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Board Rulings and Staff Opinions Interpreting Regulation O

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).
3-1062.1

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.
3-1062.2

CONTROL OF COMPANY OR BANK—Shares Owned, Controlled, or Voted as Part of Investment Advisory Functions

Companies that provide investment advisory services to investment funds and separate accounts may have dispositive authority over portfolio shares issued by banking organizations and may have the power to vote these shares on behalf of their client funds and accounts. Section 22(g) and (h) of the Federal Reserve Act (FRA) and Regulation O do not contain an exemption for shares owned, controlled, or voted as part of investment advisory functions. In addition, section 22(g) and (h) of the FRA does not give the Board authority to exempt transactions and relationships from the requirements of section 22(g) and (h). Consequently, the Board does not have statutory authority to exempt ownership of, control of, or power to vote shares held in connection with investment advisory functions from the requirements of Regulation O. Accordingly, for purposes of Regulation O, a company (1) would be a principal shareholder of a banking organization if it has dispositive or voting power over more than 10 percent of any class of voting securities of the banking organization and (2) would control a banking organization if it has dispositive or voting power over 25 percent or more of any class of voting securities of the banking organization. STAFF OP. of September 29, 2006.
Authority: FRA § 22(g) and (h), 12 USC 375a and 375b; 12 CFR 215.2(c) and (m) and 215.11(a)(1).
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 14, 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)(1) 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: BHCA § 2(d), 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)(1) and 1972(2)(G).
3-1070.1

“EXECUTIVE OFFICER”—Record Detention

Section 215.2(d) establishes a presumption that certain officers of a bank are executive officers and that executive officers of a bank owned by a holding company include executive officers of all other subsidiaries owned by that holding company. Both presumptions may be rebutted if (1) the officer is precluded by resolution from participating in major policymaking functions of the bank and (2) the officer does not actually participate therein. Sample forms of resolutions by the Board may be used to exclude by implication individuals who are not executive officers and are not authorized to participate in major policymaking functions at the bank.
The purpose of section 215.7 is to ensure that a member bank complies with Regulation O, by maintaining appropriate records. If access to records stored in another location is delayed, the benefit of section 215.7 is diminished. Therefore, a bank should physically possess the records required under section 215.7. Immediate access to electronically stored data will also satisfy this record-keeping requirement. STAFF OP. of Dec. 4, 1989.
Authority: 12 CFR 215.2(d) and 215.7.
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)(1) and 1972(2)(G).
3-1075.1

EXEMPTED TRANSACTIONS—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 competitor, 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 office 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 em ployee’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.
3-1081.31

“EXTENSION OF CREDIT”—Acquisition of Note from Related Interest

An automobile dealership and a bank are controlled by the same principal shareholders; therefore, the dealership is a related interest of the bank for purposes of Regulation O. The dealership proposes to refer potential customers to the bank for the purpose of examining the customers’ creditworthiness. The bank would conduct an independent credit evaluation and decide whether the bank would lend money to the customer. If the decision is favorable, the bank would inform the dealership of its decision. The dealership would make the loan and then sell the note to the bank. If a loan becomes delinquent, the bank could repossess the automobile and require the dealership to purchase the automobile if the automobile was delivered to the dealership within 90 days of the delinquency date. In addition, each note purchased by the bank would be personally guaranteed by a principal shareholder.
The bank’s acquisition of a note from a related interest of the Bank’s principal shareholder, which is guaranteed by the principal shareholder, is an extension of credit as this term is defined in section 215.3(a) of Regulation O. The exclusion from the definition found in section 215.3(b)(4)(ii) does not apply to the facts of this case because the exclusion is designed to permit an insider to incur indebtedness to protect a bank against losses from outstanding extensions of credit.
This transaction also may raise concerns under section 23A of the Federal Reserve Act. STAFF OP. of April 5, 1989.
Authority: 12 CFR 215.3(a) and (b).
3-1081.4

“EXTENSION OF CREDIT”—Insider Loan Renewals

The question was raised whether a loan renewal, which is part of a loan workout, may be excluded from the definition of “extension of credit” under Regulation O because the renewal is made to provide financial assistance to the bank. The question arises in the context of the renewal of a formerly unsecured loan for which adequate collateral is now offered. The loan, which complied with Regulation O when initially made, would violate the lending limit in section 22(h) of the Federal Reserve Act upon renewal.
Section 215.3(b)(4)(ii) of Regulation O excludes from the definition of “extension of credit” any indebtedness to a member bank to protect it from loss or giving financial assistance to it. This exemption is intended to enable an insider to protect a bank against a loss arising from credit extended to an unrelated third party. It does not authorize a bank to renew a loan to an insider that would violate Regulation O when the insider is already obligated to repay the bank. A renewal of a loan under the circumstances posed must independently comply with all restrictions of section 22(h) of the Federal Reserve Act and Regulation O. STAFF OP. of June 14, 1989.
Authority: FRA § 22(h), 12 USC 375b; 12 CFR 215.3(b)(4)(ii).
3-1081.5

“EXTENSION OF CREDIT”—Credit Cards Issued to Bank Insiders for the Bank’s Business Purposes

Insiders of a bank often use a bank-owned or bank-issued credit card to purchase goods and services for the bank’s business purposes. A bank-owned credit card is a credit card issued by a third-party financial institution to a bank to enable the bank (through its employees) to finance the purchase of goods and services for the bank’s business. A bank-issued credit card is a credit card issued by a bank directly to its employees to enable the employees to finance the purchase of goods and services for the bank’s business.
Section 215.3(b)(1) of Regulation O excludes from the definition of “extension of credit” any advance by a bank to an insider for the payment of authorized or other expenses incurred or to be incurred on behalf of the bank. Section 215.3(b)(5) excludes from the definition indebtedness of up to $15,000 incurred by an insider with a bank under an ordinary credit card.
In light of these provisions of the regulation and the purposes of the insider-lending restrictions in the Federal Reserve Act, for purposes of Regulation O, a bank does not make an extension of credit to an insider at the time of issuance of a bank-owned or bank-issued credit card to the insider (regardless of whether the line of credit associated with the card is greater than $15,000). In addition, for purposes of Regulation O, a bank does not extend credit to an insider when the insider uses the card to purchase goods or services for the bank’s business purposes. An extension of credit would occur if (and to the extent that) the amount of outstanding personal charges made to the card, when aggregated with all other indebtedness of the insider that qualifies for the credit card exception in section 215.3(b)(5), exceeds $15,000.
In addition, incidental personal expenses charged by an insider to a bank-owned or bank-issued credit card are not per se violations of the market-terms requirement in section 215.4(a). A bank may be able to satisfy that requirement if it approves an insider for use of a bank-owned or bank-issued credit card only if the insider meets the bank’s normal credit underwriting standards and the card does not have preferential terms (or the card does not have preferential terms in connection with uses of the card for personal purposes). STAFF OP. of May 22, 2006.
Authority: FRA § 22(g) and (h), 12 USC 375a and 375b; 12 CFR 215.3(b)(1) and (5) and 215.4(a).
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).
3-1085.5

LENDING LIMITS—Insured Branches of Foreign Banks

The staff was asked whether the restrictions on extensions of credit to insiders are the same for insured branches of foreign banks located in the United States as they are for member banks and, if so, what the definition of unimpaired capital and unimpaired surplus is for the foreign branch.
The restrictions on extensions of credit are the same for insured branches of foreign banks in the United States as they are for member banks. The lending limits of the insured branch are based on the dollar equivalent of the unimpaired capital and unimpaired surplus of the whole foreign bank of which the insured branch is a part.
Section 18(j)(3) of the Federal Deposit Insurance Act (FDIA) provides that section 22(g) and (h) of the Federal Reserve Act (FRA) “shall not apply with respect to a foreign bank solely because the foreign bank has an insured branch, but shall apply with respect to the insured branch.” By comparison with section 18(j)(3) of FDIA, the absence from the Regulation O definition of “member bank” of a specific provision to include an insured branch of a foreign bank may suggest that such branches are excluded from the coverage of Regulation O.
Whenever reasonable, an interpretation of Regulation O that is consistent with FDIA is to be preferred. This rule of interpretation is especially appropriate when, as in the case of Regulation O, the statutory authority for the regulation does not grant general authority to engage in exemptive rulemaking (see section 22(g) and (h) of the Federal Reserve Act). The current definition of “member bank” in Regulation O may reasonably be read, and therefore should be read, consistently with section 18(j)(3) of FDIA so as to address and to exclude a foreign bank as a whole but not to address and not to exclude the individual insured branches of a foreign bank. “Insured branch” is defined in the FDIC Improvement Act to mean any “branch,” as defined in the International Banking Act of 1978 (IBA), of a foreign bank of which any deposits are insured pursuant to FDIA (12 USC 1813(s)). “Branch” is defined in the IBA to mean “any office or any place of business of a foreign bank located in any State of the United States at which deposits are received” (12 USC 3101(3)). A foreign bank also may operate an “agency,” which is defined in the act to mean “any office or any place of business of a foreign bank located in any State of the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers, checks are paid, or money is lent but at which deposits may not be accepted from citizens or residents of the United States” (12 USC 3101(1), emphasis added). A branch and an agency therefore are distinguished from each other by the inability of a federal agency to receive deposits (see 12 USC 3102(d)). An agency of a foreign bank therefore may engage in insider lending, but section 18(j)(3) of FDIA would not require it to comply with Federal Reserve Act section 22(g) and (h) or with Regulation O, because an agency is not a branch.
For purposes of calculating the lending limit of an insured branch of a foreign bank, section 4(b) of the IBA provides that “any limitation or restriction based on the capital stock and surplus of a national bank shall be deemed to refer, as applied to a Federal branch or agency, to the dollar equivalent of the capital stock and surplus of the foreign bank” (see 12 USC 3102(b), and 12 CFR 28.5 and 28.101).* Both the single-borrower and the aggregate insider lending limit for national banks, as for all member banks, are based on the bank’s unimpaired capital and unimpaired surplus (see 12 USC 375b(4), and 12 CFR 215.4(c) and (d)). Accordingly, the single-borrower lending limit and the aggregate insider lending limit for an insured federal branch or for a federal agency or a foreign bank should be based on the dollar equivalent of the unimpaired capital and unimpaired surplus of the whole of the foreign bank of which the insured federal branch or the federal agency is a part. If the foreign bank has more than one federal branch or agency, extensions of credit by all its federal branches or agencies, whether or not insured, are aggregated to determine compliance with the insured bank’s lending limit (see 12 USC 3102(b) and 12 CFR 28.5).
The IBA expressly applies the single-borrower lending limit of a federal branch or federal agency to a state branch or state agency of a foreign bank (12 USC 3105(h)(2)).† This provision should be interpreted to incorporate the method of calculation of a federal branch or federal agency as well. STAFF OP. of April 21, 1993.
Authority: FDIA § 18(j)(3)(B), 12 USC 1828(j)(3)(B); FDIA § 3(s), 12 USC 1813(s); FRA § 22(g) and (h), 12 USC 375a and 375b; IBA § 1(b)(1), (3), (5), (6), and (10)-(12), 12 USC 3101(1), (3), (5), (6), and (10)-(12); IBA § 4(b) and (d), 12 USC 3102(b) and (d); IBA § 7(h)(2), 12 USC 3105(h)(2); 12 CFR 28.5, 28.101, and 215.4(c) and (d).
*
The IBA defines “Federal branch” as a branch of a foreign bank established and operating under section 4 of the act and defines “Federal agency” as an agency of a foreign bank established and operating under section 4 of the act (12 USC 3101(6) and (5)).
†
The IBA defines “state branch” as “a branch of a foreign bank established and operating under the laws of any State,” including the District of Columbia (12 USC 3101(12) and (10)) and defines “state agency” as “an agency of a foreign bank established and operating under the laws of any State,” including the District of Columbia (12 USC 3101(11) and (10)).
3-1085.51

LENDING LIMITS—Unimpaired Capital and Unimpaired Surplus

The lending limit for a member bank is defined in Regulation O to include “any subordinated notes and debentures approved as an addition to the member bank’s capital structure by the appropriate federal banking agency” (12 CFR 215.2(h)(2), emphasis added). Effective September 4, 1992, the Board eliminated from Regulation D the requirement that state member banks obtain the Board’s prior approval before issuing subordinated debt and mandatory convertible debt in order to treat such debt as tier 2 capital, rather than as a deposit (57 Fed. Reg. 40,597 (1992)). However, the Board did not eliminate all criteria concerning such debt. Simultaneously, it issued a new interpretation of the capital adequacy appendixes to Regulations H and Y to provide general guidance on the criteria that subordinated debt and mandatory convertible debt must meet in order to be included in capital (12 CFR 250.166). Therefore, even though subordinated debt and mandatory convertible debt is no longer individually reviewed and approved, it still must be “approved,” in the sense that it must comply with, or be eligible for approval on the basis of stated criteria. The definition of unimpaired capital and unimpaired surplus in Regulation O therefore may still be read consistently with the revision to Regulation D. STAFF OP. of April 21, 1993.
Authority: 12 CFR 215.2(h)(2) (revised effective Feb. 18, 1994; now 215.2(i)(2)); 12 CFR 250.166.
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 Installment 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 installment 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).
3-1089.11

PREFERENTIAL LOANS—Home Mortgage Loan Program for Employees of Financial Institution

The staff was asked whether executive officers and directors of a financial institution may participate in a home mortgage loan program offered by the institution to its employees but not to members of the general public. Under this program, employees are offered a 1-point discount on the loan-origination fee.
Executive officers and directors of a financial institution may not participate in this type of program unless the institution makes home mortgage loans on substantially the same terms to nonemployees. Regulation O prohibits a bank from extending credit to any of its executive officers, directors, or principal shareholders, or to any related interest of those persons, on terms, including interest rates, that are preferential to the terms prevailing at that time for comparable transactions by the bank with persons who are not covered by Regulation O and are not employees of the bank. An executive officer of a bank therefore may not participate in a preferential lending program, even though that program is made available to all other bank employees.
A 1-point discount on the loan-origination fee for a 30-year home mortgage loan would result in a reduction in the annual percentage rate of less than one-eighth of 1 percent. Because one-eighth of 1 percent is the amount by which, under Regulation Z, the disclosed annual percentage rate for a loan may differ from the actual annual percentage rate for the loan without a redisclosure being required or the disclosure being considered inaccurate, the financial institution contends that loans made under this program are made on substantially the same terms as loans to the general public.
Whether a loan term is “substantially the same” for purposes of Regulation O cannot be determined solely by examining the effect of the term on the loan’s annual percentage rate or by analogizing from Regulation Z, which addresses a different set of issues. Ordinarily, the loan-origination fee is a significant element in the total package of terms considered by a prospective home mortgage loan borrower. Unless it can be shown that a 1-point discount on the loan-origination fee would not be a significant factor for the general public in the selection of a home mortgage lender, home mortgage loans made subject to this discount are not made on substantially the same terms as loans to the general public. STAFF OP. of June 3, 1993.
Authority: 12 CFR 215.4(a)(1), 226.2(b), 226.19(a)(2), and 226.22(a)(2).
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)(1) 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 251.4(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 12½ 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 need not be centrally located if they are readily identifiable and available to examiners. STAFF OP. of May 4, 1979.
Authority: 12 CFR 215.7.
3-1097.1

REPORTS OF EXTENSION OF CREDIT—CEBA Credit Card Bank

A bank requested relief from certain recordkeeping, reporting, and public-disclosure requirements of Regulation O. The bank was organized in 1991 by a national retailer (“the company”) under the Competitive Equality Banking Act of 1991 (CEBA), which amended the Bank Holding Company Act (BHC Act) to exclude from the definition of “bank” an institution that—
  • engages only in credit card operations;
  • does not accept demand deposits, or deposits that the depositor may withdraw by check or similar means for payment to third parties or others;
  • does not accept any savings or time deposits of less than $100,000;
  • maintains only one office that accepts deposits; and
  • does not engage in the business of making commercial loans.
The bank’s articles of association set forth these restrictions and provide that they may not be eliminated or amended without the prior written consent of the Office of the Comptroller of the Currency (OCC).
The legislative history of CEBA clarifies that a CEBA credit card bank may make extensions of credit only to individuals. The bank has confirmed that it extends credit only through the issuance of credit cards and issues credit cards only to individuals for use in company stores. The bank is a member bank, however, for purposes of the Federal Reserve Act, and is subject to the requirements of Regulation O.
Section 215.8 of Regulation O requires a member bank annually to request each executive officer, director, and principal shareholder (insider) of the bank, any holding company of the bank, and all other subsidiaries of any holding company of the bank to provide the bank with a list of his or her related interests. As defined in section 215.2, a “related interest” is either a “company” controlled by an insider or a “political or campaign committee” controlled by or benefitting an insider. The bank notes that, by making loans only to individuals, which excludes loans to a company or a political or campaign committee, it is prevented from making loans to an insider’s related interests. Therefore, the bank suggests, it is not necessary for it to request its insiders to identify their related interests in order to ensure compliance with the insider-lending restrictions.
The purpose of section 215.8 is to ensure that banks maintain records necessary to ensure their compliance with the insider-lending restrictions. In view of the fact that the bank may not extend credit to companies, it is not necessary for it to request its insiders to identify their related interests or to maintain records of loans to its insiders’ related interests in order to ensure compliance with Regulation O.
Sections 215.9 and 215.10 of Regulation O impose reporting requirements, and section 215.11(b) imposes a public-disclosure requirement for executive officers of a member bank. Section 215.9 implements section 22(g)(7) of the Federal Reserve Act, and sections 215.10 and 215.11 implement section 7(k) of the Federal Deposit Insurance Act. Both of these statutory provisions refer solely to executive officers of a bank. Unlike their treatment under section 22(h) of the Federal Reserve Act (see paragraph (8), 12 USC 375b(8)), executive officers of affiliates of the bank are not deemed to be executive officers of the bank. The reporting and public-disclosure requirements of sections 215.9, 215.10, and 215.11(b) therefore do not apply to executive officers of the company or of any other subsidiary of the company, unless, of course, they are in fact also executive officers of the bank.
Section 215.9 of Regulation O requires each executive officer of a bank to report to the bank’s board of directors all extensions of credit from other banks that in the aggregate exceed the lending limit for extensions of credit to him or her by the bank. The bank contends that this reporting requirement is unnecessary because the bank engages only in credit card operations. Section 215.9 implements section 22(g)(7) of the Federal Reserve Act, which does not grant the Board any exemptive rulemaking authority with respect to its requirements. Accordingly, the bank’s executive officers are required to comply with section 215.9. STAFF OP. of July 26, 1993.
Authority: 12 CFR 215.8-215.11; FRA § 22(g)(7), 12 USC 375a(7); FDIA § 7(k), 12 USC 1817(k).
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—Loan 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).
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