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General Prohibitions and Restrictions of Regulation O
Is applicant an Insider of Bank, Holding Company, or Affiliate?
Is applicant an Insider of a Correspondent Bank?
Yes
No
Reg O provisions do not apply
Loan must be made on non-preferential terms
No Yes
1. No preferential terms unless available as part of benefit to all employees. 2. Underwriting at least as stringent as for similarly situated non‐insiders 3. Standard loan application provided 4. If aggregate credit (including to related interests) exceeds greater of $25,000 or 5% of
the bank’s unimpaired capital and surplus, but in any case if it exceeds $500,000 then: a. Prior board approval b. Insider did not vote and exerted no influence on others (should be noted in board
minutes) Is insider an Executive Officer or Director?
No further requirements
No
1. Limit payment of overdrafts to the following situations: ‐ Written, preauthorized interest‐bearing plan ‐ Written, preauthorized transfer plan ‐ Inadvertent overdrafts less than $1,000 and account not overdrawn for more than 5
business days ‐ Charge same fee assessed for similarly situated non‐insiders (best practice – charge
same fee as majority of customers) 2. Annually report to Board any loans to any creditor secured by EO/Director’s own bank
stock if that stock is not publicly traded Is insider an Executive Officer?
Yes
No further requirements
No
1. Demand clause required. Demand of loan is at option of Bank, but clause is required in all EO credit obligations. EO must report to Board when becoming indebted to other creditors in amount more than Bank could lend EO.
2. Aggregate credit cannot exceed higher of 2.5% of Bank’s unimpaired capital and surplus or $25,000, but in no case more than $100,000 excluding financing for: a. Purchase, construction, maintenance or improvement of a
residence of the EO (must be 1st lien and limit one such loan outstanding)
b. Education of EO’s children c. Secured in manner described in Sec. 215.4(d)(3(i)(A) thru
(d)(3)(i)(C) – generally specific marketable collateral such as US Treasury Bills
3. Current detailed financial statement provided before extension of credit
4. Promptly reported to Board of Directors
Yes
Notes: Insiders include Directors, Executive Officers, Principal Shareholders,
and all related interests of such persons. Correspondent Bank insider restrictions not in Reg O specifically, but in
12 U.S.C. §1972(2) Affiliate Directors and Executive Officers can be excluded from Reg O
restrictions by Board Resolution, but must not participate in major policy‐making functions of Bank
485
Federal Reserve System § 215.2
negotiations, agreements, contracts,
and understandings entered into, pur-
suant to this section shall be made to
the Board at least quarterly, and more
frequently if so requested by the Board,
by a duly authorized officer of the Fed-
eral Reserve Bank involved.
[Reg. N, 27 FR 1719, Feb. 22, 1962]
§ 214.6 Amendments.
The Board of Governors of the Fed-
eral Reserve System reserves the right,
in its discretion, to alter, amend or re-
peal these regulations and to prescribe
such additional regulations, condi-
tions, and limitations as it may deem
desirable, respecting relationships and
transactions of any kind entered into
by any Federal Reserve Bank with any
foreign bank or banker or with any
group of foreign banks or bankers or
with any foreign State.
[Reg. N, 8 FR 17290, Dec. 24, 1943. Redesig-
nated at 27 FR 1719, Feb. 22, 1962]
PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
Sec.
215.1 Authority, purpose, and scope.
215.2 Definitions.
215.3 Extension of credit.
215.4 General prohibitions.
215.5 Additional restrictions on loans to ex-
ecutive officers of member banks.
215.6 Prohibition on knowingly receiving
unauthorized extension of credit.
215.7 Extensions of credit outstanding on
March 10, 1979.
215.8 Records of member banks.
215.9 Disclosure of credit from member
banks to executive officers and principal
shareholders.
215.10 Reporting requirement for credit se-
cured by certain bank stock.
215.11 Civil penalties.
APPENDIX TO PART 215—SECTION 5200 OF THE
REVISED STATUTES TOTAL LOANS AND EX-
TENSIONS OF CREDIT
AUTHORITY: 12 U.S.C. 248(a), 375a(10), 375b(9)
and (10), 1817(k); and Pub. L. 102–242, 105 Stat.
2236 (1991).
SOURCE: Reg. O, 59 FR 8837, Feb. 24, 1994,
unless otherwise noted.
§ 215.1 Authority, purpose, and scope. (a) Authority. This part is issued pur-
suant to sections 11(a), 22(g), and 22(h)
of the Federal Reserve Act (12 U.S.C.
248(a), 375a, and 375b), 12 U.S.C. 1817(k),
and section 306 of the Federal Deposit
Insurance Corporation Improvement
Act of 1991 (Pub. L. 102–242, 105 Stat.
2236 (1991)).
(b) Purpose and scope—(1) This part
governs any extension of credit made
by a member bank to an executive offi-
cer, director, or principal shareholder
of the member bank, of any company of
which the member bank is a sub-
sidiary, and of any other subsidiary of
that company.
(2) This part also applies to any ex-
tension of credit made by a member
bank to a company controlled by such
a person, or to a political or campaign
committee that benefits or is con-
trolled by such a person.
(3) This part also implements the re-
porting requirements of 12 U.S.C.
1817(k) concerning extensions of credit
by a member bank to its executive offi-
cers or principal shareholders (or to
the related interests of such persons).
(4) Extensions of credit made to an
executive officer, director, or principal
shareholder of a bank (or to a related
interest of such person) by a cor-
respondent bank also are subject to re-
strictions set forth in 12 U.S.C. 1972(2).
[Reg. O, 71 FR 71474, Dec. 11, 2006]
§ 215.2 Definitions. For purposes of this part, the fol-
lowing definitions apply unless other-
wise specified:
(a) Affiliate means any company of
which a member bank is a subsidiary
or any other subsidiary of that com-
pany.
(b) Company means any corporation,
partnership, trust (business or other-
wise), association, joint venture, pool
syndicate, sole proprietorship, unincor-
porated organization, or any other
form of business entity not specifically
listed herein. However, the term does
not include:
(1) An insured depository institution
(as defined in 12 U.S.C. 1813); or
(2) A corporation the majority of the
shares of which are owned by the
United States or by any State.
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12 CFR Ch. II (1–1–11 Edition) § 215.2
1 The term is not intended to include per-
sons who may have official titles and may
exercise a certain measure of discretion in
the performance of their duties, including
discretion in the making of loans, but who
do not participate in the determination of
major policies of the bank or company and
whose decisions are limited by policy stand-
ards fixed by the senior management of the
bank or company. For example, the term
does not include a manager or assistant
manager of a branch of a bank unless that
individual participates, or is authorized to
(c)(1) Control of a company or bank means that a person directly or indi-
rectly, or acting through or in concert
with one or more persons:
(i) Owns, controls, or has the power
to vote 25 percent or more of any class
of voting securities of the company or
bank;
(ii) Controls in any manner the elec-
tion of a majority of the directors of
the company or bank; or
(iii) Has the power to exercise a con-
trolling influence over the manage-
ment or policies of the company or
bank.
(2) A person is presumed to have con-
trol, including the power to exercise a
controlling influence over the manage-
ment or policies, of a company or bank
if:
(i) The person is:
(A) An executive officer or director of
the company or bank; and
(B) Directly or indirectly owns, con-
trols, or has the power to vote more
than 10 percent of any class of voting
securities of the company or bank; or
(ii)(A) The person directly or indi-
rectly owns, controls, or has the power
to vote more than 10 percent of any
class of voting securities of the com-
pany or bank; and
(B) No other person owns, controls,
or has the power to vote a greater per-
centage of that class of voting securi-
ties.
(3) An individual is not considered to
have control, including the power to
exercise a controlling influence over
the management or policies, of a com-
pany or bank solely by virtue of the in-
dividual’s position as an officer or di-
rector of the company or bank.
(4) A person may rebut a presumption
established by paragraph (c)(2) of this
section by submitting to the appro-
priate Federal banking agency (as de-
fined in 12 U.S.C. 1813(q)) written mate-
rials that, in the agency’s judgment,
demonstrate an absence of control.
(d)(1) Director of a company or bank means any director of the company or
bank, whether or not receiving com-
pensation. An advisory director is not
considered a director if the advisory di-
rector:
(i) Is not elected by the shareholders
of the company or bank;
(ii) Is not authorized to vote on mat-ters before the board of directors; and
(iii) Provides solely general policy advice to the board of directors.
(2) Extensions of credit to a director of an affiliate of a bank are not subject to §§ 215.4, 215.6, and 215.8 if—
(i) The director of the affiliate is ex-cluded, by resolution of the board of di-rectors or by the bylaws of the bank, from participation in major policy-making functions of the bank, and the director does not actually participate in such functions;
(ii) The affiliate does not control the bank;
(iii) As determined annually, the as-sets of the affiliate do not constitute more than 10 percent of the consoli-dated assets of the company that—
(A) Controls the bank; and (B) Is not controlled by any other
company; and (iv) The director of the affiliate is
not otherwise subject to §§ 215.4, 215.6, and 215.8.
(3) For purposes of paragraph (d)(2)(i) of this section, a resolution of the board of directors or a corporate bylaw may—
(i) Include the director (by name or by title) in a list of persons excluded from participation in such functions; or
(ii) Not include the director in a list of persons authorized (by name or by title) to participate in such functions.
(e)(1) Executive officer of a company or bank means a person who participates or has authority to participate (other than in the capacity of a director) in major policymaking functions of the company or bank, whether or not: the officer has an official title; the title designates the officer an assistant; or the officer is serving without salary or other compensation. 1 The chairman of
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Federal Reserve System § 215.2
participate, in major policymaking functions
of the bank or company.
2 Where State law establishes a lending
limit for a State member bank that is lower
than the amount permitted in section 5200 of
the Revised Statutes, the lending limit es-
tablished by applicable State laws shall be
the lending limit for the State member
bank.
the board, the president, every vice
president, the cashier, the secretary,
and the treasurer of a company or bank
are considered executive officers, un-
less the officer is excluded, by resolu-
tion of the board of directors or by the
bylaws of the bank or company, from
participation (other than in the capac-
ity of a director) in major policy-
making functions of the bank or com-
pany, and the officer does not actually
participate therein.
(2) Extensions of credit to an execu-
tive officer of an affiliate of a bank are
not subject to §§ 215.4, 215.6, and 215.8
if—
(i) The executive officer is excluded,
by resolution of the board of directors
or by the bylaws of the bank, from par-
ticipation in major policymaking func-
tions of the bank, and the executive of-
ficer does not actually participate in
such functions;
(ii) The affiliate does not control the
bank;
(iii) As determined annually, the as-
sets of the affiliate do not constitute
more than 10 percent of the consoli-
dated assets of the company that—
(A) Controls the bank; and
(B) Is not controlled by any other
company; and
(iv) The executive officer of the affil-
iate is not otherwise subject to §§ 215.4,
215.6, and 215.8.
(3) For purposes of paragraphs (e)(1)
and (e)(2)(i) of this section, a resolution
of the board of directors or a corporate
bylaw may—
(i) Include the executive officer (by
name or by title) in a list of persons ex-
cluded from participation in such func-
tions; or
(ii) Not include the executive officer
in a list of persons authorized (by name
or by title) to participate in such func-
tions.
(f) Foreign bank has the meaning
given in 12 U.S.C. 3101(7).
(g) Immediate family means the spouse
of an individual, the individual’s minor
children, and any of the individual’s
children (including adults) residing in
the individual’s home.
(h) Insider means an executive offi-
cer, director, or principal shareholder,
and includes any related interest of
such a person.
(i) Lending limit. The lending limit for
a member bank is an amount equal to
the limit of loans to a single borrower
established by section 5200 of the Re-
vised Statutes, 2 12 U.S.C. 84. This
amount is 15 percent of the bank’s
unimpaired capital and unimpaired
surplus in the case of loans that are
not fully secured, and an additional 10
percent of the bank’s unimpaired cap-
ital and unimpaired surplus in the case
of loans that are fully secured by read-
ily marketable collateral having a
market value, as determined by reli-
able and continuously available price
quotations, at least equal to the
amount of the loan. The lending limit
also includes any higher amounts that
are permitted by section 5200 of the Re-
vised Statutes for the types of obliga-
tions listed therein as exceptions to
the limit. A member bank’s
unimpaired capital and unimpaired
surplus equals:
(1) The bank’s Tier 1 and Tier 2 cap-
ital included in the bank’s risk-based
capital under the capital guidelines of
the appropriate Federal banking agen-
cy, based on the bank’s most recent
consolidated report of condition filed
under 12 USC 1817(a)(3); and
(2) The balance of the bank’s allow-
ance for loan and lease losses not in-
cluded in the bank’s Tier 2 capital for
purposes of the calculation of risk-
based capital by the appropriate Fed-
eral banking agency, based on the
bank’s most recent consolidated report
of condition filed under 12 U.S.C.
1817(a)(3)
(j) Member bank means any banking
institution that is a member of the
Federal Reserve System, including any
subsidiary of a member bank. The term
does not include any foreign bank that
maintains a branch in the United
States, whether or not the branch is in-
sured (within the meaning of 12 U.S.C.
1813(s)) and regardless of the operation
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12 CFR Ch. II (1–1–11 Edition) § 215.3
of 12 U.S.C. 1813(h) and 12 U.S.C.
1828(j)(3)(B).
(k) Pay an overdraft on an account means to pay an amount upon the
order of an account holder in excess of
funds on deposit in the account.
(l) Person means an individual or a
company.
(m)(1) Principal shareholder means a
person (other than an insured bank)
that directly or indirectly, or acting
through or in concert with one or more
persons, owns, controls, or has the
power to vote more than 10 percent of
any class of voting securities of a mem-
ber bank or company. Shares owned or
controlled by a member of an individ-
ual’s immediate family are considered
to be held by the individual.
(2) A principal shareholder of a mem-
ber bank does not include a company of
which a member bank is a subsidiary.
(n) Related interest of a person means:
(1) A company that is controlled by
that person; or
(2) A political or campaign com-
mittee that is controlled by that per-
son or the funds or services of which
will benefit that person.
(o) Subsidiary has the meaning given
in 12 U.S.C. 1841(d), but does not in-
clude a subsidiary of a member bank.
[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,
July 26, 1994, as amended at 60 FR 31054, June
13, 1995; 61 FR 57770, Nov. 8, 1996; 62 FR 13298,
Mar. 20, 1997; 71 FR 71474, Dec. 11, 2006]
§ 215.3 Extension of credit.
(a) An extension of credit is a making
or renewal of any loan, a granting of a
line of credit, or an extending of credit
in any manner whatsoever, and in-
cludes:
(1) A purchase under repurchase
agreement of securities, other assets,
or obligations;
(2) An advance by means of an over-
draft, cash item, or otherwise;
(3) Issuance of a standby letter of
credit (or other similar arrangement
regardless of name or description) or
an ineligible acceptance, as those
terms are defined in § 208.24 of this
chapter;
(4) An acquisition by discount, pur-
chase, exchange, or otherwise of any
note, draft, bill of exchange, or other
evidence of indebtedness upon which an
insider may be liable as maker, drawer,
endorser, guarantor, or surety;
(5) An increase of an existing indebt-
edness, but not if the additional funds
are advanced by the bank for its own
protection for:
(i) Accrued interest; or
(ii) Taxes, insurance, or other ex-
penses incidental to the existing in-
debtedness;
(6) An advance of unearned salary or
other unearned compensation for a pe-
riod in excess of 30 days; and
(7) Any other similar transaction as a
result of which a person becomes obli-
gated to pay money (or its equivalent)
to a bank, whether the obligation
arises directly or indirectly, or because
of an endorsement on an obligation or
otherwise, or by any means whatso-
ever.
(b) An extension of credit does not in-
clude:
(1) An advance against accrued salary
or other accrued compensation, or an
advance for the payment of authorized
travel or other expenses incurred or to
be incurred on behalf of the bank;
(2) A receipt by a bank of a check de-
posited in or delivered to the bank in
the usual course of business unless it
results in the carrying of a cash item
for or the granting of an overdraft
(other than an inadvertent overdraft in
a limited amount that is promptly re-
paid, as described in § 215.4(e) of this
part);
(3) An acquisition of a note, draft,
bill of exchange, or other evidence of
indebtedness through:
(i) A merger or consolidation of
banks or a similar transaction by
which a bank acquires assets and as-
sumes liabilities of another bank or
similar organization; or
(ii) Foreclosure on collateral or simi-
lar proceeding for the protection of the
bank, provided that such indebtedness
is not held for a period of more than
three years from the date of the acqui-
sition, subject to extension by the ap-
propriate Federal banking agency for
good cause;
(4)(i) An endorsement or guarantee
for the protection of a bank of any loan
or other asset previously acquired by
the bank in good faith; or
(ii) Any indebtedness to a bank for
the purpose of protecting the bank
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Federal Reserve System § 215.4
against loss or of giving financial as-
sistance to it;
(5) Indebtedness of $15,000 or less aris-
ing by reason of any general arrange-
ment by which a bank:
(i) Acquires charge or time credit ac-
counts; or
(ii) Makes payments to or on behalf
of participants in a bank credit card
plan, check credit plan, or similar
open-end credit plan, provided:
(A) The indebtedness does not involve
prior individual clearance or approval
by the bank other than for the pur-
poses of determining authority to par-
ticipate in the arrangement and com-
pliance with any dollar limit under the
arrangement; and
(B) The indebtedness is incurred
under terms that are not more favor-
able than those offered to the general
public;
(6) Indebtedness of $5,000 or less aris-
ing by reason of an interest-bearing
overdraft credit plan of the type speci-
fied in § 215.4(e) of this part; or
(7) A discount of promissory notes,
bills of exchange, conditional sales
contracts, or similar paper, without re-
course.
(c) Non-interest-bearing deposits to
the credit of a bank are not considered
loans, advances, or extensions of credit
to the bank of deposit; nor is the giving
of immediate credit to a bank upon un-
collected items received in the ordi-
nary course of business considered to
be a loan, advance or extension of cred-
it to the depositing bank.
(d) For purposes of § 215.4 of this part,
an extension of credit by a member
bank is considered to have been made
at the time the bank enters into a
binding commitment to make the ex-
tension of credit.
(e) A participation without recourse
is considered to be an extension of
credit by the participating bank, not
by the originating bank.
(f) Tangible economic benefit rule—(1)
In general. An extension of credit is
considered made to an insider to the
extent that the proceeds are trans-
ferred to the insider or are used for the
tangible economic benefit of the in-
sider.
(2) Exception. An extension of credit
is not considered made to an insider
under paragraph (f)(1) of this section if:
(i) The credit is extended on terms
that would satisfy the standard set
forth in § 215.4(a) of this part for exten-
sions of credit to insiders; and
(ii) The proceeds of the extension of
credit are used in a bona fide trans-
action to acquire property, goods, or
services from the insider.
[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,
July 26, 1994; 63 FR 58621, Nov. 2, 1998]
§ 215.4 General prohibitions.
(a) Terms and creditworthiness—(1) In
general. No member bank may extend
credit to any insider of the bank or in-
sider of its affiliates unless the exten-
sion of credit:
(i) Is made on substantially the same
terms (including interest rates and col-
lateral) as, and following credit under-
writing procedures that are not less
stringent than, those prevailing at the
time for comparable transactions by
the bank with other persons that are
not covered by this part and who are
not employed by the bank; and
(ii) Does not involve more than the
normal risk of repayment or present
other unfavorable features.
(2) Exception. Nothing in this para-
graph (a) or paragraph (e)(2)(ii) of this
section shall prohibit any extension of
credit made pursuant to a benefit or
compensation program—
(i) That is widely available to em-
ployees of the member bank and, in the
case of extensions of credit to an in-
sider of its affiliates, is widely avail-
able to employees of the affiliates at
which that person is an insider; and
(ii) That does not give preference to
any insider of the member bank over
other employees of the member bank
and, in the case of extensions of credit
to an insider of its affiliates, does not
give preference to any insider of its af-
filiates over other employees of the af-
filiates at which that person is an in-
sider.
(b) Prior approval. (1) No member
bank may extend credit (which term
includes granting a line of credit) to
any insider of the bank or insider of its
affiliates in an amount that, when ag-
gregated with the amount of all other
extensions of credit to that person and
to all related interests of that person,
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exceeds the higher of $25,000 or 5 per-
cent of the member bank’s unimpaired
capital and unimpaired surplus, unless:
(i) The extension of credit has been
approved in advance by a majority of
the entire board of directors of that
bank; and
(ii) The interested party has ab-
stained from participating directly or
indirectly in the voting.
(2) In no event may a member bank
extend credit to any insider of the
bank or insider of its affiliates in an
amount that, when aggregated with all
other extensions of credit to that per-
son, and all related interests of that
person, exceeds $500,000, except by com-
plying with the requirements of this
paragraph (b).
(3) Approval by the board of directors
under paragraphs (b)(1) and (b)(2) of
this section is not required for an ex-
tension of credit that is made pursuant
to a line of credit that was approved
under paragraph (b)(1) of this section
within 14 months of the date of the ex-
tension of credit. The extension of
credit must also be in compliance with
the requirements of § 215.4(a) of this
part.
(4) Participation in the discussion, or
any attempt to influence the voting, by
the board of directors regarding an ex-
tension of credit constitutes indirect
participation in the voting by the
board of directors on an extension of
credit.
(c) Individual lending limit— No mem-
ber bank may extend credit to any in-
sider of the bank or insider of its affili-
ates in an amount that, when aggre-
gated with the amount of all other ex-
tensions of credit by the member bank
to that person and to all related inter-
ests of that person, exceeds the lending
limit of the member bank specified in
§ 215.2(i) of this part. This prohibition
does not apply to an extension of credit
by a member bank to a company of
which the member bank is a subsidiary
or to any other subsidiary of that com-
pany.
(d) Aggregate lending limit—(1) General limit. A member bank may not extend
credit to any insider of the bank or in-
sider of its affiliates unless the exten-
sion of credit is in an amount that,
when aggregated with the amount of
all outstanding extensions of credit by
that bank to all such insiders, does not
exceed the bank’s unimpaired capital
and unimpaired surplus (as defined in
§ 215.2(i) of this part).
(2) Member banks with deposits of less than $100,000,000. (i) A member bank
with deposits of less than $100,000,000
may by an annual resolution of its
board of directors increase the general
limit specified in paragraph (d)(1) of
this section to a level not to exceed
two times the bank’s unimpaired cap-
ital and unimpaired surplus, if:
(A) The board of directors determines
that such higher limit is consistent
with prudent, safe, and sound banking
practices in light of the bank’s experi-
ence in lending to its insiders and is
necessary to attract or retain directors
or to prevent restricting the avail-
ability of credit in small communities;
(B) The resolution sets forth the
facts and reasoning on which the board
of directors bases the finding, including
the amount of the bank’s lending to its
insiders as a percentage of the bank’s
unimpaired capital and unimpaired
surplus as of the date of the resolution;
(C) The bank meets or exceeds, on a
fully-phased in basis, all applicable
capital requirements established by
the appropriate Federal banking agen-
cy; and
(D) The bank received a satisfactory
composite rating in its most recent re-
port of examination.
(ii) If a member bank has adopted a
resolution authorizing a higher limit
pursuant to paragraph (d)(2)(i) of this
section and subsequently fails to meet
the requirements of paragraph
(d)(2)(i)(C) or (d)(2)(i)(D) of this section,
the member bank shall not extend any
additional credit (including a renewal
of any existing extension of credit) to
any insider of the bank or its affiliates
unless such extension or renewal is
consistent with the general limit in
paragraph (d)(1) of this section.
(3) Exceptions. (i) The general limit
specified in paragraph (d)(1) of this sec-
tion does not apply to the following:
(A) Extensions of credit secured by a
perfected security interest in bonds,
notes, certificates of indebtedness, or
Treasury bills of the United States or
in other such obligations fully guaran-
teed as to principal and interest by the
United States;
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Federal Reserve System § 215.5
3 This prohibition does not apply to the
payment by a member bank of an overdraft
of a principal shareholder of the member
bank, unless the principal shareholder is also
an executive officer or director. This prohibi-
tion also does not apply to the payment by a
member bank of an overdraft of a related in-
terest of an executive officer, director, or
principal shareholder of the member bank or
executive officer, director, or principal
shareholder of its affiliates.
(B) Extensions of credit to or secured
by unconditional takeout commit-
ments or guarantees of any depart-
ment, agency, bureau, board, commis-
sion or establishment of the United
States or any corporation wholly
owned directly or indirectly by the
United States;
(C) Extensions of credit secured by a
perfected security interest in a seg-
regated deposit account in the lending
bank; or
(D) Extensions of credit arising from
the discount of negotiable or nonnego-
tiable installment consumer paper that
is acquired from an insider and carries
a full or partial recourse endorsement
or guarantee by the insider, provided
that:
(1) The financial condition of each
maker of such consumer paper is rea-
sonably documented in the bank’s files
or known to its officers;
(2) An officer of the bank designated
for that purpose by the board of direc-
tors of the bank certifies in writing
that the bank is relying primarily upon
the responsibility of each maker for
payment of the obligation and not
upon any endorsement or guarantee by
the insider; and
(3) The maker of the instrument is
not an insider.
(ii) The exceptions in paragraphs
(d)(3)(i)(A) through (d)(3)(i)(C) of this
section apply only to the amounts of
such extensions of credit that are se-
cured in the manner described therein.
(e) Overdrafts. (1) No member bank
may pay an overdraft of an executive
officer or director of the bank or execu-
tive officer or director of its affiliates 3
on an account at the bank, unless the
payment of funds is made in accord-
ance with:
(i) A written, preauthorized, interest-
bearing extension of credit plan that
specifies a method of repayment; or
(ii) A written, preauthorized transfer
of funds from another account of the
account holder at the bank. (2) The prohibition in paragraph (e)(1)
of this section does not apply to pay-
ment of inadvertent overdrafts on an
account in an aggregate amount of
$1,000 or less, provided: (i) The account is not overdrawn for
more than 5 business days; and (ii) The member bank charges the ex-
ecutive officer or director the same fee
charged any other customer of the
bank in similar circumstances.
[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,
July 26, 1994, as amended at 61 FR 57770, Nov.
8, 1996; 62 FR 13298, Mar. 20, 1997]
§ 215.5 Additional restrictions on loans to executive officers of member banks.
The following restrictions on exten-
sions of credit by a member bank to
any of its executive officers apply in
addition to any restrictions on exten-
sions of credit by a member bank to in-
siders of itself or its affiliates set forth
elsewhere in this part. The restrictions
of this section apply only to executive
officers of the member bank and not to
executive officers of its affiliates. (a) No member bank may extend
credit to any of its executive officers,
and no executive officer of a member
bank shall borrow from or otherwise
become indebted to the bank, except in
the amounts, for the purposes, and
upon the conditions specified in para-
graphs (c) and (d) of this section. (b) No member bank may extend
credit in an aggregate amount greater
than the amount permitted in para-
graph (c)(4) of this section to a partner-
ship in which one or more of the bank’s
executive officers are partners and, ei-
ther individually or together, hold a
majority interest. For the purposes of
paragraph (c)(4) of this section, the
total amount of credit extended by a
member bank to such partnership is
considered to be extended to each exec-
utive officer of the member bank who
is a member of the partnership. (c) A member bank is authorized to
extend credit to any executive officer
of the bank: (1) In any amount to finance the edu-
cation of the executive officer’s chil-
dren;
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12 CFR Ch. II (1–1–11 Edition) § 215.6
(2) In any amount to finance or refi-
nance the purchase, construction,
maintenance, or improvement of a resi-
dence of the executive officer, pro-
vided:
(i) The extension of credit is secured
by a first lien on the residence and the
residence is owned (or expected to be
owned after the extension of credit) by
the executive officer; and
(ii) In the case of a refinancing, that
only the amount thereof used to repay
the original extension of credit, to-
gether with the closing costs of the re-
financing, and any additional amount
thereof used for any of the purposes
enumerated in this paragraph (c)(2),
are included within this category of
credit;
(3) In any amount, if the extension of
credit is secured in a manner described
in § 215.4(d)(3)(i)(A) through (d)(3)(i)(C)
of this part; and
(4) For any other purpose not speci-
fied in paragraphs (c)(1) through (c)(3)
of this section, if the aggregate amount
of extensions of credit to that execu-
tive officer under this paragraph does
not exceed at any one time the higher
of 2.5 per cent of the bank’s unimpaired
capital and unimpaired surplus or
$25,000, but in no event more than
$100,000.
(d) Any extension of credit by a mem-
ber bank to any of its executive offi-
cers shall be:
(1) Promptly reported to the member
bank’s board of directors;
(2) In compliance with the require-
ments of § 215.4(a) of this part;
(3) Preceded by the submission of a
detailed current financial statement of
the executive officer; and
(4) Made subject to the condition in
writing that the extension of credit
will, at the option of the member bank,
become due and payable at any time
that the officer is indebted to any
other bank or banks in an aggregate
amount greater than the amount speci-
fied for a category of credit in para-
graph (c) of this section.
[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,
July 26, 1994; 60 FR 17636, Apr. 7, 1995]
§ 215.6 Prohibition on knowingly re-ceiving unauthorized extension of credit.
No executive officer, director, or
principal shareholder of a member
bank or any of its affiliates shall know-
ingly receive (or knowingly permit any
of that person’s related interests to re-
ceive) from a member bank, directly or
indirectly, any extension of credit not
authorized under this part.
§ 215.7 Extensions of credit out-standing on March 10, 1979.
(a) Any extension of credit that was
outstanding on March 10, 1979, and that
would, if made on or after March 10,
1979, violate § 215.4(c) of this part, shall
be reduced in amount by March 10,
1980, to be in compliance with the lend-
ing limit in § 215.4(c) of this part. Any
renewal or extension of such an exten-
sion of credit on or after March 10, 1979,
shall be made only on terms that will
bring the extension of credit into com-
pliance with the lending limit of
§ 215.4(c) of this part by March 10, 1980.
However, any extension of credit made
before March 10, 1979, that bears a spe-
cific maturity date of March 10, 1980, or
later, shall be repaid in accordance
with its repayment schedule in exist-
ence on or before March 10, 1979.
(b) If a member bank is unable to
bring all extensions of credit out-
standing on March 10, 1979, into com-
pliance as required by paragraph (a) of
this section, the member bank shall
promptly report that fact to the Comp-
troller of the Currency, in the case of a
national bank, or to the appropriate
Federal Reserve Bank, in the case of a
State member bank, and explain the
reasons why all the extensions of credit
cannot be brought into compliance.
The Comptroller or the Reserve Bank,
as the case may be, is authorized, on
the basis of good cause shown, to ex-
tend the March 10, 1980, date for com-
pliance for any extension of credit for
not more than two additional one-year
periods.
§ 215.8 Records of member banks.
(a) In general. Each member bank
shall maintain records necessary for
compliance with the requirements of
this part.
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Federal Reserve System § 215.9
(b) Recordkeeping for insiders of the
member bank. Any recordkeeping meth-
od adopted by a member bank shall:
(1) Identify, through an annual sur-
vey, all insiders of the bank itself; and
(2) Maintain records of all extensions
of credit to insiders of the bank itself,
including the amount and terms of
each such extension of credit.
(c) Recordkeeping for insiders of the
member bank’s affiliates. Any record-
keeping method adopted by a member
bank shall maintain records of exten-
sions of credit to insiders of the mem-
ber bank’s affiliates by:
(1) Survey method. (i) Identifying,
through an annual survey, each insider
of the member bank’s affiliates; and
(ii) Maintaining records of the
amount and terms of each extension of
credit by the member bank to such in-
siders; or
(2) Borrower inquiry method. (i) Re-
quiring as part of each extension of
credit that the borrower indicate
whether the borrower is an insider of
an affiliate of the member bank; and
(ii) Maintaining records that identify
the amount and terms of each exten-
sion of credit by the member bank to
borrowers so identifying themselves.
(3) Alternative recordkeeping methods
for insiders of affiliates. A member bank
may employ a recordkeeping method
other than those identified in para-
graphs (c)(1) and (c)(2) of this section if
the appropriate Federal banking agen-
cy determines that the bank’s method
is at least as effective as the identified
methods.
(d) Special rule for non-commercial
lenders. A member bank that is prohib-
ited by law or by an express resolution
of the board of directors of the bank
from making an extension of credit to
any company or other entity that is
covered by this part as a company is
not required to maintain any records of
the related interests of the insiders of
the bank or its affiliates or to inquire
of borrowers whether they are related
interests of the insiders of the bank or
its affiliates.
§ 215.9 Disclosure of credit from mem-ber banks to executive officers and principal shareholders.
(a) Definitions. For the purposes of this section, the following definitions apply:
(1) Principal shareholder of a member bank means any person other than an insured bank, or a foreign bank as de-fined in 12 U.S.C. 3101(7), that, directly or indirectly, owns, controls, or has
power to vote more than 10 percent of
any class of voting securities of the
member bank. The term includes a per-
son that controls a principal share-
holder (e.g., a person that controls a
bank holding company). Shares of a
bank (including a foreign bank), bank
holding company, or other company
owned or controlled by a member of an
individual’s immediate family are pre-
sumed to be owned or controlled by the
individual for the purposes of deter-
mining principal shareholder status. (2) Related interest means: (i) Any company controlled by a per-
son; or (ii) Any political or campaign com-
mittee the funds or services of which
will benefit a person or that is con-
trolled by a person. For the purpose of
this section, a related interest does not
include a bank or a foreign bank (as de-
fined in 12 U.S.C. 3101(7)). (b) Public disclosure. (1) Upon receipt
of a written request from the public, a
member bank shall make available the
names of each of its executive officers
and each of its principal shareholders
to whom, or to whose related interests,
the member bank had outstanding as of
the end of the latest previous quarter
of the year, an extension of credit that,
when aggregated with all other out-
standing extensions of credit at such
time from the member bank to such
person and to all related interests of
such person, equaled or exceeded 5 per-
cent of the member bank’s capital and
unimpaired surplus or $500,000, which-
ever amount is less. No disclosure
under this paragraph is required if the
aggregate amount of all extensions of
credit outstanding at such time from
the member bank to the executive offi-
cer or principal shareholder of the
member bank and to all related inter-
ests of such a person does not exceed
$25,000.
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12 CFR Ch. II (1–1–11 Edition) § 215.10
(2) A member bank is not required to disclose the specific amounts of indi-vidual extensions of credit.
(c) Maintaining records. Each member bank shall maintain records of all re-quests for the information described in paragraph (b) of this section and the disposition of such requests. These records may be disposed of after two years from the date of the request.
[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,
July 26, 1994. Redesignated and amended at
71 FR 71474, Dec. 11, 2006]
§ 215.10 Reporting requirement for credit secured by certain bank stock.
Each executive officer or director of a member bank the shares of which are not publicly traded shall report annu-ally to the board of directors of the member bank the outstanding amount of any credit that was extended to the executive officer or director and that is
secured by shares of the member bank.
[Reg. O, 59 FR 8837, Feb. 24, 1994. Redesig-
nated at 71 FR 71474, Dec. 11, 2006]
§ 215.11 Civil penalties. Any member bank, or any officer, di-
rector, employee, agent, or other per-
son participating in the conduct of the
affairs of the bank, that violates any
provision of this part (other than
§ 215.9) is subject to civil penalties as
specified in section 29 of the Federal
Reserve Act (12 U.S.C. 504).
[Reg. O, 71 FR 71475, Dec. 11, 2006]
APPENDIX TO PART 215—SECTION 5200 OF
THE REVISED STATUTES TOTAL
LOANS AND EXTENSIONS OF CREDIT
(a)(1) The total loans and extensions of
credit by a national banking association to a
person outstanding at one time and not fully
secured, as determined in a manner con-
sistent with paragraph (2) of this subsection,
by collateral having a market value at least
equal to the amount of the loan or extension
of credit shall not exceed 15 per centum of
the unimpaired capital and unimpaired sur-
plus of the association. (2) The total loans and extensions of credit
by a national banking association to a per-
son outstanding at one time and fully se-
cured by readily marketable collateral hav-
ing a market value, as determined by reli-
able and continuously available price
quotations, at least equal to the amount of
the funds outstanding shall not exceed 10 per
centum of the unimpaired capital and
unimpaired surplus of the association. This
limitation shall be separate from and in ad-
dition to the limitations contained in para-
graph (1) of this subsection.
DEFINITIONS
(b) For the purposes of this section—
(1) The term loans and extensions of credit
shall include all direct or indirect advances
of funds to a person made on the basis of any
obligation of that person to repay the funds
or repayable from specific property pledged
by or on behalf of the person, and to the ex-
tent specified by the Comptroller of the Cur-
rency, such term shall also include any li-
ability of a national banking association to
advance funds to or on behalf of a person
pursuant to a contractual commitment; and
(2) The term person shall include an indi-
vidual, sole proprietorship, partnership, joint
venture, association, trust, estate, business
trust, corporation, sovereign government, or
agency, instrumentality, or political sub-
division thereof, or any similar entity or or-
ganization.
EXCEPTIONS
(c) The limitations contained in subsection
(a) of this section shall be subject to the fol-
lowing exceptions:
(1) Loans or extensions of credit arising
from the discount of commercial or business
paper evidencing an obligation to the person
negotiating it with recourse shall not be sub-
ject to any limitation based on capital and
surplus.
(2) The purchase of bankers’ acceptances of
the kind described in section 372 of this title
and issued by other banks shall not be sub-
ject to any limitation based on capital and
surplus.
(3) Loans and extensions of credit secured
by bills of lading, warehouse receipts, or
similar documents transferring or securing
title to readily marketable staples shall be
subject to a limitation of 35 per centum of
capital and surplus in addition to the general
limitations if the market value of the sta-
ples securing each additional loan or exten-
sion of credit at all times equals or exceeds
115 per centum of the outstanding amount of
such loan or extension of credit. The staples
shall be fully covered by insurance whenever
it is customary to insure such staples.
(4) Loans or extensions of credit secured by
bonds, notes, certificates of indebtedness, or
Treasury bills of the United States or by
other such obligations fully guaranteed as to
principal and interest by the United States
shall not be subject to any limitation based
on capital and surplus.
(5) Loans or extensions of credit to or se-
cured by unconditional takeout commit-
ments or guarantees of any department,
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Federal Reserve System Pt. 216
agency, bureau, board, commission, or estab-
lishment of the United States or any cor-
poration wholly owned directly or indirectly
by the United States shall not be subject to
any limitation based on capital and surplus. (6) Loans or extensions of credit secured by
a segregated deposit account in the lending
bank shall not be subject to any limitation
based on capital and surplus. (7) Loans or extensions of credit to any fi-
nancial institution or to any receiver, con-
servator, superintendent of banks, or other
agent in charge of the business and property
of such financial institution, when such
loans or extensions of credit are approved by
the Comptroller of the Currency, shall not be
subject to any limitation based on capital
and surplus. (8)(A) Loans and extensions of credit aris-
ing from the discount of negotiable or non-
negotiable installment consumer paper
which carries a full recourse endorsement or
unconditional guarantee by the person trans-
ferring the paper shall be subject under this
section to a maximum limitation equal to 25
per centum of such capital and surplus, not-
withstanding the collateral requirements set
forth in subsection (a)(2) of this section. (B) If the bank’s files or the knowledge of
its officers of the financial condition of each
maker of such consumer paper is reasonably
adequate, and an officer of the bank des-
ignated for that purpose by the board of di-
rectors of the bank certifies in writing that
the bank is relying primarily upon the re-
sponsibility of each maker for payment of
such loans or extensions of credit and not
upon any full or partial recourse endorse-
ment or guarantee by the transferor, the
limitations of this section as to the loans or
extensions of credit of each such maker shall
be the sole applicable loan limitations. (9)(A) Loans and extensions of credit se-
cured by shipping documents or instruments
transferring or securing title covering live-
stock or giving a lien on livestock when the
market value of the livestock securing the
obligation is not at any time less than 115
per centum of the face amount of the note
covered, shall be subject under this section
notwithstanding the collateral requirements
set forth in subsection (a)(2) of this section,
to a maximum limitation equal to 25 per
centum of such capital and surplus. (B) Loans and extensions of credit which
arise from the discount by dealers in dairy
cattle of paper given in payment for dairy
cattle, which paper carries a full recourse en-
dorsement or unconditional guarantee of the
seller, and which are secured by the cattle
being sold, shall be subject under this sec-
tion, notwithstanding the collateral require-
ments set forth in paragraph (a)(2) of this
section, to a limitation of 25 per centum of
such capital and surplus. (10) Loans or extensions of credit to the
Student Loan Marketing Association shall
not be subject to any limitation based on
capital and surplus.
AUTHORITY OF COMPTROLLER OF THE
CURRENCY
(d)(1) The Comptroller of the Currency may
prescribe rules and regulations to administer
and carry out the purposes of this section,
including rules or regulations to define or
further define terms used in this section and
to establish limits or requirements other
than those specified in this section for par-
ticular classes or categories of loans or ex-
tensions of credit.
(2) The Comptroller of the Currency also
shall have authority to determine when a
loan putatively made to a person shall for
purposes of this section be attributed to an-
other person.
[48 FR 42806, Sept. 20, 1983]
PART 216—PRIVACY OF CON-SUMER FINANCIAL INFORMA-TION (REGULATION P)
Sec.
216.1 Purpose and scope.
216.2 Model privacy form and examples.
216.3 Definitions.
Subpart A—Privacy and Opt Out Notices
216.4 Initial privacy notice to consumers re-
quired.
216.5 Annual privacy notice to customers
required.
216.6 Information to be included in privacy
notices.
216.7 Form of opt out notice to consumers;
opt out methods.
216.8 Revised privacy notices.
216.9 Delivering privacy and opt out no-
tices.
Subpart B—Limits on Disclosures
216.10 Limitation on disclosure of nonpublic
personal information to nonaffiliated
third parties.
216.11 Limits on redisclosure and reuse of
information.
216.12 Limits on sharing account number in-
formation for marketing purposes.
Subpart C—Exceptions
216.13 Exception to opt out requirements for
service providers and joint marketing.
216.14 Exceptions to notice and opt out re-
quirements for processing and servicing
transactions.
216.15 Other exceptions to notice and opt
out requirements.
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Reproduced with permission from BNA’s Banking Report, 99 BBR 652, 10/16/12, 10/16/2012. Copyright � 2012 byThe Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
D i r e c t o r s a n d O f fi c e r s
Regulation O: Common Mistakes and Technicalities Explained
BY PETER G. WEINSTOCK AND DAVID A. SHIPLEY
R egulators often rely upon Regulation O, the statuteregarding transactions with affiliates, and statu-tory legal lending limits as the basis for regulatory
actions. Unfortunately, because of the technical natureof such rules, bankers have experienced difficulty abid-ing by them. In the current regulatory environment, theentire tone of an examination may shift as the result ofa possible Reg O violation. The purpose of this article isto provide an outline of the provisions of Reg O in thecontext of common mistakes that are often committedby bankers. Subsequent articles will outline the provi-sions of the statutes governing transactions between abank and its affiliates and discuss the statutory legallending limits.
Common Mistake #1 —Who is an Executive Officer?
Reg O governs ‘‘extensions of credit’’ to the ‘‘direc-tors,’’ ‘‘executive officers’’ and ‘‘principal sharehold-ers’’ (collectively referred to as ‘‘Insiders’’), and their‘‘related interests’’ of a federally regulated bank, its af-filiates or its parent bank holding company. It is typi-cally obvious who a director is, and the term ‘‘principalshareholder’’ refers to a person or enterprise (otherthan an insured bank) that directly or indirectly is act-ing through or in concert with others, owns, controls orhas the power to vote more than 10 percent of theshares of any class (not just common stock) of votingsecurities.
A more difficult determination is: who is an ‘‘execu-tive officer?’’ Reg O says individuals with the followingtitles are all executive officers: the chairman of theboard, the president, every vice president, the cashier,the secretary and the treasurer. In addition, any indi-vidual who participates, or has the authority to partici-pate, in a bank’s or a company’s major policy-makingdecisions is also considered an executive officer, even ifsuch person has no title or the person’s title designateshim as an assistant or that person is not paid.
Example #1: The son of a bank’s chairman of theboard serves as vice chairman of the board. The son hassignature authority and presides over the board in hisfather’s absence. Because the son has no banking expe-rience, the father never leaves the son in charge. Theson is considered an executive officer because he couldsign checks in his father’s absence even if he does notexercise such authority.
Example #2: An employee of the bank does not haveany policy role but always gives his opinions to those ina policy-making position and also helps implementpolicy. Such an employee does not possess policy-making authority and really does not participate in
Peter G. Weinstock is the practice groupleader of the Financial Institutions section ofHunton & Williams LLP. His practice isdevoted to corporate and regulatory represen-tation of a wide range of financial institutionfranchises. David A. Shipley is an associateat the firm, where he focuses on corporatetransactions and securities issuances.
COPYRIGHT � 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0891-0634
BNA’s
Banking Report™
policy-making and his decisions are also limited bypolicy standards set by senior management.
Example #3: The same employee as in Example #1advises the bank’s president that the bank should notloan money to persons with bad credit. The bank’spresident agrees and causes the bank’s loan policy to berewritten accordingly. The employee is still not an ex-ecutive officer because he only has sporadic input intobank policy making and his decisions are also limitedby policy standards set by senior management. In orderto avoid the employee being deemed as an executive of-ficer, the bank’s board can adopt a resolution statingthat the employee is not an executive officer. The em-ployee, however, must not actually participate in policy-making.
Example #4: The bank’s board adopts the resolutiondescribed in Example #3. The next year the same em-ployee is appointed to the executive officer’s strategicplanning committee, but the board reaffirms its earlierresolution. Now the employee is an executive officer be-cause he is participating in policy-making despite theexistence of the board resolution.
Common Mistake #2 —Who is a Related Interest?
As mentioned above, Reg O governs ‘‘extensions ofcredit’’ to the ‘‘directors,’’ ‘‘executive officers’’ and‘‘principal shareholders’’ and their ‘‘related interests’’of a bank, its affiliates or its parent bank holding com-pany. Reg O defines the term ‘‘related interest’’ as apartnership, company, trust or other enterprise that is‘‘controlled’’ by a person or enterprise, or a political orcampaign committee that is ‘‘controlled’’ by, or thefunds or services of which will benefit, a person or en-terprise. A person or enterprise is deemed to have con-trol over a company or a bank if that person or enter-prise, directly or indirectly, or acting through or in con-cert with one or more persons (i) owns, controls or hasthe power to vote 25 percent or more of any class of vot-ing securities of a company or a bank, (ii) controls inany manner the election of a majority of the directors ofa company or bank or (iii) has the power to exercise acontrolling influence over the management or policiesof a company or bank.
Example #5: A bank’s president owns 25 percent ofX Corp. and that entity owns 100 percent of Y Corp.Both X Corp. and Y Corp. are considered ‘‘related inter-ests’’ of the bank’s president because the president di-rectly controls X Corp. through a 25 percent ownershipinterest and controls Y Corp. through an indirect 25percent ownership interest by virtue of X Corp.’s 100percent ownership interest in Y Corp.
In addition to the control test mentioned above, a per-son is presumed to have control over a company orbank if (i) the person is (a) an executive officer or direc-tor of the company or bank and (b) directly or indirectlyowns, controls or has the power to vote more than 10percent of any class of voting securities of the companyor bank, or (ii) the person (a) directly or indirectlyowns, controls or has the power to vote more than 10percent of any class of voting securities of the companyor bank and (b) no other person owns, controls or hasthe power to vote a greater percentage of that class ofvoting securities.
A person may rebut a presumption of control by sub-mitting to the appropriate federal banking agency writ-ten materials that, in the agency’s judgment, demon-strate an absence of control.
Common Mistake #3 —What are the Restrictions on Loans to Insiders?
Reg O contains provisions designed to ensure consis-tent treatment between Insiders and third parties, in-cluding ensuring that loans to Insiders are creditworthyand contain terms, such as the interest rate, collateraland the repayment schedule, which are substantiallysimilar to that bank’s third-party loans. In addition, abank must apply the same standards for creditworthi-ness and repayment risks to loans to Insiders as it ap-plies to loans to other borrowers.
Example #6: In October, a bank loans funds to its ca-shier and his wife to open a restaurant, secured by therestaurant. The next June, the restaurant’s neighbor en-ters into a contract to store toxic waste for the U.S. gov-ernment. In October when the loan is up for renewal,may the bank renew it? The bank generally can renewthe loan if the bank would renew the same loan thatwas made to a third party.
Common Mistake #4 — How MuchCan Be Loaned to an Executive Officer?
A bank may only extend credit to an executive officer(this rule does not include executive officers of thebank’s parent holding company or the bank’s affiliates)in the following amounts and for the following pur-poses:
(a) In any amount for the education of the executiveofficer’s children;
(b) In any amount with respect to the acquisition,maintenance, construction or improvement of the ex-ecutive officer’s residence; provided, however, that theextension of credit must be secured by a first lien on theproperty; and
(c) For any other purpose in an aggregate amount notto exceed the higher of (i) $25,000 or (ii) 2.5 percent ofthe bank’s unimpaired capital and surplus (in no eventmay this percentage exceed $100,000).
This monetary limit also applies to a partnership inwhich one or more of the bank’s executive officers arepartners and either separately or together represent amajority interest. The total amount of the extension ofcredit is deemed extended to each of the bank’s execu-tive officers who is also a partner.
Example #7: A bank’s capital and surplus is$10,000,000. The bank loans $80,000 to a partnershipcreated by the bank’s senior vice president and execu-tive vice president. The senior vice president alreadyhas a $12,000 car loan and a $10,000 fully funded lineof credit. The loan to the partnership would violate RegO because although 2.5 percent of $10,000,000 is$250,000, the maximum amount a bank can loan to itsexecutive officers is $100,000 for a loan that is not forthe education of the executive officer’s children or forthe acquisition, maintenance, construction or improve-ment of the executive officer’s residence. Further, aloan to a partnership in which executive officers controla majority interest is deemed to be a loan to each execu-tive officer who is a partner. Thus, the loans to the se-nior vice president aggregate to $102,000.
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In addition, extensions of credit to Insiders (includingthe executive officers of a bank’s parent holding com-pany and a bank’s affiliates) and his related interestsmay not exceed 15 percent of the bank’s unimpairedcapital and surplus in the case of loans that are not fullysecured, and an additional 10 percent of the bank’s un-impaired capital and surplus in the case of loans thatare fully secured by readily marketable collateral.
Further, extensions of credit to all Insiders and theirrelated interests (including the executive officers of abank’s parent holding company and a bank’s affiliates)generally may not exceed the bank’s unimpaired capi-tal and surplus. Banks with deposits of fewer than $100million may increase this limit to a level not to exceedtwo times the bank’s unimpaired capital and surplus bya resolution of the board of directors if (a) such level isconsistent with prudent, safe and sound banking prac-tices and is necessary to attract or retain directors or toprevent restricting the availability of credit in smallcommunities, (b) the bank meets or exceeds all appli-cable regulatory capital requirements and (c) the bankreceived a satisfactory composite rating in its most re-cent report of examination.
Other Provisions of Reg O
1. Procedure for Approval for Loans to Insiders. Abank may not loan money to an Insider (including theexecutive officers of a bank’s parent holding companyand a bank’s affiliates) and his related interests in anaggregate amount in excess of $25,000 or 5 percent ofthe bank’s unimpaired capital and surplus (in no eventmay this percentage exceed $500,000), whichever ishigher, unless:
(a) the extension of credit has been approved in ad-vance by a majority of the bank’s entire board of direc-tors (not just a majority of the directors present), and
(b) the interested party has not voted, participated inthe discussion or attempted to influence the vote re-garding the extension of credit.
‘‘Unimpaired capital and surplus’’ is the aggregate ofthe bank’s Tier 1 and Tier 2 capital and the balance ofthe bank’s allowance for loan and lease losses not in-cluded in the bank’s Tier 2 capital.
2. Additional Procedures. Reg O contains additionalrequirements before a bank may extend credit to its ex-ecutive officers (this rule does not include executive of-ficers of the bank’s parent or the bank’s affiliates).These procedures are as follows:
(a) The loan must be promptly reported to the boardof directors of the bank. This requirement is only im-portant if the aggregate of all loans to that executive of-ficer and his related interests is less than the higher ofeither (i) $25,000 or (ii) 5 percent of the bank’s capitalplus unimpaired surplus. A loan in an amount in excessof the higher of $25,000 or 5 percent must not only bereported to the board, but as indicated earlier, the boardmust approve such a loan without the interested party’sbeing involved in the board’s deliberation;
(b) Before the loan may be made, the executive offi-cer must submit his current financial statements to thebank; and
(c) The loan must be subject to the condition that thebank at its option may ‘‘call in’’ the loan if the executiveofficer becomes indebted to another bank in an aggre-gate amount greater than the higher of (i) $25,000 or (ii)
2.5 percent of the bank’s unimpaired capital and sur-plus (in no event may this percentage exceed $100,000).
3. Overdrafts. In general, no bank may pay a direc-tor’s or executive officer’s (includes executive officersof the bank’s parent holding company and the bank’saffiliates as well) overdrafts, unless:
(a) The overdraft is pursuant to a written, pre-authorized, interest-bearing plan, specifying a methodof repayment, or
(b) The overdraft will be paid by a transfer of fundsfrom another account at the bank, and such transferwas pre-authorized in writing.
This rule does not apply to overdrafts of a director’sor executive officer’s related interests. Overdrafts areconsidered extensions of credit. Accordingly, the otherReg O rules such as the requirement of substantiallysimilar terms and prior approval also apply.
4. Records. A bank must maintain records in orderto enable it to comply with the provisions of Reg O.Among other things, these records must (a) identify allInsiders (including executive officers of the bank’s par-ent holding company and the bank’s affiliates) and theirrelated interests and (b) specify the amount and termsof each extension of credit to Insiders and their relatedinterests. The bank must annually request Insiders toidentify their related interests.
5. Reports. Reg O requires both executive officersand directors of a bank, the shares of which are notpublicly traded, to annually report to the board of direc-tors of the bank the outstanding amount of any creditthat was extended to the executive officer or directorthat is secured by shares of the bank.
6. Public Disclosure. Upon receipt of a written re-quest from the public, Reg O requires a bank to makepublicly available the names of each of its executive of-ficers and principal shareholders (not including execu-tive officers or principal shareholders of the bank’s par-ent holding company or the bank’s affiliates) to whom,or to whose related interests, the bank had outstanding,as of the end of the previous quarter, aggregate exten-sions of credit at least equal to the lesser of (a) 5 per-cent of the bank’s unimpaired capital and surplus or (b)$500,000. No disclosure is required if the aggregate ex-tensions of credit to any executive officer or principalshareholder and their related interests does not exceed$25,000. A record should be kept by the bank of all suchpublic requests and the disposition of such requests forat least 2 years from the date of request.
Penalties for Violations of Reg O
1. Civil Money Penalties. Any officer, director, em-ployee, agent or other person, or even the bank itself,participating in the conduct of the affairs of a bank, thatviolates any provision of Reg O (other than the provi-sions regarding public disclosure) may be subject tocivil money penalties of up to $1,000,000 for each day(or, for the bank itself, the lesser of $1,000,000 or 1 per-cent of the total assets of the bank) during which theviolation continues. A regulatory agency’s imposition ofcivil money penalties may be appealed within thatagency, and then to the courts. As a practical matter,unless a violation of Reg O has been particularly egre-gious, regulatory agencies do not impose civil moneypenalties if a violation has already been corrected or is
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corrected promptly after it is called to the attention ofbank management.
2. Cease and Desist Order. As discussed earlier, aregulatory agency may seek the imposition of an ad-ministrative action, such as a Cease and Desist Order, ifReg O has been violated. Even if a violation has beencorrected, the regulators take the position that adminis-trative action may still be appropriate to discouragerepetition of the violation.
3. Revocation of a Loan. Regulators have sometimesrequested a bank to ‘‘call in’’ an extension of credit thatwas in violation of Reg O.
In summary, regulators are increasingly scrutinizingtransactions between a bank and its insiders. Becauseof the complexity of the regulations governing suchtransactions, the result of this increased scrutiny hasbeen the discovery of a greater number of legal viola-tions. Bankers must become more cognizant of the re-strictions contained in Reg O if they are to avoid theregulation’s draconian penalties and the increased like-lihood that their bank will become subject to an admin-istrative action.
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[BANK NAME] BOARD RESOLUTION FOR APPOINTMENT OF EXECUTIVE OFFICERS
WHEREAS, Federal Reserve Board Regulation O defines an “executive officer” as any person, regardless of title, who is involved in major policy making for [Bank Name] including, but not limited to, all individuals with the title of Chairman of the Board, President, every Vice President, Cashier, Secretary, or Treasurer; and WHEREAS, Federal Reserve Board Regulation O authorizes [Bank Name] to exclude, by Board resolution, any such persons from the definition of “executive officer” and from participation (other than in the capacity of Director) in major policy making functions of [Bank Name], if such person(s) do not actually participate therein; therefore BE IT RESOLVED, that only the following persons listed by name and/or title, and excluding those not listed but considered, for the purposes of Federal Reserve Board Regulation O, shall be empowered to participate in major policy making functions of [Bank Name] and thus, by definition, serve as an executive officer of [Bank Name]. Any Director holding any title included in the Regulation O definition of Executive Officer shall only participate in major policy making functions in the capacity of Director. The following positions are deemed to be executive officers for purposes of compliance with Federal Reserve Board Regulation O to the exclusion of all others:
Chief Executive Officer
President
Chief Financial Officer
Chief Credit Officer
Chief Risk Officer
Senior Lending Officer
Treasurer
QUESTIONNAIRE FOR INSIDERS OF BANKSOUTH
Name: Home Address: Social Security No.: Date of Birth: Home Phone: Home Fax Number: Home E-mail Address:
Place of Employment: Job Position/Title: Business Address: Business Phone: Business Fax Number: Business E-mail Address: Cell Phone Number: Assistant or Secretary’s Name: Assistant or Secretary’s Phone Number: Assistant or Secretary’s E-mail Address:
Immediate Family: (Spouse or other family member living in the same household) Spouse: Children’s Names and Ages: Other Dependents:
Board/Senior Executive Positions in Other Companies:
Are there any BankSouth loans currently outstanding to you, your immediate family, business or related interests?
RELATED INTERESTS Please complete the table giving the name of related interest, description of position held, and current percentage ownership interest. List only those with percentage ownership of 10% or greater. (Definitions are provided below.)
Name of Related Interest: Business/Political Campaigns/Trust Funds
Position Held % Ownership
Regulation O – Insider Lending requires the Bank to annually identify the “related interests” of each executive officer, director and principal shareholder.
“Related Interest” means 1. A company that is controlled by that person; or2. A political or campaign committee that is controlled by that person or the funds or services of which will benefit that
person.
“Company” means any corporation, partnership, trust (business or otherwise), association, joint venture, pool syndicate, sole proprietorship, unincorporated organization, or any other form of business entity not specifically listed herein.
“Control” means that a person directly or indirectly, or acting through or in concert with one or more persons 1. Owns, controls or has the power to vote 25 percent or more of any voting securities of the company; 2. Controls in any manner the election of a majority of the directors of the company; 3. Has the power to exercise a controlling influence over the management or policies of the company.
A person is presumed to have control, including the power to exercise a controlling influence over the management or policies, of a company if the person is:
1. An executive officer or director of the company; and directly or indirectly owns, controls, or has the power tovote more than 10 percent of any class of voting securities of the company; OR,
2. The person directly or indirectly own, controls, or has the power to vote more than 10 percent of any class ofvoting securities of the company; and no other person owns, controls, or has the power to vote a greaterpercentage of that class of securities.
An individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company solely by virtue of the individual’s position as an officer or director of the company.
REGULATION O - LOANS SECURED BY BANKSOUTHAS OF DECEMBER 31,
Federal Regulation 12 CFR 215.12 requires directors and executive officers of banks to annually report to the holding company board the outstanding amount of any credit secured by bank stock. The following is a list of loans outstanding as of the calendar year ending December 31, , which are collateralized by shares of BankSouth stock that I own.
If none, please indicate by writing “NONE” in the space provided below.
by .Please forward the completed form to
I, a BankSouth Insider, do hereby certify that the above listed information is true and complete as to my “related interests.” I further acknowledge that the above information may be used for internal and/or Compliance audi ing purposes and will be ma de available for Federal and/or State regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new relationships, changes in relationships or ceasing of relationships which may occur as a “related interest” during the coming year.
Signature: Date:
Printed Name: