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  4. Background and Summary of Regulation O and FIRA Titles VIII and IX

Background and Summary of Regulation O and FIRA Titles VIII and IX

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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.
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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. In complying with the prohibitions of title VIII, banks should use the definition of “control” in section 215.2(c) of Regulation O.
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DEFINITION OF “EXECUTIVE OFFICER”

The title VIII definition of “executive officer” is the same as that in section 22(h)(9)(C) 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 purposes of titles VIII and IX and subpart B of Regulation O, an executive officer of a bank holding company of which the member bank is a subsidiary, or of any other subsidiary of a bank holding company, is not an executive officer of the member bank unless that person actually holds that office.
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REPORTS BY EXECUTIVE OFFICERS

Title VIII requires an annual report from each executive officer and principal shareholder (but not from directors unless they are also principal shareholders or executive officers) of federally insured banks to the board of directors of that bank if they are indebted during the calendar year to a correspondent bank. Executive officers and principal shareholders are required to report (1) the “maximum indebtedness” during the calendar year of each person, and of that person’s related interests, to each bank that maintains a correspondent account for the reporting person’s bank; (2) the amount of indebtedness outstanding as of a date 10 business days before the report is filed; and (3) 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 calendar 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.
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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.
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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.
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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 be in the same relationship with the parent member bank, because Regulation O, section 215.2(o), specifies that the term “subsidiary” does not include a subsidiary of a member bank.
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