Skip Header

Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

FDIC Law, Regulations, Related Acts

[Table of Contents] [Previous Page] [Next Page] [Search]

7500 - FRB Regulations


BACKGROUND AND SUMMARY OF REGULATION O AND FIRA TITLES VIII AND IX


3--1027

Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA) prohibits banks that maintain correspondent accounts with each other from extending credit to each other's executive officers, directors, or principal shareholders unless the extension of credit (1) is made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and (2) does not involve more than normal risk of repayment or present other unfavorable features. Banks whose executive officers, directors, or principal stockholders have received preferential extensions of credit from other banks are prohibited from opening correspondent relationships with those banks.

3--1028

CONTROL OF BANK OR HOLDING COMPANY

Shares of a bank or a bank holding company owned or controlled by a member of an individual's immediate family are considered controlled by the individual for the purposes of determining principal-shareholder status. The title VIII definition of "executive officer" is the same as that in section 22(g) of the Federal Reserve Act: a person who, other than in the capacity of a director, has authority to participate in major policymaking functions of the bank. However, for the purposes of titles VIII and IX and subpart B of Regulation O, the executive officer or director of a bank holding company of which the member bank is a subsidiary, or any other subsidiary of a bank holding company, is not an executive officer or director of the member bank unless that person actually holds those offices. In complying with the prohibitions of title VIII, banks should use the definition of "control" in section 215.2(b) of Regulation O.

3--1029

REPORTS BY EXECUTIVE OFFICERS

Title VIII requires an annual report from each executive officer and principal shareholder but not from directors unless they are principal stockholders or executive officers, of federally insured banks to the board of directors of that bank if they are indebted during the year to a correspondent bank. They are required to report the "maximum indebtedness" of executive officers or principal shareholders, each person's related interest to each bank that maintains a correspondent account for the reporting person's bank, the amount of indebtedness outstanding as of a date 10 days before the report is filed, and the terms and conditions, including the range of interest rate, for each extension of credit included in the figure reported as the "maximum amount of indebtedness." The regulation does not require a report on the terms and conditions of indebtedness outstanding 10 days before the report is filed. This report need not be made public and must be kept on file at the bank for at least three years, although the appropriate agency may require that reports be kept longer. Reports should not be forwarded to the appropriate federal banking agency unless the agency so requests but the reports are subject to inspection by examiners of the appropriate federal banking agency.

3--1030

ANNUAL REPORTS ON AGGREGATE CREDIT

Titles VIII and IX authorize the federal banking agencies to issue regulations to require the reporting and public disclosure of information concerning extensions of credit by a bank or by a bank's correspondent banks to the executive officers and principal shareholders of the bank. The three federal regulatory agencies have adopted regulations requiring public disclosure of the names of executive officers and principal shareholders who have borrowed from, or whose related interests have borrowed from, the reporting bank or from the reporting bank's correspondent banks in an amount that exceeds 5 percent of the bank's capital and unimpaired surplus or $500,000, whichever is less.

For purposes of the aggregate lending limit, the Federal Reserve Act section 22(h)(1) definition of "principal shareholder" of a bank located in a city, town, or village of less than 30,000 is an individual or company that controls 18 percent of any class of voting shares of the bank or, if the bank is a subsidiary of a bank holding company, of any class of voting securities of the bank holding company.

3--1031

INDEBTEDNESS TO CORRESPONDENT BANKS

The prohibitions of title VIII apply to any person (company or individual) who owns, controls, or has the power to vote more than 10 percent of a bank's voting shares. The reporting requirements of titles VIII and IX, however, apply to each "stockholder of record," which is defined in conformity with the prohibitions of title VIII. This definition includes the actual owner of the shares, whether or not that person's name appears on the bank's stock register as the owner of the shares. This definition also includes persons who control the member bank's parent bank holding, with control of a company defined as generally 25 percent of the company's outstanding voting shares, control of the elections of the majority of the company's board of directors, or the power to exercise a controlling influence over the management or policies of the company as defined in title I or in subpart A of Regulation O.

3--1032

PRIOR APPROVAL AND PREFERENTIAL LENDING

Once a line of credit has been approved by a majority of the bank's entire board of directors, drawdowns on that line of credit do not require further approval as long as (1) the line of credit was approved within 14 months of the date of the drawdown and (2) the terms of the drawdown comply with the statutory prohibition against preferential lending and do not involve more than the normal risk of repayment or present other unfavorable features.

Member bank loans to its own subsidiaries are not subject to the limitations of section 22(h), including the prior-approval and preferential-lending requirements. Executive officers, directors, and principal shareholders of such subsidiaries will not be deemed to have that same relationship with the parent member bank, because Regulation O, section 215.2(l), specifies that the term "subsidiary" does not include a subsidiary of a member bank.

The term "extension of credit" in section 22(h) has the same meaning as in section 23A, and will be interpreted, for the purposes of section 22(h), consistent with its interpretations of section 23A.

[Source:  Federal Reserve Regulatory Service 3--1027 to 3--1032]

BOARD INTERPRETATIONS OF REGULATION O

"Executive officer"

Exempted transactions

Prohibited transactions

Reports of indebtedness to other banks

3--1035

"EXECUTIVE OFFICER"--Members of Boards of Managers and Finance Committees of Trust Companies

This refers to your letter of March 3, 1936, submitting an inquiry from the _______ , Trust Company, _______ and an opinion of counsel for your bank as to whether members of the boards of managers of branches of the trust company, chairmen of the boards of managers of branches of the trust company, and members of the finance committees of such branches are "executive officers" within the meaning of that term as defined in section 1(b) of the Board's Regulation O.

It appears from the information submitted that the members of the board of managers of a branch of the trust company are chosen by the board of directors of the trust company; that such members give no regular time to the business of the bank other than attendance at meetings of the board; that the individual member of the board has no powers in the management of the branch other than his vote as a member of the board of managers and has no compensation other than fees for attendance at meetings; and that the board of managers elects branch officers, passes on loans of limited amount, and acts as a board of directors of the branch, but with every act subject to the approval and control of the board of directors of the trust company. While it is clear that such members are not strictly directors, since they are not elected by the stockholders, it is apparent that their duties are analogous to the functions usually exercised by a board of directors of a bank and, on the basis of the facts stated above, it is the view of the Board that the members involved are not included within the definition of the term "executive officer" as contained in the Board's Regulation O.

The chairman of the board of managers of a branch would not be considered an "executive officer" unless he "participates in the management of the bank or any branch thereof" within the meaning of that phrase as used in section 1(b) of Regulation O, and the determination of this question must be based upon the facts in each case. It appears from the by-laws of the trust company that the chairman of the board of managers of a branch is appointed by the board of managers subject to the approval of the board of directors of the trust company, and that such chairman is only authorized to preside at meetings of the board at which he may be present. It is stated in the letter from the trust company that the only duties of a chairman are to preside at meetings of the board of managers. It is also understood that there are two chairmen of boards of managers of branches of the trust company who are paid a small salary in lieu of a fee for attendance at meetings. These salaries are reported as being $250.00 and $528.00 per annum. Although the payment of a salary may in some cases indicate that the recipient has duties to perform in an individual capacity which would bring him within the classification of an "executive officer," it is the Board's understanding that the chairmen involved perform no other duties than to preside at meetings of the boards of managers. Therefore, on this basis, it is the opinion of the Board that such chairmen are not included within the meaning of the term "executive officer" as contained in the Board's Regulation O.

In connection with members of the finance committees of such branches, it appears that such committees are appointed by the boards of managers pursuant to the general authority of the bylaws of the trust company and that the functions of such committees are similar to the functions of the executive committee of the trust company, such as passing upon loans in a preliminary way between meetings of the boards of managers. Assuming that the members of such committees exercise no other duties in the management of the bank or branch except those of attending committee meetings and voting upon matters considered at such meetings, it is the Board's view that such members are not executive officers within the meaning of the Board's Regulation O.

The conclusions reached above are limited to those persons whose only duties are to serve in the capacities referred to above, and who hold no other office in the trust company or any branch thereof. X-9576; May 4, 1936.

3--1036

"EXECUTIVE OFFICER"--Indebtedness at Appointment

The prohibitions of section 22(g) of the Federal Reserve Act refer to an executive officer of a member bank who is an executive officer thereof at the time he borrows from or otherwise becomes indebted to the bank. Accordingly, when a loan is made in good faith by a member bank to an individual who is not at the time of the making of the loan an executive officer thereof and the loan is not made in contemplation of his becoming an executive officer of the bank, there is nothing in the statute which would prohibit such person from subsequently becoming an executive officer of the bank, notwithstanding his outstanding indebtedness thereto. Digest of 1936 Fed. Res. Bull. 121; ¶ 3750.

3--1037

"EXECUTIVE OFFICER"--Secretary of Board of Directors

The secretary of the board of directors of a member bank who is also a director and whose functions are those pertaining to the minutes of the board and the certification of resolutions passed by the board and who does not in any sense participate in the management of the bank is not an "executive officer" as defined in Regulation O. Digest of 1936 Fed. Res. Bull. 248; ¶ 3790.

3--1038

"EXECUTIVE OFFICER"--Resolutions for Inactive Officers

Form of Resolution of Board of Directors with Respect to Inactive Officers

The definition of the term "executive officer" as amended effective July 1, 1939, provides that it will be assumed that certain officers of a member bank are executive officers "unless it is provided by resolution of the board of directors or the bank's by-laws that any such officer is not authorized to participate in the operating management of the bank and he does not actually participate therein." There are printed below two forms of resolutions which comply with this provision of the definition and which could be adopted by the board of directors of a member bank which desires to make loans to an officer who does not actually participate in the operating management of the bank. These forms are merely illustrative of the type of resolution contemplated by the amended definition. No particular form of resolution or provision of the by-laws is required, however, and any form which provides that the officer in question is not authorized to participate in the operating management of the bank is sufficient for the purposes of the amended definition.

Form No. 1

Whereas, for the purposes of Regulation O of the Board of Governors of the Federal Reserve System, an officer is not regarded as an executive officer if it is provided by resolution of the board of directors that he is not authorized to participate in the operating management of the bank and he does not actually participate therein; and

Whereas, the office of _______ held by Mr. _______ in this bank is an honorary position;

Now, therefore, be it resolved, That the incumbent of the said position shall not be authorized to participate in the operating management of the bank.

NOTE:  If the officer in question is also a director of the bank, there should be added to the last paragraph of the above resolution the words "otherwise than in the capacity of a director of the bank."

NOTE:  The first paragraph of the above resolution may be omitted if desired. The word "inactive" may be used in place of "honorary" if desired.

Form No. 2

Resolved, That no vice presidents of this bank other than Messrs. _______ , _______ , and _______ shall have authority to participate in the operating management of the bank.

NOTE:  If the officer affected is also a director of the bank, there should be added to the above resolution the words "otherwise than in the capacity of a director of the bank."

NOTE:  If desired, the first paragraph of form No. 1 may be used in connection with form No. 2.

1939 Fed. Res. Bull. 636, 637; selected portion of ¶ 3775.

3--1039

"EXECUTIVE OFFICER"--Inactive Discount Committee Member

This refers to your letter of March 25, 1940, and previous correspondence regarding the status of Mr. _______ , vice president and director of The _______ National Bank, of _______ , under the Board's Regulation O.

The board of directors of the bank in July, 1939, adopted a resolution to the effect that Mr. _______ is not authorized to participate in the operating management of the bank. A question was raised by the examiner concerning his status, however, because of the fact that he was also serving as a member of the discount committee, which, under the by-laws, consisted of the "president, cashier, and three directors". It appears from your letter of March 25, quoting a letter received from the cashier of the bank that Mr. _______ has now resigned his position on the discount committee and is no longer a member of the committee. While it is understood that he is a member of the examining committee, it is assumed that the duties of this committee are not such that members thereof are to be considered as participating in the operating management of the bank by reason of such membership.

Since Mr. _______ is no longer a member of the discount committee, it is not necessary for the Board to express any opinion with regard to the question which was raised by reason of such membership. It is understood that under the resolution adopted by the board of directors Mr. _______ is not authorized to participate in the operating management of the bank and that he does not actually participate therein. In the circumstances, he is not an executive officer within the meaning of Regulation O.

While it appears that president _______ with respect to whom a like resolution was adopted by the board of directors, is a member of the discount committee, it is not understood that he is borrowing from the bank or that any question regarding his status has been raised at this time. S-210; April 10, 1940.

3--1040

"EXECUTIVE OFFICER"--Discount Committee Member

The Board has been requested to render an opinion on the question whether an officer of a member bank, who is also serving as a director and as a member of the discount committee of the bank, is to be regarded as an executive officer within the meaning of the Board's Regulation O, as amended effective July 1, 1939, notwithstanding the adoption of a resolution by the board of directors providing that he is not authorized to participate in its operating management.

The Board of Governors has considered this question in the light of the definition of the term "executive officer" in its Regulation O, the views expressed by Federal Reserve Banks and others who have considered this matter, and the authority of the Board to define the term "executive officer." The Board has concluded that an officer of a member bank, who is also serving as a director and as a member of the discount committee and with respect to whom a resolution as described above has been adopted by the board of directors, is to be considered an executive officer within the meaning of Regulation O except in a case where a provision of the by-laws of the bank or a resolution of the board of directors requires the service in rotation of every director as a member of the discount committee and the directors do in fact serve as members of the committee in accordance with such by-law or resolution. 1941 Fed. Res. Bull. 1087; ¶ 3780.

3--1041

"EXECUTIVE OFFICER"--Inactive Officer Serving on Discount Committee

The Board has been requested to render an opinion with regard to the application of Regulation O to inactive officers of smaller member banks who are also directors and serve as members of the discount committee.

As stated in a ruling by the Board published at page 1087 of the 1941 Federal Reserve Bulletin, a person who is an inactive officer and director of a member bank and with respect to whom a resolution has been adopted by the board of directors providing that he is not authorized to participate in the operating management of the bank will not be considered an executive officer because of his service on the discount committee where the by-laws of the bank or resolution of the board of directors requires the service in rotation of every director as a member of the discount committee and the directors do in fact serve as members of the committee in accordance with such by-laws or resolution. The difficulty was pointed out in applying this principle to small member banks having usually only five directors all of whom are also serving as members of the discount committee.

In the circumstances, the ruling referred to above is hereby extended so that, in addition to the rule enunciated therein, an officer of a member bank with respect to whom a resolution described above has been adopted who is also serving as a director and as a member of the discount committee where all of the members of the board of directors are also members of, and do in fact serve on, the discount committee will not be considered an executive officer within the meaning of Regulation O. 1943 Fed. Res. Bull. 215; ¶ 3785.

3--1042

"EXECUTIVE OFFICER"--Vice Chairman Authorized to Sign Documents

The Board has received an inquiry as to whether the term "executive officer," as defined in the Board's Regulation O, embraces the vice chairman of the board of directors of a member bank who, in the absence of the chairman, serves as a member of the loan and discount committee and who also, in the absence of the chairman, is authorized to execute any and all documents or instruments on behalf of the bank. It is further understood that the member bank has adopted a resolution to the effect that the chairman of the board is not authorized to participate in the operating management of the bank and does not actually so participate otherwise than in his capacity as director.

Under section 215.1(b) of Regulation O the chairman of the board of directors of a member bank is assumed to be an executive officer unless it is provided by resolution of the board of directors or the bank's by-laws that he is not authorized to participate in the operating management of the bank and he does not actually participate therein. In view of this provision, although a bank may have adopted such a resolution with respect to the chairman, he must be considered an executive officer if in fact his duties involve participation in the operating management of the bank. Likewise, the vice chairman would be an executive officer if, in the absence of the chairman, he has authority to perform such duties.

It appears from the information supplied that the loan and discount committee, which consists only of members of the board of directors, does not actually make loans but rather reviews loans made by loan officers of the bank and acts in a supervisory and advisory capacity. The Board is of the view that these duties are such as are normally performed by directors, as contrasted with the duties of management, and accordingly would not make either the chairman or the vice chairman an executive officer for the purpose of Regulation O.

However, it is also the view of the Board that the chairman and vice chairman of the member bank do participate in the operating management of the bank because of their authority to execute any and all documents or instruments on behalf of the bank. The Board believes that the broad authority to execute such documents brings both the chairman and the vice chairman within a 1940 unpublished interpretation of the Board to the effect that an inactive vice president of a member bank who was authorized to sign deeds, checks, drafts, and other documents in the absence of the president, but who was expressly denied authority to make loans or to perform any of the other duties of an executive officer, should be considered an executive officer. 1962 Fed. Res. Bull. 289; 12 CFR 215.102; ¶ 3786.

3--1043

EXEMPTED TRANSACTIONS--Loans to Corporation Invested in by Executive Officer

Section 22(g) of the Federal Reserve Act does not prohibit a loan by a member bank to a corporation even though an executive officer of such bank is substantially interested in the corporation where such loan is made in good faith and the proceeds would be used by the corporation for its corporate purposes. Digest of 1936 Fed. Res. Bull. 249; ¶ 3865.

3--1044

EXEMPTED TRANSACTIONS--Life Insurance Plan as Loan

In your Bank's letter of March 28, 1961, and in subsequent correspondence and discussions, the question was presented as to whether the institution by a member bank of a program of so-called "split-dollar" life insurance for its managerial employees would result in executive officers becoming indebted to the bank in excess of $2,500, which is prohibited by section 22(g) of the Federal Reserve Act and the Board's Regulation O. In the meantime, the same question has been raised in two other Federal Reserve Districts involving life insurance plans that differ somewhat in detail but are substantially the same as the plan described by you.

It is understood that the member banks are interested in the plan since they believe it will enable them to recruit and retain in their employ promising young men having potential managerial ability. The insurance may be attractive to a young employee since it enables him to secure life insurance at much lower rates than would be otherwise available, and at a time when his need for insurance is perhaps the greatest.

All the various plans of split-dollar insurance which have been examined are based on the fact that in every permanent life insurance contract there is (1) an investment element represented by cash value and dividends, if any, that increases each year, and (2) the insurance element that decreases as the investment element increases.

While, as indicated, different plans may vary in detail, they all appear to incorporate the same basic features. Pursuant to an agreement made with its key employees, a bank takes out a life insurance policy for each. The bank pays that portion of the premium that is equivalent to the increase in the cash surrender value of the policy and the employee pays the remainder. However, since the policy at its inception has no cash surrender value, special arrangements usually are made for payment of the entire first year premium by the employee, although arrangements in this respect vary with different insurance plans. When a policy is paid up, or should the employee die or his services be terminated during the life of the policy, the bank receives a return of an amount equivalent to the sum of the premiums it has paid.

Under some forms of agreement, the employee obligates himself, in the event his employment is terminated during the life of the policy, to pay to the bank any difference there may be between the cash surrender value of the policy and the aggregate premiums theretofore paid by the bank with interest compounded at 2 percent per annum. In the unlikely event that no dividends have been paid, it is understood that this could amount to $2,920 in the twenty-fifth year of a $50,000 policy, thus exceeding the $2,500 limitation provided by Regulation O. However, the Board considers the likelihood of this ever happening to be so remote that it may be disregarded for purposes of the question here considered.

Regulation O may be violated whenever, as a result of any transaction, an executive officer becomes indebted to his bank, directly or indirectly. Under no plan of split-dollar insurance that has been brought to the Board's attention does the executive officer ever become so obligated. On the contrary, the bank must look solely to the cash surrender value of the policy, including dividends, for reimbursement of the sum expended for its portion of the premium. Accordingly, since any obligation to make payment to the bank runs to the insurance company and not to the executive officer, it is the Board's view that no violation of the regulation would be involved.

Finally, it seems evident from the legislative history of section 22(g) that its underlying purpose was not to interfere with or discourage banks from providing their employees with various forms of fringe benefits, including programs for life insurance. This is not to say, however, that a violation of the regulation would not result if, under the terms and conditions of a particular plan, an executive officer is required to become indebted to his bank in excess of the $2,500 permitted by the Regulation. S-1887, March 28, 1961.

3--1045

PROHIBITED TRANSACTIONS--Loans from Trust Funds

The restrictions contained in section 22(g) of the Federal Reserve Act and in the Board's Regulation O include loans to executive officers of member banks from trust funds administered by such banks. Likewise, an indebtedness of an executive officer of a member bank to another bank arising out of the lending of trust funds should be reported to the board of directors as provided in Regulation O. It is contrary to the established principle regarding the handling of trust funds for a trustee to have any interest in the funds of a trust which he is administering and such principle is applicable to executive officers of a corporate trustee.

The $2,500 exception contained in this section does not in any manner affect the provision of section 11(k) of the Federal Reserve Act which prohibits a national bank exercising trust powers from lending funds held in trust to any of its officers, directors, or employees; since the provision in section 22(g) can be applied to loans of the bank's own funds and thus be given full effect even though it is not regarded as repealing the provision of section 11(k) referred to above. Digest of 1936 Fed. Res. Bull. 324; ¶ 3835.

Modified by 12 CFR 215.106. Section 11(k) of the Federal Reserve Act has been repealed, but the prohibition can be found at 12 USC 92a(b).

3--1046

PROHIBITED TRANSACTIONS--Indorsement of Partnership Note

The liability to a member bank of an executive officer thereof arising from his indorsement of a note of a partnership in which he has less than a majority interest constitutes a liability falling within the provisions of section 22(g) of the Federal Reserve Act and Regulation O. If the officer is a member of a partnership under an agreement whereby his liability for partnership debts is limited, his individual indorsement of a note of the partnership would clearly increase the extent of his liability. Even in the case of an unlimited partnership, the act of a partner in adding his individual indorsement to a note of the partnership would appear to create a liability distinct from, and in addition to, his liability as a partner arising by operation of law. Digest of 1936 Fed. Res. Bull. 772; ¶ 3830.

3--1047

PROHIBITED TRANSACTIONS--Commodity Credit Corporation Notes on Cotton

This refers to Mr. Gough's letter of December 16, 1937, requesting a ruling on the question whether the provisions of section 22(g) of the Federal Reserve Act are applicable to executive officers of member banks who execute Commodity Credit Corporation notes on cotton.

It appears from the enclosures transmitted with Mr. Gough's letter that a producer of cotton desiring to obtain a loan on cotton on the forms prescribed by the Commodity Credit Corporation may deal directly with any bank or lending agency. The borrower executes a loan agreement which provides that he shall remain liable to the holder of the note for any deficiency only in the event that he does not reduce cotton acreage or production in accordance with the provisions of an agricultural conservation program offered by the Secretary of Agriculture pursuant to certain provisions of law, or has made any misrepresentation in connection with the loan, or in the event of a breach of warranty contained in the loan agreement. It is also provided that any holder of a note may declare it immediately due and payable if the price of cotton goes above a certain stated amount, upon discovery that the maker has made any misrepresentation in connection with the loan, upon any breach of warranty in the loan agreement, upon any failure on the part of the maker to comply with agreements in connection with a conservation program, or upon the filing by the maker of a petition in bankruptcy or for the composition or extension of debts under the Bankruptcy Act. In these circumstances, it appears that there is a contingent liability on the part of the maker of such a note.

The definition of the term "loan" contained in section 1(c) of the Board's Regulation O includes a contingent liability, and, accordingly, it is the view of the Board that the liability of an executive officer of a member bank as maker of a note on the form prescribed by the Commodity Credit Corporation representing a loan on cotton falls within the provisions of the Board's Regulation O.

In this connection, it is appropriate to state that the Board was furnished with a copy of a letter written by the assistant attorney general to the United States attorney at _______ , under date of February 14, 1935, in which the view was stated that there is a contingent liability on the part of the borrower on loans made on Commodity Credit Corporation forms (which, it is understood, were at that time similar to the present forms) and that such liability was sufficient to bring the case within the scope of section 22(g) of the Federal Reserve Act as it then existed. S-64; Jan. 12, 1938.

3--1048

PROHIBITED TRANSACTIONS--Loan to Officer as Trustee of Estate

This refers to your letter of March 19, 1941, enclosing a copy of a letter dated March 15, 1941, from Mr. A., chairman of the board of directors of the _______ National Bank, to Mr. _______ , chief national bank examiner, inquiring whether section 22(g) of the Federal Reserve Act would prohibit the _______ National Bank from making a loan to A as trustee of his father's estate.

It appears that Mr. A is chairman of the board of directors of the national bank. It also appears that he is trustee of his father's estate, in which he has a life interest, and that the property of the estate will upon his death vest in his two sons, one of whom is vice president of the national bank. The trust estate consists of property with a value in excess of $100,000 with no indebtedness, the principal item being a business block yielding approximately $7,500 per annum, and the estate may wish to borrow about $15,000, which Mr. A describes as a "gilt-edged" loan and one "that any bank would obviously welcome."

It will be assumed that under the laws of the State of _______ a trustee in borrowing on behalf of the trust may sign the instrument in such a way as to avoid any personal liability on the obligation and that the proposed loan would be handled in this way. While the trustee would thus have no personal liability, he would benefit directly from the making of the loan in his capacity as life tenant of the trust estate, which would be obligated on the note. He is interested in the loan both in a representative capacity and in his own right. In this connection, it is noteworthy that the law forbids a member bank to make any loan or "extend credit in any other manner" to an executive officer.

It appears that the principal purpose underlying the enactment of section 22(g) of the Federal Reserve Act was to prevent the exercise of undue influence by executive officers of member banks in obtaining credit from the banks they serve; and, while there is nothing to suggest that any such influence would be used in this particular instance, it is apparent that the case is one of a type in which undue influence may readily be exercised.

In all the circumstances, and particularly in view of the fact that Mr. A is not only trustee but also a beneficiary of the trust estate which would receive the loan, it is the view of the Board that the making of the loan proposed would contravene the intention of Congress and would be inconsistent with the provisions of the statute. S-258; April 2, 1941.

3--1049

PROHIBITED TRANSACTIONS--Loans from Employee Profit-Sharing Trust Fund

The Board of Governors has been requested to consider the question whether the restrictions of section 22(g) of the Federal Reserve Act and the Board's Regulation O apply to loans made by a member bank to executive officers from funds held in trust by the bank under an employee profit-sharing plan. It is understood that one of the important provisions of the trust arrangement is that a participating employee is extending the privilege of borrowing for worthwhile purposes up to the amount of his vested interest in the trust, and that all officers and employees of the bank may participate in the plan.

The question presented involves the Board's interpretation in the 1936 Federal Reserve Bulletin at page 324, to the effect that Regulation O applies to loans made to executive officers of member banks from trust funds administered by such banks.

The Board has reviewed its 1936 interpretation in the light of the facts presented, and has concluded that the views then expressed should be modified so as to permit loans of the type described without regard to the limitation imposed by section 22(g) and Regulation O. The underlying purpose of these limitations was to prevent executive officers from exerting improper influence in connection with loans made to them from deposits accepted from the public for prudent investment. The same dangers against which section 22(g) was directed are not present, insofar as the Board can discern, with respect to loans made from the trust fund established under the profit-sharing plan. The privilege of borrowing is extended to any employee who chooses to become a member and makes contributions to the fund. No member is extended any special treatment since each may borrow on the same terms and in an amount not exceeding his particular vested interest. In these circumstances it is difficult to perceive how an executive officer could exert improper influence.

Accordingly, the Board's 1936 interpretation as to the applicability of Regulation O is modified to the extent indicated above. 1965 Fed. Res. Bull. 1539; 12 CFR 215.106; ¶ 3836.

3--1050

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Morris Plan Companies

A Morris Plan company authorized to lend money, to buy and sell bonds or choses in action, to sell its secured or unsecured evidences or certificates of indebtedness and to receive therefor payments in instalments or otherwise is a "bank" within the meaning of the provision of section 22(g) of the Federal Reserve Act which requires an executive officer of a member bank to report to his member bank any indebtedness to "any bank" other than the member bank of which he is an executive officer. Digest of 1936 Fed. Res. Bull., 249; ¶ 3900.

3--1051

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Discounted Commercial House Notes

Regulation O provides that if an executive officer of a member bank becomes indebted to any bank other than a member bank of which he is an executive officer, he shall make a written report of such indebtedness to his board of directors. Accordingly, when an executive officer gives his note to a commercial house, which later discounts it with another bank, he thereupon becomes indebted to such bank within the meaning of the regulation and such indebtedness is therefore required to be reported. While the executive officer involved will not always know when his obligation has been acquired by another bank, he should make a written report of such indebtedness as soon as he becomes aware of such fact. Digest of 1936 Fed. Res. Bull. 690; ¶ 3910.

3--1052

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Credit Unions

In view of the above, the Board has concluded that indebtedness of an executive officer of a member bank to a credit union organized under the Federal Credit Union Act of June 26, 1934, need not be reported to the board of directors of the member bank. Selected portion of S-1550; Oct. 8, 1954.

3--1053

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Foreign Bank's Domestic Branch

* * * (b)  Domestic branch of foreign bank a "bank" under section 22(g) of the act. A related inquiry received by the Board is whether a branch in this country of a foreign bank, such as the one involved under (a) above, falls within the term "any bank" in the second sentence of section 22(g) of the Federal Reserve Act (12 USC 375a), which requires an executive officer of a member bank to report to that bank any indebtedness owed by him to "any bank" other than the member bank.

The Board is of the view that, for reasons similar to those determinative of the matter set forth in (a) hereof, such a branch clearly is within the words "any bank" in section 22(g) of the act, and that, accordingly, any indebtedness of an executive officer of a member bank to any such branch must be reported as required by the statute.* * * 1964 Fed. Res. Bull. 168; 12 CFR 215.104; ¶ 3926.

For paragraph (a), see 12 CFR 210.101.

3--1054

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Private Banks

* * * (d)  Private bank a "bank" under section 22(g) of the act. The Board had received an inquiry related to the matters covered under (b) and (c) above. The question is whether a private bank, such as the one involved in (c), comes within the term "any bank" in the second sentence of section 22(g) of the Federal Reserve Act (12 USC 375a). That statute requires any executive officer of a member bank to report to that bank any indebtedness owed by him to "any bank" other than the member bank.

The Board's view is that any indebtedness of an executive officer of a member bank to any such private bank must be reported as required by the aforementioned provision of section 22(g) of the Act since, as indicated in (c) hereof, the private bank clearly is within the words "any bank" as used in the statute.

These views of the Board supersede any other previous interpretations to the extent that they conflict with these views, and to that extent such interpretations are hereby revoked. * * * 1964 Fed. Res. Bull. 169; 12 CFR 215.105; ¶ 3927.

For paragraph (b), see 12 CFR 215.104; for paragraph (c), see 12 CFR 210.102.

[Source:  Federal Reserve Regulatory Service 3--1035 to 3--1054]


BOARD RULINGS AND STAFF OPINIONS INTERPRETING REGULATION O

"Company"

Control of company or bank

"Executive officer"

Exempted transactions

"Extension of credit"

"Indebtedness"

Overdrafts

Prior approval

Prohibited transactions

Reports of extension of credit

Reports of indebtedness to other banks

Terms and creditworthiness

3--1060

"COMPANY"--Not-for-Profit Entities

The term "company" as defined in section 215.2(a) of Regulation O includes not-for-profit entities. STAFF OP. of May 4, 1979.

Authority: 12 CFR 215.2(a).

"COMPANY"--Estate or Trust

See 3--1062.1.

3--1061

CONTROL OF COMPANY OR BANK--Executive Officer or Director; Principal Shareholder

Section 215.2(b) addresses the issue of control of a company by an individual who is an executive officer or director of that company. The interests of an immediate family member are not taken into account when determining control or presumed control of a member bank. Instead, control is solely determined by the definition of "principal shareholder." STAFF OP. of May 4, 1979.

Authority: 12 CFR 215.2(b)(1)(i), 215.2(b)(2)(i), 215.2(b)(2)(ii), and 215.2(j).

3--1062

CONTROL OF COMPANY OR BANK--Subsidiary Owned by Principal Shareholder

A subsidiary of a member bank, whether wholly or partially owned by the member bank, is not considered a related interest (controlled company) of a principal shareholder of the member bank under subparts A or B of Regulation O. STAFF OP. of March 5, 1980.

Authority: FRA; 12 CFR 215.10, 215.22, and 215.23; FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

See also 44 Fed. Reg. 12,959 (1979).

3--1062.1

CONTROL OF COMPANY OR BANK--Executor, Trustee, or Beneficiary of Estate or Trust

An extension of credit by a member bank to an estate or trust for which a director of the bank is executor or trustee (but not beneficiary) is not considered made directly to the director under subpart A of Regulation O solely by reason of the director's status as executor of the estate or trustee of the trust. However, if the director was personally liable for the extension of credit or if the proceeds of the extension of credit were transferred to the director or used for the director's personal benefit, the extension of credit would be considered made to the director.

An extension of credit to an estate may be subject to the prohibitions of subpart A of Regulation O if the estate is a "related interest" of the director. The term "estate" is not included in the definition of "company" under subpart A. Estates are generally similar to individuals, which are not considered companies under subpart A. Accordingly, a member bank may extend credit to an estate of which the director is the executor (but not beneficiary) without regard to the prohibitions of subpart A. However, if the estate is long lived or takes on other characteristics of a company, the estate may be considered a company. If the estate controls a company, the director may be held to control the company through the director's control as executor of shares of the company held by the estate. Also, if the estate holds 10 percent or more of the shares of any class of voting shares of the bank, the estate would qualify as a principal shareholder of the bank. In such a case, the director would also be considered a principal shareholder of the bank through his control of the estate.

A trust qualifies as a company under subpart A. Control of a company under Regulation O exists when a person, directly or indirectly, owns or controls 25 percent or more of the voting shares of a company. Also, a person is presumed to control a company when that person owns or controls more than 10 percent but less than 25 percent of the voting shares. Whether a director controls depends on whether the director is in the position to control the requisite share of the trust. Therefore, a sole trustee or a co-trustee would control the trust, and the trust would qualify as a "related interest" of the director. In that situation, any extension of credit to the trust would be subject to the preferential and prior-approval requirement of Regulation O.

If a director is a beneficiary of a trust or estate, an extension of credit to the trust or estate would inure to the benefit of the director. If the director has a 25 percent or more present or contingent interest in the estate or trust, the extension of credit will be considered to have been made to the director. Also, if the director, who is a beneficiary (but not a trustee) of the trust possessed the right to sell or dispose of the trust assets, terminate the trust, or replace the trustee, the director must be considered to control the trust. STAFF OP. of May 23, 1980.

Authority: FRA § 22(g) and (h), 12 USC 375a and 375b; 12 CFR 215.2(a), (b), and (k); 12 CFR 215.3(f) and 215.4(c).

See also 1936 Fed. Res. Bull. 249.

3--1065

"EXECUTIVE OFFICER"--Directors Approving Excessive Loans and Securities Purchases

Directors who approve excessive loans and investment securities purchases are acting "otherwise than in the capacity of a director" and are classified as "executive directors." STAFF OP. of March 4, 1968.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.2(d); FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

3--1066

"EXECUTIVE OFFICER"--Foreign Branch Officers

Regulation O applies to executive officers stationed abroad. Regulation K simply authorizes a higher loan ceiling for acquiring and constructing residences. STAFF OP. of July 13, 1972.

Authority: 12 CFR 215.2(b).

See also 12 CFR 211.3(b).

3--1067

"EXECUTIVE OFFICER"--Directors Serving on Executive Committees

Directors who serve on executive committees, but otherwise do not have official positions with the bank, are not regarded as "executive officers." STAFF OP. of May 29, 1973.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.2(b).

3--1068

"EXECUTIVE OFFICER"--Loan Beneficiaries

Section 22(g) of the Federal Reserve Act does not apply to officers or trustees who are not beneficiaries, because fiduciary standards of state laws satisfy the legislative intent of Regulation O. However, whenever officers or trustees are beneficiaries, section 22(g) is applicable and prohibits the loan. STAFF OP. of Oct. 1, 1974.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.5; FIRA §§ 901 and 801, 12 USC 1817(k)(l) and 1972(2)(G).

3--1069

"EXECUTIVE OFFICER"--Subsidiary Bank Shareholders and Policymakers

Regulation O restrictions are inapplicable to a principal shareholder of a subsidiary member bank. However, any individual in a subsidiary bank who participates or has authority to participate in major policymaking functions will be considered an executive officer. STAFF OP. of May 4, 1979.

Authority: 12 USC 1841(d); 12 CFR 215.2(d), 215.2(j), and 215.2(l).

3--1070

"EXECUTIVE OFFICER"--Inactive Subsidiaries of a Bank Holding Company

Directors and executives of inactive subsidiaries of a bank holding company are not considered executive officers for the purposes of Regulation O if they are not involved in the subsidiary bank's policies and affairs. STAFF OP. of July 12, 1979.

Authority: FRA §§ 22(h) and 22(h)(6), 12 USC 375b; 12 CFR 215.2(d); FIRA §§ 901 and 801, 12 USC 1817(k)(l) and 1972(2)(G).

3--1075

EXEMPTED TRANSACTIONS--Loans from Employee Profit Sharing Plans

The restrictions of section 22(g) of the Federal Reserve Act do not apply to loans made by a member bank to executive officers from funds held in trust by the bank under an employee profit-sharing plan that extends the privilege of borrowing to any employee who chooses to participate in the plan. BD. RULING of Nov. 9, 1965.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.4(a); FIRA §§ 901 and 801, 12 USC 1817(k)(l) and 1972(2)(G).

3--1075.1

EXEMPTED TRANSACTION--Extension of Credit by Bank Holding Company or Nonbank Subsidiary

Regulation O does not apply to the extension of credit by a bank holding company or its nonbank subsidiaries to an executive officer of a member bank controlled by the bank holding company, provided that the funds for such a loan are not derived from the member bank, and provided that the loan does not represent in any way an indirect extension of credit by the member bank.

If a mortgage loan made by a nonbank subsidiary represents bona fide compensation of the bank's executive officer such as would be paid by a business competitior, it would constitute furnishing services to or performing services for a bank holding company or its banking subsidiaries within the meaning of section 4(c)(1)(C) of the Bank Holding Company Act. STAFF OP. of May 7, 1982.

Authority: FRA § 22(g), 12 USC 375a; BHCA § 4(c)(1)(C), 12 USC 1843(c)(1)(C); 12 CFR 215.4(a).

3--1080

"EXTENSION OF CREDIT"--Full Payout Nonoperating Leases

Because they are direct or indirect obligations to pay money, full-payout nonoperating leases, such as an open-ended automobile lease, fall within the definition of extension of credit for the purposes of Regulation O. STAFF OP. of April 8, 1976.

Authority: FRA § 22(g), 12 USC § 375a; 12 CFR 215.2(c)(5), 225.4(a)(6)(a)(i), and 225.6.

3--1081

"EXTENSION OF CREDIT"--Negative Bank Account Balance

The negative balance on a zero-balance account is an overdraft and therefore an extension of credit, unless the negative balance qualifies as an inadvertent overdraft. This is unaffected by the existence of funds in a second account of the account holder, unless the bank has written authorization from the account holder to charge the second account and that account is actually charged in the amount of the overdraft. However, a negative balance outstanding for 24 hours or less would not constitute an overdraft where funds are being automatically or electronically deposited or transferred.

A check drawn and paid against uncollected funds is neither an overdraft nor an extension of credit. It becomes an extension of credit if it is returned to the bank uncollected and does not qualify as an inadvertent overdraft. STAFF OP. of May 4, 1979.

Authority: 12 CFR 215.2(h), 215.3, and 215.4(d).

3--1081.1

"EXTENSION OF CREDIT"--Loans to Spouse of Executive Officer in Community Property State

A member bank proposes to extend a loan that exceeds the limitations on loans to executive officers in Regulation O to the spouse of an executive officer in a community property state. The spouse has no separate property, and the loan proceeds will be applied to a business that is community property and that is managed by the spouse. The loan would not be deemed to be made to the executive officer if the spouse is creditworthy; the proceeds of the loan were not transferred to, or used for the direct benefit of, the executive officer; and the loan was repaid from the separate income of the spouse. Even though either spouse in a community property state may obligate the entire community and the executive officer appears to be indirectly obligated because the assets of the community would be attachable for repayment of the debt, the loan would not be an extension of credit to the executive officer since there is no evidence that the Congress or the Board intended to treat loans to spouses of executive officers differently in community property states and non-community property states.

Also, if the loan were made in good faith directly to the business for business purposes and repayment of the loan were to be made out of the income of the business, the loan would not be construed as an extension of credit to the executive officer; however, as community property, the business would qualify as a controlled company or related interest of the executive officer. On this basis, the extension of credit would be subject to the prior-approval requirement and the preferential-lending and aggregate lending limit restrictions of Regulation O. STAFF OP. of May 23, 1980.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.2(a), 215.3(a)(8), 215.3(f), 215.5, and 215.4(a), (b), and (c).

See also 3-1043.

3--1081.2

"EXTENSION OF CREDIT"--Loan to Children Guaranteed by Officer

Loans to the children of an executive officer of a bank, in an amount greater than the lending limitations of Regulation O, that are guaranteed by that executive officer are extensions of credit to the executive officer in violation of Regulation O. This conclusion would not be altered if the executive officer were to place securities with a value greater than the amount of the loans into a trust to be used to secure the loans and if those securities were to revert to the executive officer on repayment of loans and the executive officer were to retain voting control and beneficial ownership of the shares. The pledged securities remain under the control of the executive officer, and the trust agreement constitutes a guaranty of the loan by the executive officer and is therefore still an extension of credit under section 215.3(a)(8) of Regulation O. STAFF OP. of March 9, 1981.

Authority: 12 CFR 215.3(a)(8) and 215.5.

3--1081.3

"EXTENSION OF CREDIT"--Split-Dollar Insurance

The question has arisen whether insurance premiums paid in part by a bank on behalf of its executive officers (split-dollar insurance) amount to an interest-free extension of credit for purposes of Regulation O and section 22(g) of the Federal Reserve Act. In the case of split-dollar insurance, the insurance policy is owned by the executive officer and a collateral assignment is made to the bank to the extent of the premiums paid by the bank. The bank's contribution eventually is repaid from the proceeds of the insurance policy or from the policy's cash surrender value.

The term "extension of credit" is not defined in section 22(g) of the Federal Reserve Act. Although split-dollar insurance might appear to come within the broad definition of "extension of credit" contained in Regulation O, since the collateral assignment to the bank of certain policy proceeds might be construed as an indirect obligation of the bank's executive officer, it should not be deemed an extension of credit for purposes of Regulation O if the executive officer treats the bank's payments as taxable income.

In this connection, the Internal Revenue Service has ruled that split-dollar insurance does not involve a loan by the employer since the employee is not expected to repay the funds except from the proceeds of the policy or from funds from the cash surrender value of the policy. Consequently, the IRS requires that an employee report as taxable income the payments made by an employer on the employee's behalf. In light of the IRS's ruling, insurance premiums paid by a bank on behalf of its executive officer should not be considered an extension of credit for purposes of Regulation O if the executive officer has reported the bank's contribution on his or her behalf as part of taxable income. STAFF OP. of March 10, 1981.

Authority: FRA § 22(g)(10), 12 USC 375a(10); 12 CFR 215.3(a)(8).

See also Rev. Rul. 64-328, C.B. 1964-3, 11.

3--1085

"INDEBTEDNESS"--Backup Lines of Credit Connected with Commercial Paper Issuance

Backup lines of credit that are negotiated in connection with the issuance of commercial paper and have not been drawn upon are not outstanding debts. STAFF OP. of Dec. 28, 1979.

Authority: FRA § 22(h), 12 USC 375b; 12 CFR 215.22 and 215.23; FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

3--1086

OVERDRAFTS--Payment by Banks

The payment by a member bank of small, short-duration, inadvertent overdrafts of its directors and executive officers would not be prohibited if made pursuant to "a written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment" or "a written, preauthorized transfer of funds from another account of the account holder bank." STAFF OP. of Dec. 13, 1979.

Authority: FRA § 22(h), 12 USC 375b; 12 CFR 215.4(d); FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

OVERDRAFTS--Check Drawn and Paid Against Uncollected Funds

See 3-1081.

OVERDRAFTS--Negative Bank Account Balance

See 3-1081.

3--1089

PREFERENTIAL LOANS--Demand and Instalment Notes

A director of a bank received a loan at preferential rates prior to the enactment of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA) from a correspondent bank. Whether the loan should be recalled depends on whether the loan note is a demand or installment note. FIRA and Regulation O prohibit a member bank from making a preferential loan to an executive officer, director, or principal shareholder of a correspondent bank; however, the prohibitions of FIRA and Regulation O are prospective and not retrospective. FIRA and Regulation O would prohibit the renewal of the preferential loan or the opening of any additional correspondent accounts between the banks while the preferential loan was outstanding. In a statement issued in connection with its proposed Regulation O (44 Fed. Reg. 13035 (1979)), the Board advised member banks to eliminate preferential loans as soon as practicable. FIRA, Regulation O, or the policy statement would not require the correspondent bank to call a director's loan if it was an instalment note; however, if the loan was a demand loan, the correspondent bank should recall it.

A loan note that was not preferential at the time it was written does not violate FIRA or Regulation O, even if it would be preferential if written now. STAFF OP. of March 23 and May 8, 1981.

Authority: FIRA title VIII, 12 USC 1972(2); FRA § 22(g) and (h), 12 USC 375a and 375b; 12 CFR 215.3 and 215.6

3--1089.1

PREFERENTIAL LOANS--Backup Line of Credit to Holding Company

Title VIII of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 prohibits a bank from extending credit with preferential terms to a principal shareholder of a correspondent bank. A bank holding company is a principal shareholder of its subsidiary. Therefore, title VIII would apply to a backup line of credit issued by a national bank to a bank holding company of a correspondent of the lending bank when the holding company is not able to market its commercial paper because of adverse financial conditions. The preferentiality of an extension of credit made pursuant to a backup line of credit would be determined at the time the commitment is established, rather than when funds are actually advanced. STAFF OP. of April 28, 1983.

Authority: FIRA title VIII, 12 USC 1972(2); 12 CFR 215.3(d).

3--1090

PRIOR APPROVAL--Current Board of Directors

Before member banks can grant or extend credit to executive officers, directors, or principal shareholders of that bank, prior approval must be obtained from a majority of the entire board of directors, currently in office. STAFF OP. of May 4, 1979.

Authority: 12 CFR 215.4(b).

3--1091

PRIOR APPROVAL--Blanket Resolution for Approving Loans

A blanket resolution passed by the board of directors approving loans in excess of $25,000, but not in excess of the maximum loan limits of the bank, satisfies the prior approval requirement if the Board makes a good faith assessment of the creditworthiness of each person covered by the resolution and the credit limits are no greater than the person's credit would warrant. STAFF OP. of May 18, 1979.

Authority: 12 CFR 215.4(b).

3--1092

PRIOR APPROVAL--Loans to Subsidiaries

Loans from member banks to their subsidiaries are not subject to the prior approval preferential lending restrictions of Regulation O. STAFF OP. of Dec. 10, 1979.

Authority: FIRA §§ 901 and 801, 12 USC 1817(k)(l) and 1972(2)(G); 12 CFR 215.4(a).

See also 44 Fed. Reg. 12, 959 (1979).

3--1092.1

PRIOR APPROVAL--14-Month Rule

A national bank may seek the prior approval of its board of directors for an initial 90-day loan of $20,000, and three renewals of that loan, at the same board meeting. Such a procedure would be similar to a board of directors' prior approval of a line of credit. Section 215.4(b)(2) of Regulation O provides that approval by a bank's board of directors is not required for an extension of credit made pursuant to a line of credit approved within 14 months of the date of the extension. Since the bank proposes to seek the board of directors' prior approval of the original extension of credit and the three renewals thereof, and the note and three renewals will occur within 14 months of the original extension of credit, the proposal complies with Regulation O. STAFF OP. of April 1, 1981.

Authority: FRA § 22(g), 12 USC 375a; 12 CFR 215.3 and 215.4

3--1094

PROHIBITED TRANSACTIONS--Below-Market-Rate Bank Loan to Bank President

A bank holding company made a commitment to a person who was shortly to become president and director of one of the holding company's subsidiary banks to provide mortgage financing for the future officer's new residence at an interest rate of 10 percent. The holding company wants the subsidiary bank, rather than the holding company or its mortgage company subsidiary, to provide the financing.

Although an extension of credit by a bank holding company or its mortgage company subsidiary would not, in general, be prohibited by Regulation O, section 215.4(a) prohibits a member bank from extending credit to its executive officers, directors, or principal shareholders, or to any related interest thereof, unless the credit is extended on substantially the same terms, including rates, as those prevailing at the time for comparable transactions with other persons.

The holding company argues that the interest rate commitment was not preferential in any way but was instead an accommodation that was necessary to secure the talent required by the subsidiary bank. The prevailing mortgage interest rates at the time the commitment was made were between 121;2 and 13 percent, and current interest rates, at the time the loan is to be made, are between 14 and 15 percent. The interest rate offered to the prospective officer is not substantially the same as the rates prevailing at the time for other persons; therefore, the proposed loan would violate Regulation O. STAFF OP. of Sept. 17, 1984.

Authority: FRA § 22(g)(1)(B) and (h)(3), 12 USC 375a and 375b; 12 CFR 215.4.

3--1095

REPORTS OF EXTENSION OF CREDIT--Credit Card Plan

The reporting requirement for extension of credit to a bank's executive officers through a credit card plan is satisfied by annually granting continuing authority to borrow periodically, provided the authority not exceed twelve months and the amount of indebtedness not exceed the statutory maximum. STAFF OP. of Nov. 26, 1968.

Authority: 12 CFR 215.5(a).

See also 1937 Fed. Res. Bull. 1074 and 1966 Fed. Res. Bull. 1152.

3--1096

REPORTS OF EXTENSION OF CREDIT--Loans by Wholly Owned Subsidiaries

Loans by a wholly owned subsidiary of a member bank to an executive officer of the bank can and should be attributed to the bank for the purposes of Regulation O. STAFF OP. of April 1, 1969.

Authority: FRA § 22(g), 12 USC 375a.

3--1097

REPORTS OF EXTENSION OF CREDIT--Availability

Records of credit extended by member banks may not be centrally located if they are readily identifiable and available to examiners. STAFF OP. of May 4, 1979.

Authority: 12 CFR 215.7.

3--1100

REPORTS OF INDEBTEDNESS TO OTHER BANKS--Foreign Banks

The board of directors of member banks should receive reports from any executive officer who is indebted to foreign banks in excess of the amounts specified in section 22(g) of the Federal Reserve Act. The term "bank" as used in section 22(g)(6) includes foreign banks. STAFF OP. of Dec. 10, 1979.

Authority: FRA §§ 1 and 22(g), 12 USC 221 and 375a.

See also 79 Congressional Record 6956, 6957 (1935).

3--1105

TERMS AND CREDITWORTHINESS--Standards for Assessing Creditworthiness

The requirement for prior board of directors approval for member bank's loans in excess of $25,000 to any of its executive officers, directors and principal shareholders or to their related interest is satisfied if the extension of credit is made pursuant to a line of credit that has been approved by the bank's board of directors within 14 months of the actual extension of credit. In authorizing a line of credit, the Board expects that the board of directors of the member bank will make a good faith assessment of the creditworthiness of the bank official. If such an assessment is made, the board of directors is not required to pass on the details of each extension of credit made pursuant to the line of credit.

In making an assessment, the board of directors should take care to ensure that the terms of any extension of credit does not violate section 22(h) of the Federal Reserve Act and Regulation O prohibitions against preferential lending. Loans by member banks to executive officers, directors, and principal shareholders should be made according to the same criteria for creditworthiness and repayment risk as are used by the bank for other borrowers. The interest rates, collateral requirements, and repayment terms should also be assigned without special consideration given to the borrower's position. STAFF OP. of Dec. 13, 1979.

Authority: FRA § 22(h), 12 USC 375b; 12 CFR 215.4(a); FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

3--1106

TERMS AND CREDITWORTHINESS--Loans Criteria

A loan by a member bank at no interest or at nominal interest to executive employees for the purchase of an annuity is prohibited. STAFF OP. of Dec. 17, 1979.

Authority: FRA § 22(h)(3), 12 USC 375b; 12 CFR 215.4(a); FIRA §§ 901 and 801, 12 USC 1817(k)(1) and 1972(2)(G).

[Source:  Federal Reserve Regulatory Service 3--1061 to 3--1106]


[Table of Contents] [Previous Page] [Next Page] [Search]