We believe that a bank officer may bid in a foreclosure sale involving their bank, but this transaction could invite scrutiny from examiners and the court confirming the foreclosure sale, as well as reputational risks.

The FDIC’s guidance stresses the importance of maintaining policies regarding conflicts of interest and a code of ethics. Bank directors and officers owe a duty of loyalty to their bank, which prohibits them from advancing their own personal or business interests at the expense of the bank. The FDIC instructs directors to never abuse their influence with bank management for personal advantage, nor to wrongfully employ confidential information concerning the bank’s clients. The FDIC directs examiners to “carefully scrutinize” any transaction involving an executive officer or other bank insider for compliance with these ethical principles.

Additionally, Illinois courts have broad discretion to set aside judicial sales when they find that justice has not been done in the sale. What constitutes “injustice” is not expressly defined, but the Illinois Supreme Court has explained courts have the “power to vacate a sale where unfairness is shown that is prejudicial to an interested party.”

Allowing an executive officer to take part in a judicial sale of property that the bank has foreclosed may invite questions from examiners as to whether the sale was conducted in the best interests of the bank — or in the best interests of the executive officer at the expense of the bank. Examiners may question whether the executive officer used their position (either as an officer or secretary of the board) to influence the opening bid or gain exclusive advantageous knowledge concerning the sale, such as the amount of the opening bid or confidential information concerning the relevant mortgagor. Further, the court confirming the sale may question whether allowing such an officer to take part in the sale creates prejudicial unfairness that justifies disapproving the sale.

We recommend that your affiliate review its policies on conflicts of interest and code of ethics before deciding whether to allow the bid, and to ensure that the executive officer handles the transaction with “utmost fairness and good faith in guarding the interests of the bank,” as demanded by FDIC guidance. Additionally, we recommend that they review any local rules that may be relevant to the sale (such as whether the opening bid is public knowledge).

If the sale is allowed, and you or your affiliate bank decide to finance the transaction, then Regulation O would govern the extension of credit. Regulation O applies to extensions of credit to any insiders of a bank or an insider of its affiliates, which include other subsidiaries of a bank holding company. Note that additional restrictions under Regulation O apply to loans by a bank to an executive officer, but not loans to an executive officer of an affiliate.

For resources related to our guidance, please see:

• FDIC, Risk Management Manual of Examination Policies, Section 4.1 – Management, page 3 (“Directors are responsible for providing a clear framework of risk appetite, strategic focus, objectives and general policies within which executive officers operate and administer the bank’s affairs. These objectives and policies at a minimum, include written guidelines for such matters as . . . conflicts of interest [and] code of ethics. . . .”)

• FDIC, FIL-105-2005, Guidance On Implementing An Effective Ethics Program (October 21, 2005) (“The board should establish clear expectations on acceptable business practices and prohibited conflicts of interest by establishing policies on expected behavior. Management should ensure that these policies are communicated and understood throughout the organization.”)

• FDIC, Statement Concerning the Responsibilities of Bank Directors and Officers (“Directors and officers of banks have obligations to discharge duties owed to their institution and to the shareholders and creditors of their institutions, and to comply with federal and state statutes, rules and regulations. Similar to the responsibilities owed by directors and officers of all business corporations, these duties include the duties of loyalty and care. The duty of loyalty requires directors and officers to administer the affairs of the bank with candor, personal honesty and integrity. They are prohibited from advancing their own personal or business interests, or those of others, at the expense of the bank. The duty of care requires directors and officers to act as prudent and diligent business persons in conducting the affairs of the bank.”)

• FDIC, Risk Management Manual of Examination Policies, Section 4.1 – Management, page 5 (“Although somewhat independent from the responsibility to provide effective direction and supervision, the need for directors to avoid self-serving practices and conflicts of interest is of no less importance. Bank directors must place performance of their duties above personal concerns. Wherever there is a personal interest of a director that is adverse to that of the bank, the situation clearly calls for the utmost fairness and good faith in guarding the interests of the bank. Accordingly, directors must never abuse their influence with bank management for personal advantage, nor wrongfully employ confidential information concerning the bank’s clients. The same principles with respect to self-serving practices and conflicts of interest apply to the executive management of the bank.”)

• FDIC, Risk Management Manual of Examination Policies, Section 4.1 – Management, page 10 (“Examiners should be especially alert to any insider involvement in real estate projects, loans or other business activities that pose or could pose a conflict of interest with a director’s fiduciary duties of care and loyalty to the bank. . . . Examiners are also reminded to inquire into bank policies and procedures designed to bring conflicts of interest to the attention of the board of directors when they are asked to approve loans or other transactions in which an officer, director, or principal stockholder may be involved. . . . Examiners are also reminded to carefully scrutinize any loan or other transaction in which an officer, director or principal stockholder is involved. Such loans or other transactions should be sound in every respect and be in full compliance with applicable laws and regulations and the bank’s own policies.”)

• Illinois Code of Civil Procedure, 735 ILCS 5/15-1508(b) (“Upon motion and notice in accordance with court rules applicable to motions generally, which motion shall not be made prior to sale, the court shall conduct a hearing to confirm the sale. Unless the court finds that (i) a notice required in accordance with subsection (c) of Section 15-1507 was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done, the court shall then enter an order confirming the sale.”)

• Household Bank, FSB v. Lewis, 229 Ill. 2d 173, 178 (2008) (“The provisions of section 15-1508 have been construed as conferring on circuit courts broad discretion in approving or disapproving judicial sales. A court’s decision to confirm or reject a judicial sale under the statute will not be disturbed absent an abuse of that discretion.”)

• Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469 at ¶ 19 (2013) (“What constitutes an injustice under section 15-1508(b)(iv) is not expressly defined in the statute. . . . Nevertheless, it appears to merely codify the long-standing discretion of the courts of equity to refuse to confirm a judicial sale. Long before the codification of the Foreclosure Law, courts have retained the power to vacate a sale where unfairness is shown that is prejudicial to an interested party.”)

• Federal Reserve, Compliance Guide to Small Entities (“Regulation O governs any extension of credit by a member bank to an executive officer, director, or principal shareholder of that bank, of a bank holding company of which the member bank is a subsidiary, and of any other subsidiary of that bank holding company. The regulation also applies to any extension of credit by a member bank to a company controlled by a bank official and to a political or campaign committee that benefits or is controlled by an executive of the financial institution.”)

• Regulation O, 12 CFR 215.4(a)(1) (“No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit: (i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and (ii) Does not involve more than the normal risk of repayment or present other unfavorable features.”)

• Regulation O, 12 CFR 215.5 (“The following restrictions on extensions of credit by a member bank to any of its executive officers apply in addition to any restrictions on extensions of credit by a member bank to insiders of itself or its affiliates set forth elsewhere in this part. The restrictions of this section apply only to executive officers of the member bank and not to executive officers of its affiliates.”)