to have a significant role in the establishment of loan policies and procedures. Further, even though the lending team will be able to make the ultimate decision on a particular credit (except, of course, on loans to insiders subject to Regulation O, which will continue to require review and approval by the board of directors), directors must verify and have documented with the lending team that the loan meets all of the legal and risk parameters set forth in the bank’s loan policy, including limitations on concentrations based on loan type and borrower.