Know the Standard of FDIC Liability for Community Banks

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Over 400 financial institutions have failed since the financial crisis began in September 2008, causing hundreds of billions of dollars in losses to the Deposit Insurance Fund (DIF).[1] On July 2, 2010, the Federal Deposit Insurance Corporation began its efforts to recover losses to the DIF when it sued officers of IndyMac Bank, then the second largest bank to fail in U.S. history.[2] The FDIC has filed a total of 41 professional liability lawsuits against former bank directors and officers of failed institutions.[3] A majority of the complaints have involved small or medium size banks.

The recent developments in FDIC professional liability litigation warrant close attention from community bankers. For example, consider the FDIC’s focus in those lawsuits on director approval of individual loans. If courts ultimately hold that directors have an independent obligation to ensure that loans they approve as a member of the board or a loan committee were underwritten properly by the bank, then directors would face pressure to curtail or even avoid loan approvals, to exponentially increase the amount of time taken to verify proper loan underwriting, or both. Such outcomes would be especially acute at institutions with high concentrations of commercial real estate, the former directors of which have been the focus of over 90 percent of the FDIC lawsuits to date.[4]

This article discusses (1) how the FDIC litigates cases against former directors and officers of failed banks, (2) the results of recent federal district court rulings in these FDIC cases, and (3) how these decisions might impact community bank directors and lending.

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