For insiders with extensions of credit that when aggregated exceed $500,000, I understand that prior Board approval is required for each new extension of credit. My bank's approach to accomplishing this without taking every individual loan to the Board is to have the Board annually approve the insider's total lending limit, which includes outstanding debts, available credit, and what we call an unfunded commitment, which is basically a cushion for future borrowings.
For example, if Director Bob's extensions of credit total $700,000, and the Board has already preapproved an additional $50,000 for future borrowings, is it okay that we close a new auto loan for $20,000 without taking that specific loan application to the Board for prior approval? The available credit in the $50,000 unfunded commitment (cushion) would be decreased immediately.
Similarly, would this approach suffice for Director Bob's related interest checking account when it overdraws? We, of course, don't allow directors and executive officers to overdraw. However, some related interest accounts have been overdrawn in the past, and management has relied on this unfunded commitment (cushion) to argue that it was preapproved, assuming the amount of the overdraft did not exceed the available funds in the cushion. Is this okay?
I appreciate any and all feedback.
Don't make me say, "I told you so!" Sincerely, your friendly Compliance Officer.