[Federal Register Volume 59, Number 37 (Thursday, February 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3860]
[[Page Unknown]]
[Federal Register: February 24, 1994]
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FEDERAL RESERVE SYSTEM
12 CFR Part 215
[Regulation O; Docket Nos. R-0800 and R-0809]
Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks; Loans to Holding Companies and Affiliates
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is revising Regulation O to permit the aggregate
limit on lending to insiders by eligible, adequately capitalized small
banks to be increased from 100 percent of unimpaired capital and
surplus to 200. The Board also is revising Regulation O to permit banks
to follow alternative recordkeeping procedures on loans to insiders of
affiliates, to narrow the definition of ``extension of credit,'' and to
adopt certain exceptions to the general restrictions on lending to
insiders and the special restrictions on lending to executive officers.
Other minor revisions clarifying certain exemptions and conforming
certain provisions to the enabling statutes are included as well.
EFFECTIVE DATE: Effective February 18, 1994.
FOR FURTHER INFORMATION CONTACT: Gregory Baer, Senior Attorney (202/
452-3236), Gordon Miller, Attorney (202/452-2534), or Stephen Van
Meter, Attorney (202/452-3554), Legal Division; Stephen M. Lovette,
Manager of Policy Implementation (202/452-3469), or Mark Benton, Senior
Financial Analyst (202/452-5205), Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System. For the
hearing impaired only, Telecommunications Device for the Deaf (TDD),
Dorothea Thompson (202/452-3544), Board of Governors of the Federal
Reserve System, 20th & C Streets, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Background
The Board is making permanent, with certain additional
qualifications, its interim rule permitting small, adequately
capitalized banks to extend credit to insiders up to 200 percent of
unimpaired capital and surplus, in circumstances where such lending is
necessary to serve local credit needs or to attract directors. The
Board also is adopting amendments to Regulation O (12 CFR part 215)
designed to increase the ability of banks to make extensions of credit
that pose minimal risk of loss, to eliminate recordkeeping requirements
that impose a paperwork burden but do not significantly aid compliance
with the regulation, and to remove certain transactions from the
regulation's coverage consistent with bank safety and soundness. The
above amendments are expected to increase the availability of credit,
particularly in communities served by small banks, and to reduce the
cost of compliance with the regulation.
In view of the extensive changes made to Regulation O as a result
of this rulemaking, the Board is restating subpart A of Regulation O as
amended, rather than separately describing each amendment.
The Board is making the rule effective immediately in order to
prevent a lapse in the 200 percent lending limit available to eligible
banks under the interim rule for loans to insiders, and to make all
other provisions effective at the same time.
II. The 200 Percent Aggregate Lending Limit
Section 22(h) of the Federal Reserve Act (12 U.S.C. 375b) restricts
the amounts and terms of extensions of credit from a bank to executive
officers, directors, and principal shareholders of the bank and its
holding company affiliates and to any related interest of those persons
(insiders). Section 306 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA)1 amended section 22(h) to impose
an aggregate limit on the amount a bank may lend to its insiders as a
class. See 12 U.S.C. 375b(5). In general, the limit is equal to 100
percent of the bank's unimpaired capital and unimpaired surplus. The
Board is authorized, however, to make exceptions to the general limit
for banks with deposits of less than $100 million ``if the Board
determines that the exceptions are important to avoid constricting the
availability of credit in small communities or to attract directors of
such banks.'' 12 U.S.C. 375b(5)(C). The higher limit may not exceed 200
percent of the bank's unimpaired capital and unimpaired surplus. Id.
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\1\Pubic Law 102-242, Section 306, 105 Stat. 2236 (1991).
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Effective May 18, 1992, the Board amended Regulation O, which
implements section 22(h), to incorporate the aggregate lending limit
added by FDICIA. The general limit on lending to insiders and their
related interests--100 percent of the bank's unimpaired capital and
unimpaired surplus--was adopted. The Board also decided as an interim
measure to permit banks with deposits under $100 million to adopt a
higher limit, not to exceed 200 percent of the bank's unimpaired
capital and unimpaired surplus, for a period of one year to expire May
18, 1993. The interim period was intended to allow the Board to consult
with the other federal banking agencies and collect data on the lending
practices of banks in order to analyze the effect of the aggregate
lending limit on the availability of credit and service of directors.
See 57 FR 22417, 22420, May 28, 1992.
The Board subsequently extended the interim rule for six months,
through November 18, 1993, in order to obtain public comments on
whether the interim rule should be made permanent, modified, or
permitted to expire. See 58 FR 28492, May 14, 1993. The Board
thereafter extended the interim rule an additional three months,
through February 18, 1994, in order to review the written comments,
call reports of small banks, and relevant information from other
governmental agencies. See 58 FR 61803, November 23, 1993.
The interim rule established requirements that a small bank had to
meet in order to adopt a higher aggregate lending limit. Under that
rule, the board of directors of the bank had to determine by resolution
that a higher aggregate lending limit was consistent with prudent,
safe, and sound banking practices in light of the bank's experience in
lending to its insiders, and that a higher limit was necessary to
attract or retain directors or to prevent restricting the availability
of credit in small communities. The resolution had to set forth the
facts and reasoning that supported this determination, including the
amount of the bank's aggregate lending to insiders, expressed as a
percentage of unimpaired capital and unimpaired surplus, as of the date
of the resolution. The bank also was required to submit its resolution
to the appropriate federal banking agency, with a copy to the Board.
Finally, the bank had to meet or exceed all applicable capital
requirements. See 12 CFR 215.4(d)(2).
In response to the notice of the extension of the interim rule, the
Board received 147 written comments, with 144 respondents in favor of
making the 200 percent limit permanent. Small banks subject to the rule
submitted the large majority of comments. Other commenters included
numerous state and national banking trade associations, several state
banking superintendents and Federal Reserve Banks, individual bank
directors, bank holding companies, and law firms.
Adverse comment focused on the relatively low level of use of the
interim provision. Two of the three adverse commenters argued that a
higher aggregate lending limit was not important to credit or director
availability because very few banks had used the interim rule. One
state banking commissioner noted that of the 88 small banks it
supervised, only one had aggregate insider loans in excess of 60
percent of unimpaired capital and unimpaired surplus as of March 31,
1993.
Call report data reflected a similar low level of aggregate insider
lending. As of September 30, 1993, of a total population of 7,435 banks
with deposits of less than $100 million, only 17 reported loans to
insiders in an amount greater than 100 percent of capital. A total of
131 banks reported insider loans greater than 60 percent of capital.
Only 54 banks have notified the Board pursuant to the interim rule that
they have adopted a higher aggregate lending limit.
In support of the proposed rule, sixty-two commenters stated that a
higher aggregate lending limit was important in order that small banks
not be forced to choose between refusing credit to qualified insiders
and asking insiders to resign as directors. Several banks observed that
this was a particular hardship because qualified directors typically
are active businesspersons whose businesses have substantial yet
healthy credit requirements.
Fifteen commenters observed that the aggregate lending limit was a
particular hardship in small communities and rural markets because in
those settings small banks were dependent on insiders as a loan source,
insiders had fewer alternative credit sources, and insiders tended to
be closely identified with their banks, making it difficult for them to
seek credit from a competitor.
In order to demonstrate that the higher limit was being used and
would have important benefits if made permanent, the Independent
Bankers Association of America (IBAA) presented in its comment a survey
of 8,057 small banks. Of 1,060 banks that responded to the survey, 152
reported that the general aggregate lending limit had prevented them
from making a loan to an insider; 95 respondents reported that the
aggregate lending limit had prevented them from naming an individual as
a director; and 53 respondents reported that they had accepted a
director resignation attributable to the aggregate lending limit.
Additional commenters presented a variety of reasons for the low
level of use of the interim 200 percent limit: concern that the interim
rule would be eliminated, thereby forcing banks to retract credit
extended in reliance on it; historically low lending levels; loan
participations as an alternative to approving a higher limit; and
deferral of consideration of the issue by small banks whose insider
loans had not matured since adoption of the interim rule. Some
commenters also observed that the interim rule imposed detailed
requirements and that some banks may have feared attracting additional
regulatory scrutiny by adopting the interim rule.
After the close of the comment period, the General Accounting
Office (GAO) provided to the Board a draft report on bank insider
activities. The GAO reviewed banks that failed during 1990 and 1991 in
order to determine whether insider practices contributed to the banks'
failures. (The GAO did not evaluate any existing or proposed regulation
in this area.) The GAO found that insider problems (which the GAO
defined very broadly) were prevalent at failed banks, that banks with
less than $100 million of assets were more likely than larger banks to
be cited for insider problems, and that the most frequently cited
violations were loans to insiders made in excess of lending limits and
on preferential terms not available to the general public.
However, the GAO report did not establish a causal link between
insider problems and bank failures. Rather, the GAO appeared to
conclude that insider problems, as broadly defined by the GAO, were
correlated with poor internal controls and underwriting practices. The
GAO was not able to measure the actual level of insider lending at
failed or troubled banks, and therefore was not able to address
specifically the relationship of the actual level of insider lending to
bank failures. The major GAO recommendations were for increased
monitoring of insider lending and more effective follow-up on
violations.
The Board has concluded that the concerns raised in the GAO report
do not justify preventing qualified banks from utilizing a higher
aggregate lending limit. If the higher limit should present safety and
soundness problems at an institution, then the appropriate banking
supervisor retains general authority to require a reduction in the
level of insider loans. If problems should occur more generally, the
Board retains authority to eliminate or reduce the exemption.
Although the 100 percent aggregate lending limit does not appear to
be currently creating a widespread problem with credit or director
availability, the Board has concluded that it does appear to pose
important problems for banks in certain communities. Given the
available data and the comments, the Board believes that the 100
percent limit is restricting the availability of credit and the
recruitment of directors in communities where the proper certification
can be made. In such circumstances, the Board believes that an eligible
small bank should be permitted to establish a higher lending limit up
to 200 percent of unimpaired capital and unimpaired surplus. Each
eligible bank's board of directors will still be required to certify
that the higher limit is necessary to avoid restricting credit or to
assist in attracting directors and is consistent with prudent, safe,
and sound banking practices.
The Board emphasizes that, as was the case prior to FDICIA,
borrowing by insiders will continue to be subject to scrutiny during
the examination process, including an evaluation of whether such
borrowing represents an inappropriate concentration of loans.
In the final rule, the Board has adopted three modifications to the
proposed rule. First, the Board has provided that to qualify for the
higher lending limit, a bank must be in satisfactory overall condition
as determined in the most recent report of examination of the bank, as
well as being adequately capitalized, as was already required in the
interim rule. Second, a provision has been added clarifying that a bank
operating above the 100 percent limit that subsequently becomes
ineligible for the higher limit may retain its existing insider loans
but may not extend credit that would maintain aggregate insider lending
in excess of 100 percent of unimpaired capital and surplus. Third,
banks are not be required to file the required resolutions with their
primary regulator or the Board, as was required by the interim rule.
The resolutions are to be made available for inspection during the
examination process.
III. Recordkeeping Procedures
Section 215.8 of Regulation O currently requires that each bank
maintain records necessary for compliance with the insider lending
restrictions of Regulation O. Specifically, banks are required to
maintain records (1) identifying all directors, officers, and principal
shareholders of the bank and its affiliates and all related interests
of those persons (collectively, ``insiders''), and (2) specifying the
amounts and terms of all credit extended to these insiders. Section
215.8 further requires each bank to request on an annual basis that its
insiders and insiders of its affiliates identify their related
interests. The list of insiders is then used by the bank to identify
all existing or proposed extensions of credit covered by Regulation O,
to monitor the amount thereof subject to the individual and aggregate
lending limits, and to ensure that all appropriate approval procedures
are followed.
Since adoption of the initial recordkeeping requirement, the annual
survey has grown in size and complexity. Bank holding companies have
become increasingly large and diversified, and commercial organizations
have acquired credit card banks and limited purpose banks. Thus, for
example, a small, grandfathered bank owned by a large diversified
holding company may have hundreds of affiliates with thousands of
officers and directors. Although the bank may have no contact with
these officers and directors and companies controlled by them, it
currently is required to collect information on all these parties. In
another example, a CEBA credit card bank is prevented by law from
making loans to anyone but individuals,2 and is thus effectively
prohibited from lending to insiders' related interests, but the current
rule nonetheless requires the bank to conduct an annual survey of
related interests.
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\2\See 12 U.S.C. 1841(c)(2).
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On September 9, 1993, the Board published notice of proposed
rulemaking and requested comment concerning alternative recordkeeping
procedures that banks may follow to monitor loans to insiders of the
bank and its affiliates. See 58 FR 47400. The Board proposed to allow
each bank to decide on its own how to gather information on related
interests, so long as its method was effective. For example, in the
case of a nonbank credit card bank or other bank that does not make
commercial loans, the bank could decide not to keep records on related
interests. For banks that make commercial loans, two acceptable
recordkeeping methods were identified: (1) The ``survey'' method
currently required, under which all insiders are asked annually to
identify all their related interests; and (2) the ``borrower inquiry''
method, under which the bank would (a) ask each commercial borrower as
part of the loan application process whether it is a related interest
of an insider of the bank, and (b) maintain a record of each
affirmative response. Finally, the proposed rule sought comment on
whether any other recordkeeping methods would be effective in
monitoring compliance with Regulation O.
The draft GAO report, discussed above, urged the federal bank
agencies to emphasize the importance of accurate and complete insider
recordkeeping. Management recordkeeping failures, the GAO argued, were
indicative of larger bank management problems, and management solutions
in this area, the GAO reasoned, would contribute to the resolution of
management's larger problems. The Board believes that the proposed
recordkeeping amendments, which attempt to eliminate unnecessary
recordkeeping and allow for alternative methods of recordkeeping, are
consistent with the GAO's recommendations.
Commenters supported the recordkeeping amendments as a means of
decreasing unnecessary paperwork burden. Commenters uniformly supported
no longer requiring credit card banks and other institutions that do
not make commercial loans to keep records on the related interests of
insiders. No commenter proposed any general recordkeeping methods in
addition to those identified in the rule.
A few commenters expressed concerns about the second recordkeeping
option put forth in the proposed rule--the ``borrower inquiry'' method.
Commenters noted that in some cases a corporate borrower might be
unaware that it is a related interest of a bank insider and therefore
might inadvertently misinform a bank's loan officer. For example, a
corporate employee negotiating a loan may not know that one of his
company's controlling shareholders is also a director of one of the
lending bank's affiliates. Citing this possibility, several bank
commenters supported the recordkeeping provision but requested that the
Board specify that use of the borrower inquiry method would give a bank
a ``safe harbor'' from criticism during an examination in the event
that inaccurate certifications were accepted from borrowers. On a
related point, two commenters sought assurance that internal controls
consistent with the proposed recordkeeping alternatives would meet the
compliance certification requirements of section 112 of FDICIA.
The Board believes protections currently exist to prevent
intentional misreporting by borrowers under the borrower inquiry
method. Intentional misreporting could bring criminal or civil
penalties. First, a borrower that knowingly misstates whether it is a
related interest of the lending bank is criminally liable. 18 U.S.C.
1014. Second, a bank insider to whom the corporate borrower is related
and who is aware of the loan violates Regulation O if the insider
permits the related interest to receive any extension of credit not
authorized under Regulation O. 12 CFR 215.6.
The Board has also concluded that any unintentional misreporting
should not be a matter of serious concern. While there could be cases
in large multi-bank holding companies where a borrower and lender are
genuinely ignorant of the relationship between them, there is no
potential in those circumstances for an insider's status to improperly
affect the credit decision.
The Board has decided to adopt the recordkeeping provisions, as
proposed, with three amendments. First, in order to address concerns
about inaccurate reporting, the Board has adopted an additional
safeguard to prevent the occurrence of those reporting errors, both
intentional and unintentional, that are likely to occur most frequently
and that raise the greatest concern. The final rule establishes a
minimum requirement that every bank, regardless of the recordkeeping
method it selects, must conduct an annual survey to identify its own
insiders (that is, its own executive officers, directors, and principal
shareholders and their related interests, but not those of its holding
company affiliates). Every bank is expected to check this short list
before extending credit, even if it is employing the borrower inquiry
method of recordkeeping for affiliates in lieu of the survey method. In
addition to addressing possible violations of Regulation O, the limited
survey and the short list it produces will be available for monitoring
compliance with section 23A of the Federal Reserve Act.
As for concerns about a ``safe harbor,'' the Board believes that an
implicit safe harbor exists for banks electing either one of the two
recordkeeping options included in the final rule, and that following
either of these options would allow the necessary certification to be
made for purposes of section 112 of FDICIA. Furthermore, under the
enforcement guidelines, the federal banking agencies should not assess
civil money penalties for an inadvertent or accidental violation of
their rules.
Second, because the commenters did not identify any recordkeeping
methods other than the two proposed by the Board, the Board has adopted
a presumption in the final rule that a bank must use either one of the
two identified methods unless it can demonstrate that another method is
equally effective. The suitability of any alternative procedure for
monitoring lending to insiders and their related interests must be
determined, of course, on the basis of the effectiveness of the
procedure in preventing violations of law and insider abuse. Any
alternative recordkeeping procedure must sufficiently identify
extensions of credit covered by Regulation O to ensure that proper
monitoring of and compliance with insider lending restrictions is
maintained.
Finally, the Board has made an explicit exemption from the
requirement that a bank keep records of, or inquire about related
interests of insiders of the bank or its affiliates, for banks that are
prohibited from making commercial loans in the first place.3
Related interests consist only of companies or other similar entities,
as a result of which a bank that is prohibited from making commercial
loans is prohibited from making loans to any company or other entity
that may be a related interest. When such a prohibition exists,
recordkeeping or inquiries with respect to related interests is
unnecessarily burdensome.
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\3\For example, a nonbank credit card bank, in order to maintain
its exception from the definition of ``bank'' in the Bank Holding
Company Act, may not engage in the business of making commercial
loans. See 12 U.S.C. 1841(c)(2)(E).
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IV. Definition of Extension of Credit
The Board proposed three amendments to the definition of
``extension of credit'' in Regulation O: a clarification of the
``tangible economic benefit'' rule; a new exception for the discount by
a bank of obligations sold by an insider without recourse; and an
increase in the threshold for treating credit card debt as an extension
of credit. See 58 FR 47400, September 9, 1993.
A. ``Tangible Economic Benefit'' Rule
Regulation O provides that an extension of credit is deemed to be
made to an insider when the proceeds of the credit are used for the
tangible economic benefit of, or are transferred to, the insider. 12
CFR 215.3(f). These extensions of credit are thereby counted toward the
lending limits of Regulation O.
Following the enactment of FDICIA, which expanded the lending limit
provision of section 22(h) of the Federal Reserve Act to cover
directors and their related interests, questions were raised more
frequently regarding the scope and proper application of the tangible
economic benefit rule. If interpreted literally, the tangible economic
benefit rule would apply whenever a bank extended credit to any person,
including a member of the general public with no other relationship to
the bank, and the proceeds of the extension of credit were transferred
to or used for the benefit of an insider or an insider's related
interest. For example, as one commenter noted, loans on non-
preferential terms to members of the general public to purchase homes
from a builder who is a director of the bank would be treated as loans
to the builder/director.
The tangible economic benefit rule is similar to a provision
contained in section 23A of the Federal Reserve Act, and was adopted at
a time when the Board was required by section 22(h) of the Federal
Reserve Act to use the definition of ``extension of credit'' found in
section 23A. See Public Law 95-630 Section 104, 92 Stat. 3644 (1978).
The definition of extension of credit in section 22(h), however, is no
longer tied to section 23A, and the Board is authorized to adopt
appropriate definitions of terms in the statute. See 12 U.S.C.
375b(9)(D) and 375b(10). The Board therefore proposed to revise the
tangible economic benefit rule to clarify that it was not intended to
reach such transactions, by providing explicitly that the rule does not
apply to an arm's-length4 extension of credit by a bank to a third
party where the proceeds of the credit are used to finance the bona
fide acquisition of property, goods, or services from an insider or an
insider's related interest.
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\4\In order to satisfy this requirement, the extension of credit
to the general public must be on terms that would satisfy the
standard set forth in Sec. 215.4 of Regulation O if the extension of
credit was being made directly to an insider or an insider's related
interest.
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Commenters supported the proposal, and no adverse comments were
received. Three commenters objected to the requirement that any arm's-
length loan satisfy the non-preferential provisions for insider loans
found in Sec. 215.4(a), labelling that requirement overly restrictive.
The Board has retained the requirement, however, that loans be on non-
preferential terms, in order to prevent banks from participating in
commercial promotions that benefit the bank's insiders to the detriment
of the bank.5
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\5\ One other commenter sought clarification on the relationship
between the tangible economic benefit rule and another rule in
Regulation O that states that loans made by a bank to a partnership
in which one or more executive officers of the bank hold a majority
interest are to be attributed in full to each of the executive
officers. 12 CFR 215.5(b). The introductory portion of Sec. 215.5
has been revised to clarify the interplay between Sec. 215.5 and the
general provisions of Regulation O.
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Continuing to be covered by the tangible economic benefit rule are
extensions of credit to an insider's nominee and transactions in which
the proceeds of the credit are loaned to an insider. The Board also
notes that provisions of the definition of ``extension of credit''
outside the tangible economic benefit rule will continue to reach
transactions in which an insider actually becomes obligated to a bank,
``whether the obligation arises directly or indirectly, or because of
an endorsement on an obligation or otherwise, or by any means
whatsoever.'' 12 CFR 215.3(a)(8).
B. Discount of Obligations without Recourse
Regulation O includes within the definition of ``extension of
credit'' any ``discount of promissory notes, bills of exchange,
conditional sales contracts, or similar paper, whether with or without
recourse.'' 12 CFR 215.3(a)(5) (emphasis added). At the time this
provision was adopted, the Board was required by section 22(h) to
include such items in the regulatory definition of extension of
credit.6 However, the current statutory definition does not
require the inclusion of such items where the transaction is made
without recourse to the transferor.7 The Board proposed to delete
this provision so as to exclude non-recourse transactions from
Regulation O coverage. Transactions entered into with recourse to the
transferor would continue to be covered under other provisions of the
definition. See 12 CFR 215.3(a)(4) and (8).
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\6\The current definition of ``extension of credit'' in
Regulation O was adopted in 1979, when the Board substantially
amended the regulation in order to implement the Financial
Institutions Regulatory Act of 1978 (FIRA), Public Law 95-630
Section 104, 92 Stat. 3644 (1978). 44 FR 12963, March 9, 1979. FIRA
added section 22(h) to the Act, which in turn incorporated the
definition of ``extension of credit'' contained in section 23A. At
that time, section 23A's definition included the above-referenced
provision concerning the discount of paper acquired with or without
recourse. See Public Law 89-485 Section 12, 80 Stat. 241 (1966).
\7\The statutory cross-reference to section 23A was deleted from
section 22(h) in 1982. See Public Law 97-230 Section 410, 96 Stat.
1520 (1982). FDICIA added a new definition of ``extension of
credit'' to section 22(h), which applies whenever a member bank
makes or renews a loan, grants a line of credit, or enters into any
similar transaction as a result of which a person becomes obligated
to pay money or its equivalent to the bank. See 12 U.S.C.
375b(9)(D). This definition does not cover all transactions, such as
the purchase of assets, covered by section 23A.
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The Board has adopted this amendment as proposed. Non-recourse
transactions resemble a purchase of assets more than the lending of
money, and the final rule conforms the treatment of these transactions
to the treatment of other asset pruchases between a bank and its
insiders. Moreover, these non-recourse transactions do not constitute
``extensions of credit'' to the transferor under the National Bank Act
as interpreted by the Office of the Comptroller of the Currency. See 12
U.S.C. 84(b)(1); 12 CFR 32.2(a). These transactions will continue to be
governed, however, by general standards of safety and soundness,
prohibitions against fraud and abuse, and corporate fiduciary
duties.8
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\8\In addition, sections 23A and 23B of the Act may be
applicable to such transactions if the insider or the insider's
related interest is an affiliate, as defined in section 23A, of the
lending bank.
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Commenters supported the proposal, and no adverse comments were
received. One commenter asked the Board to clarify whether limited or
partial recourse transactions would be treated as extensions of credit.
The Board believes that it is more appropriate to address the numerous
possible recourse arrangements on a case-by-case basis.
C. Credit Card Plan Indebtedness
Regulation O exempts from the definition of ``extension of
credit,'' and thus from Regulation O's lending limits, indebtedness of
$5,000 or less arising through any general arrangement by which a bank:
(1) Acquires charge or time credit accounts; or (2) makes payments to
or on behalf of participants in a bank credit card plan or other open-
end credit plan. 12 CFR 215.3(b)(5). To qualify for the exemption, the
indebtedness must be on market terms and must not involve prior
individual clearance or approval by the bank other than for the purpose
of determining the borrower's eligibility and compliance with any
applicable dollar limit. Id.
The Board proposed to increase from $5,000 to $15,000 the threshold
above which standard credit card loans to insiders would be counted as
extensions of credit. This proposed increase reflected widespread
increases by credit card issuers in pre-approved lending limits and, to
some extent, inflation since the initial adoption of the $5,000 limit
in 1979. The Board did not propose raising the limit for extensions of
credit through overdraft plans, leaving that limit at $5,000.
Extensions of credit through overdrafts in amounts up to $15,000 have
not become routine.
Commenters supported the proposed increase. Many commenters,
however, requested that the increase be expanded. Thirteen commenters
suggested that the proposed $15,000 cap on the amount of excluded
credit card debt either be eliminated, increased, indexed, or
periodically reviewed. Two commenters requested that credit card debt
be exempted from the cap on general purpose loans to executive
officers.
Eight commenters requested that the overdraft limit be raised by an
identical amount. Commenters reasoned that one extension of credit is
the same as another and thus that no substantive difference exists
between credit card loans and overdraft extensions of credit. Moreover,
some overdraft protection plans are now tied directly to credit card
lines of credit. Commenters also noted that the rationale that the
credit card limit was being raised to compensate for inflation applied
equally to overdraft protection.
The Board has decided to increase the credit card exemption from
$5,000 to $15,000 and to maintain the overdraft limit at $5,000.
Raising the limit could encourage insiders to view overdraft plans as a
source of credit, rather than solely as protection against infrequent
and unplanned events. The Board is not prohibiting payment of
overdrafts over $5,000 pursuant to a permissible pre-approved overdraft
plan, but merely providing that overdrafts over $5,000 are counted
toward the individual and aggregate lending limits of Regulation O.
The Board believes that the proposed limit is an appropriate
compromise between its concern to prevent insider lending abuse and the
added convenience that even higher or indexed limits may provide.
Commenters presented no evidence to support their argument that a cap
on exempt credit card lending is no longer necessary. Finally, the
Board believes that exempting credit card loans from the cap on general
purpose loans to executive officers would be more properly addressed in
the context of a more general review of executive officer lending
restrictions.
V. Consumer Installment Paper
Pursuant to the authority granted it by the Housing and Community
Development Act of 1992 (HCDA),9 the Board proposed an exception
to the aggregate lending limit for the discount of consumer installment
paper from an insider with recourse, so long as the bank is relying
primarily upon the creditworthiness of the maker of the paper and not
on any endorsement or guarantee of the insider. Such transactions would
continue to constitute extensions of credit subject to the aggregate
lending limit if the maker of the consumer installment paper was an
insider. See 58 FR 47400, September 9, 1993.
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\9\Public Law 102-550 Section 955, 106 Stat. 3672 (1992).
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The legislative history of HCDA states that the Board should make a
``zero-based review'' of any exceptions it adopts.10 The proposed
exception is consistent with this directive. The Board has concluded
that, where the bank is relying primarily upon the creditworthiness of
the underlying maker, the accompanying extension of credit to an
insider transferring the paper with recourse poses minimal risk of loss
to the bank.11 In addition like the previous three exceptions, the
new exception is found in the National Bank Act,12 and is
incorporated as an exception to the individual lending limit in
Regulation O. See 12 U.S.C. 84(c)(8); 12 CFR 215.2(h) and 215.4(c).
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\1\0See 138 Cong. Rec. S17,914-15 (daily ed. October 8, 1992).
\1\1Although extensions of credit made in conformity with the
proposed exception would not count toward a bank's aggregate lending
limit, such extensions of credit would continue to be treated as
extensions of credit under 12 CFR 215.3(4) (a) and (b) of Regulation
O, as a safeguard against abuse of this exception.
\1\2All interpretations by the Comptroller of the Currency of
the exceptions contained in 12 U.S.C. 84 are applicable to
Regulation O to the extent that these exceptions are incorporated by
reference into or otherwise adopted in Regulation O.
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Commenters generally supported the new exception, and no adverse
comments were received. Three commenters argued that the proposed
requirement that a designated officer of the bank certify in writing
that the bank is relying primarily upon the maker of the discounted
paper was too burdensome because it did not accommodate itself to bulk
transactions in which the bank may perform only a statistical sampling
of a discounted loan portfolio. One commenter asked the Board to
clarify that the discount of consumer lease paper was included in the
provision. Six commenters suggested adoption of additional exceptions
contained in the National Bank Act, and one commenter suggested an
additional exception not included in the National Bank Act.
The requirement that a designated officer certify that the bank has
followed appropriate underwriting procedures is found in the National
Bank Act, and the Board has decided to maintain consistency with that
Act.
Concerning consumer lease paper, the Board notes that an
interpretative letter concerning the circumstances under which a lease
transaction may be considered to be an extension of credit for purposes
of Regulation O has previously been issued. See Interpretative Letter
dated April 8, 1976. The Board believes that it would be more
appropriate to provide further guidance as to the treatment of
particular transactions under Regulation O on a case-by-case basis.
Additional exemptions found in the National Bank Act have not been
adopted. Those are either limited exemptions, exemptions for credit
secured by collateral that is not stable and liquid, or exemptions that
would be difficult to administer in the Regulation O context. Other
exemptions suggested by commenters would require statutory change.
VI. Loans to Executive Officers
The Board proposed three amendments to the rules governing
extensions of credit by a bank to its executive officers: A new
exemption to the limit for general purpose loans that are fully
collateralized by certain categories of highly stable and liquid
collateral; clarification that home mortgage loan refinancing, subject
to certain limitations, is included in the category of home mortgage
loans; and a restatement of the prior approval requirement in section
22(g) of the Federal Reserve Act. See 58 FR 47400, September 9, 1993.
A. General Purpose Loans
Section 22(g) of the Federal Reserve Act establishes a special
additional rule for extensions of credit by a bank to its executive
officers. In general, a bank's lending to each of its executive
officers is limited to an amount equal to the greater of $25,000 or 2.5
percent of the bank's capital and unimpaired surplus, but not to exceed
$100,000. 12 CFR 215.5(c). Qualifying home mortgage loans and
educational loans are not counted toward this limit, although they do
count toward the general individual and aggregate lending limits
applicable to all insiders under Sec. 215.4 of Regulation O. 12 CFR
215.5(c)(1) and (2). Also, unlike the general individual and aggregate
lending limits, there has been no exception to the executive officer
lending limit based on the manner in which the extension of credit is
collateralized.
The Board proposed to create an exemption to the general purpose
lending limit for loans to executive officers for loans fully secured
by: (a) Obligations of the United States or other obligations fully
guaranteed as to principal and interest by the United States; (b)
commitments or guarantees of a department or agency of the United
States; or (c) a segregated deposit account with the lending bank.
The Board previously has determined that extensions of credit
collateralized in the manner described above pose minimal risk of loss
to a bank. See 58 FR 26507, May 4, 1993. In view of this determination,
the Board has concluded that it is consistent with safe and sound
banking practices to increase the amount of credit that a bank may
extend to its executive officers when the credit is secured as
described above. Because such loans would continue to be subject to the
prohibitions against preferential lending, the Board also believes that
the proposed exception would not lend itself to evasions of the law or
any other abuse.
Commenters supported the proposed exception. Six commenters
suggested that additional categories of exempt extensions of credit be
adopted. Nine commenters requested that the current $100,000 cap on
general purpose loans be increased, and two commenters suggested that
the cap be eliminated altogether. One commenter suggested that loans to
an executive officer serving in a bona fide fiduciary capacity not be
included as loans to the executive officer for purposes of 12 CFR
215.5(c).
The additional exceptions that have been proposed apply more
readily to loans made in a commercial context rather than to personal
loans. Section 215.5 primarily governs personal loans, however, and the
additional proposals therefore are neither necessary nor appropriate.
The Board also considers it more appropriate to reconsider the
appropriate lending limit for executive officers in connection with a
more general review of executive officer restrictions. Finally, the
Board notes that the proper treatment under Regulation O of loans to an
executive officer serving in a bona fide fiduciary capacity has
previously been addressed. See I Fed. Res. Reg. Serv. 3-1048. The Board
will provide any further guidance on this issue on a case-by-case
basis.
B. Refinancing of Home Mortgage Loans
Section 22(g) of the Federal Reserve Act provides that a bank may
make a loan to its executive officer, without restriction as to amount,
if the loan is secured by a first lien on a dwelling that is owned by
the executive officer and used by the executive officer as a residence
after the loan is made. 12 U.S.C. 375a(2). Section 215.5(c)(2) of
Regulation O implements this provision, and sets forth additional
restrictions on such loans.
The Board proposed to revise the regulation to provide clearly that
the refinancing of a home mortgage loan is included within this
category to the extent that the proceeds are used to pay off the prior
home mortgage loan or for one or more of the permissible purposes
enumerated in 12 CFR 215.5(c)(2).
Comments were generally supportive. Two commenters asked the Board
to clarify that the closing costs of a home mortgage refinancing are
included as part of the qualifying portion of the loan. Two commenters
requested that all proceeds of a home mortgage refinancing be included
in this category.
The Board, as requested in the comments, has revised the regulation
further to provide expressly that closing costs are included as part of
the exempt portion of a home mortgage refinancing, and to make other
clarifying changes. Inclusion within the exemption of proceeds of a
refinancing that may be used for unrestricted purposes is prohibited by
the enabling statute.
C. Prior Approval of Home Mortgage Loans
Section 22(g) provides that the board of directors of a bank must
specifically approve in advance a home mortgage loan to an executive
officer. 12 U.S.C. 375a(2). Regulation O, however, does not set forth
this requirement. The Board proposed that 12 CFR 215.5(c) be revised to
conform to the enabling statute.
Comments upon this proposal were mixed. One commenter asked the
Board to clarify that prior approval is required for all home mortgage
loans regardless of size, notwithstanding the general provisions of
Regulation O that require prior approval only for loans in excess of a
calculated amount. See 12 CFR 215.4(b). Two commenters suggested that
the Board rely on its rulemaking authority not to conform to the
statute, and two commenters asked the Board to seek relief from this
requirement from Congress.
The Board has adopted this provision substantially as proposed. As
discussed above, the Board has added an introductory statement to
Sec. 215.5 to clarify that the requirements for extensions of credit to
executive officers under that section, pursuant to section 22(g), are
in addition to the general requirements for insiders set forth
elsewhere in Regulation O. The Board lacks the authority to adopt a
provision of Regulation O that does not conform to the statutory prior
approval requirement. The additional comments are beyond the scope of
this rulemaking.
VII. Conforming Definition of ``Bank''
Subpart B of Regulation O partially implements the reporting
requirements of title VIII of FIRA, as amended by the Garn-St. Germain
Depository Institutions Act of 1982\13\ and FDICIA. 12 U.S.C.
1972(2)(G). Section 215.22 requires an executive officer or principal
shareholder of a bank to report to the bank each year if the person or
any related interest of the person borrowed during the prior calendar
year from a correspondent bank of the bank.
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\13\Public Law 97-320, 96 Stat. 1469 (1982).
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As originally enacted, a correspondent bank was defined in title
VIII of FIRA to include a bank as defined in the Bank Holding Company
Act. Title VIII was subsequently amended to include in the definition a
mutual savings bank, a savings bank, and a savings association as
defined in section 3 of the Federal Deposit Insurance Act. 12 U.S.C.
1971 and 1972(H). The Board proposed to amend the definition of bank in
subpart B of Regulation O to conform the rule to the statutory
amendments. See 58 FR 47400, September 9, 1993.
Comments were favorable, and the Board has adopted this provision
as proposed.
VIII. Technical Amendments
The Board has adopted a series of technical amendments to
Regulation O that are designed to make the regulation more easily
understandable and somewhat shorter. The amendments include a new
definition of ``affiliate,'' which makes the regulation read more
clearly and allows various cross-references and footnotes to be
eliminated. Because the technical amendments do not make any
substantive change to the regulation, notice and comment on them was
not required.
IX. Final Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an
agency to prepare a final regulatory flexibility analysis when the
agency promulgates a final rule. Two of the requirements of a final
regulatory flexibility analysis, a succinct statement of the need for
and objectives of the rule, and a summary and assessment of issues
raised by the public comments and of any changes made in the proposed
rule as a result thereof (5 U.S.C. 604(b)), are contained in the
summary and supplementary information above. No significant
alternatives to the final rule were considered by the agency.
X. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1980, 44 U.S.C.
3507, and 5 CFR 1320.130, the Board, under authority delegated by the
Office of Management and Budget, has reviewed its amendments to
Regulation O. The Board has determined that the revisions do not
significantly increase the burden of the reporting institutions. The
changes are expected to reduce regulatory burden for some banks,
particularly small community banks and rural banks, but the estimated
effect on aggregate burden calculations is not deemed to be
significant.
List of Subjects in 12 CFR Part 215
Credit, Penalties, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Board is amending 12
CFR part 215 as follows:
PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)
1. The authority citation for part 215 is revised to read as
follows:
Authority: 12 U.S.C. 248(i), 375a(10), 375b(9) and (10), 1817(k)
and 1972(2)(G)(ii); Pub. L. 102-242, 105 Stat. 2236.
Subpart A--Loans by Member Banks to Their Executive Officers,
Directors, and Principal Shareholders
2. 12 CFR part 215, subpart A, is amended by revising Secs. 215.1
through 215.13, to read as follows:
Sec. 215.1 Authority, purpose, and scope.
(a) Authority. This subpart is issued pursuant to sections 11(i),
22(g), and 22(h) of the Federal Reserve Act (12 U.S.C. 248(i), 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. This subpart A governs any extension of
credit by a member bank to an executive officer, director, or principal
shareholder of: The member bank; a bank holding company of which the
member bank is a subsidiary; and any other subsidiary of that bank
holding company. It also applies to any extension of credit by a member
bank to: A company controlled by such a person; and a political or
campaign committee that benefits or is controlled by such a person.
This subpart A also implements the reporting requirements of 12 U.S.C.
375a concerning extensions of credit by a member bank to its executive
officers and of 12 U.S.C. 1817(k) concerning extensions of credit by a
member bank to its executive officers or principal shareholders, or the
related interests of such persons.
Sec. 215.2 Definitions.
For the purposes of this subpart A, the following definitions apply
unless otherwise specified:
(a) Affiliate means any company of which a member bank is a
subsidiary or any other subsidiary of that company.
(b) 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. 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.
(c)(1) Control of a company or bank means that a person directly or
indirectly, 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 election of a majority of the
directors of the company or bank; or
(iii) Has the power to exercise a controlling influence over the
management or policies of the company or bank.
(2) A person is presumed to have control, including the power to
exercise a controlling influence over the management 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, controls, 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 indirectly owns, controls, or has
the power to vote more than 10 percent of any class of voting
securities of the company or bank; and
(B) No other person owns, controls, or has the power to vote a
greater percentage of that class of voting securities.
(3) An individual is not considered to have control, including the
power to exercise a controlling influence over the management or
policies, of a company or bank solely by virtue of the individual's
position as an officer or director of the company or bank.
(4) A person may rebut a presumption established by paragraph
(b)(2) of this section by submitting to the appropriate Federal banking
agency (as defined in 12 U.S.C. 1813(q)) written materials that, in the
agency's judgment, demonstrate an absence of control.
(d) Director of a member bank means any director of a member bank,
whether or not receiving compensation. An advisory director is not
considered a director if the advisory director:
(1) Is not elected by the shareholders of the company or bank;
(2) Is not authorized to vote on matters before the board of
directors; and
(3) Provides solely general policy advice to the board of
directors.
(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 the board, the
president, every vice president, the cashier, the secretary, and the
treasurer of a company or bank are considered executive officers,
unless the officer is excluded, by resolution of the board of directors
or by the bylaws of the bank or company, from participation (other than
in the capacity of a director) in major policymaking functions of the
bank or company, and the officer does not actually participate therein.
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\1\The term is not intended to include persons 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 standards 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 participate, in major policymaking
functions of the bank or company.
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(2) Extensions of credit to an executive officer of an affiliate of
a member bank (other than a company that controls the bank) shall not
be subject to Secs. 215.4, 215.6 and 215.8 of this part, provided that:
(i) The executive officer of the affiliate is excluded (by name or
by title) from participation in major policymaking functions of the
member bank by resolutions of the boards of directors of both the
affiliate and the member bank, and does not actually participate in
such major policymaking functions; and
(ii) The executive officer is not otherwise subject to such
requirements as a director or principal shareholder.
(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 officer, 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 Revised 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 capital and unimpaired surplus in the case of
loans that are fully secured by readily marketable collateral having a
market value, as determined by reliable 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 Revised Statutes for the types of obligations listed
therein as exceptions to the limit. A member bank's unimpaired capital
and unimpaired surplus equals the sum of:
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\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 established by applicable
State laws shall be the lending limit for the State member bank.
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(1) The ``total equity capital'' of the member bank reported on its
most recent consolidated report of condition filed under 12 U.S.C.
1817(a)(3);
(2) Any subordinated notes and debentures that comply with
requirements of the appropriate Federal banking agency for addition to
the member bank's capital structure and are reported on its most recent
consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and
(3) Any valuation reserves created by charges to the member bank's
income reported on its 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 insured (within the
meaning of 12 U.S.C. 1813(s)) and regardless of the operation 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 member bank or
company. Shares owned or controlled by a member of an individual's
immediate family are considered to be held by the individual.
(2) A principal shareholder of a member 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 committee that is controlled by that
person 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 include a subsidiary of a member bank.
Sec. 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 includes:
(1) A purchase under repurchase agreement of securities, other
assets, or obligations;
(2) An advance by means of an overdraft, 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 Sec. 208.8(d) of this
chapter;
(4) An acquisition by discount, purchase, 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 indebtedness, 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 expenses incidental to the existing
indebtedness;
(6) An advance of unearned salary or other unearned compensation
for a period in excess of 30 days; and
(7) Any other similar transaction as a result of which a person
becomes obligated 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 whatsoever.
(b) An extension of credit does not include:
(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 deposited 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 repaid, as
described in Sec. 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 assumes liabilities of another bank or
similar organization; or
(ii) Foreclosure on collateral or similar 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 acquisition,
subject to extension by the appropriate 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 against loss or of giving financial assistance to it;
(5) Indebtedness of $15,000 or less arising by reason of any
general arrangement by which a bank:
(i) Acquires charge or time credit accounts; 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 purposes of determining
authority to participate in the arrangement and compliance with any
dollar limit under the arrangement; and
(B) The indebtedness is incurred under terms that are not more
favorable than those offered to the general public;
(6) Indebtedness of $5,000 or less arising by reason of an
interest-bearing overdraft credit plan of the type specified in
Sec. 215.4(e) of this part; or
(7) A discount of promissory notes, bills of exchange, conditional
sales contracts, or similar paper, without recourse.
(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
uncollected items received in the ordinary course of business
considered to be a loan, advance or extension of credit to the
depositing bank.
(d) For purposes of Sec. 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 extension 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 transferred to the insider or are used for the tangible economic
benefit of the insider.
(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 Sec. 215.4(a) of this part for extensions of credit to
insiders; and
(ii) The proceeds of the extension of credit are used in a bona
fide transaction to acquire property, goods, or services from the
insider.
Sec. 215.4 General prohibitions.
(a) Terms and creditworthiness. No member bank may extend credit to
any insider of the bank or insider of its affiliates unless the
extension of credit:
(1) Is made on substantially the same terms (including interest
rates and collateral) as, and following credit underwriting procedures
that are not less stringent than, those prevailing at the time for
comparable transactions by the bank with other persons that are not
covered by this part and who are not employed by the bank; and
(2) Does not involve more than the normal risk of repayment or
present other unfavorable features.
(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 aggregated with the
amount of all other extensions of credit to that person and to all
related interests of that person, exceeds the higher of $25,000 or 5
percent 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 abstained 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 person, and all
related interests of that person, exceeds $500,000, except by complying
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 extension 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 extension of
credit. The extension of credit must also be in compliance with the
requirements of Sec. 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 extension of credit
constitutes indirect participation in the voting by the board of
directors on an extension of credit.
(c) Individual lending limit--No member bank may extend credit to
any insider of the bank or insider of its affiliates in an amount that,
when aggregated with the amount of all other extensions of credit by
the member bank to that person and to all related interests of that
person, exceeds the lending limit of the member bank specified in
Sec. 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 company.
(d) Aggregate lending limit --(1) General limit. A member bank may
not extend credit to any insider of the bank or insider of its
affiliates unless the extension 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 Sec. 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 capital 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 experience in lending to its insiders and is necessary to
attract or retain directors or to prevent restricting the availability
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 agency; and
(D) The bank received a satisfactory composite rating in its most
recent report 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 section 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 guaranteed as to
principal and interest by the United States;
(B) Extensions of credit to or secured by unconditional takeout
commitments or guarantees of any department, agency, bureau, board,
commission 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 segregated deposit account in the lending bank; or
(D) Extensions of credit arising from the discount of negotiable or
nonnegotiable 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
reasonably 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 directors 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 secured in the manner described therein.
(e) Overdrafts. (1) No member bank may pay an overdraft of an
executive officer or director of the bank3 on an account at the
bank, unless the payment of funds is made in accordance with:
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\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 prohibition also does not apply to the payment by a
member bank of an overdraft of a related interest of an executive
officer, director, or principal shareholder of the member bank.
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(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 payment 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 executive officer or director the
same fee charged any other customer of the bank in similar
circumstances.
Sec. 215.5 Additional restrictions on loans to executive officers of
member banks.
The following restrictions on extensions of credit by a member bank
to any of its executive officers apply in addition to any restrictions
on extensions of credit by a member bank to insiders of itself or its
affiliates set forth elsewhere in this part. The restrictions of this
section apply only to executive officers of the member bank and not to
executive officers of its affiliates.
(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 paragraphs (c) and
(d) of this section.
(b) No member bank may extend credit in an aggregate amount greater
than the amount permitted in paragraph (c)(3) of this section to a
partnership in which one or more of the bank's executive officers are
partners and, either individually or together, hold a majority
interest. For the purposes of paragraph (c)(3) of this section, the
total amount of credit extended by a member bank to such partnership is
considered to be extended to each executive 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 education of the executive
officer's children;
(2) With the specific prior approval of the board of directors, in
any amount to finance or refinance the purchase, construction,
maintenance, or improvement of a residence of the executive officer,
provided:
(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, together with the
closing costs of the refinancing, 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 Sec. 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this
part; and
(4) For any other purpose not specified in paragraphs (c)(1)
through (c)(3) of this section, if the aggregate amount of extensions
of credit to that executive officer under this paragraph does not
exceed at any one time the higher of 2.5 per cent of the bank's capital
and unimpaired surplus or $25,000, but in no event more than $100,000.
(d) Any extension of credit by a member bank to any of its
executive officers shall be:
(1) Promptly reported to the member bank's board of directors;
(2) In compliance with the requirements of Sec. 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 specified for a category of
credit in paragraph (c) of this section.
Sec. 215.6 Prohibition on knowingly receiving unauthorized extension
of credit.
No executive officer, director, or principal shareholder of a
member bank or any of its affiliates shall knowingly receive (or
knowingly permit any of that person's related interests to receive)
from a member bank, directly or indirectly, any extension of credit not
authorized under this part.
Sec. 215.7 Extensions of credit outstanding 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
Sec. 215.4(c) of this part, shall be reduced in amount by March 10,
1980, to be in compliance with the lending limit in Sec. 215.4(c) of
this part. Any renewal or extension of such an extension of credit on
or after March 10, 1979, shall be made only on terms that will bring
the extension of credit into compliance with the lending limit of
Sec. 215.4(c) of this part by March 10, 1980. However, any extension of
credit made before March 10, 1979, that bears a specific maturity date
of March 10, 1980, or later, shall be repaid in accordance with its
repayment schedule in existence on or before March 10, 1979.
(b) If a member bank is unable to bring all extensions of credit
outstanding on March 10, 1979, into compliance as required by paragraph
(a) of this section, the member bank shall promptly report that fact to
the Comptroller 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 extend
the March 10, 1980, date for compliance for any extension of credit for
not more than two additional one-year periods.
Sec. 215.8 Records of member banks.
(a) In general. Each member bank shall maintain records necessary
for compliance with the requirements of this part.
(b) Recordkeeping for insiders of the member bank. Any
recordkeeping method adopted by a member bank shall:
(1) Identify, through an annual survey, 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
recordkeeping method adopted by a member bank shall maintain records of
extensions of credit to insiders of the member 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 insiders; or
(2) Borrower inquiry method. (i) Requiring 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
extension 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 paragraphs (c)(1) and (c)(2) of this section if the
appropriate Federal banking agency 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
prohibited 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.
Sec. 215.9 Reports by executive officers.
Each executive officer of a member bank who becomes indebted to any
other bank or banks in an aggregate amount greater than the amount
specified for a category of credit in Sec. 215.5(c) of this part,
shall, within 10 days of the date the indebtedness reaches such a
level, make a written report to the board of directors of the officer's
bank. The report shall state the lender's name, the date and amount of
each extension of credit, any security for it, and the purposes for
which the proceeds have been or are to be used.
Sec. 215.10 Reports on credit to executive officers.
Each member bank shall include with (but not as part of) each
report of condition (and copy thereof) filed pursuant to 12 U.S.C.
1817(a)(3) a report of all extensions of credit made by the member bank
to its executive officers since the date of the bank's previous report
of condition.
Sec. 215.11 Disclosure of credit from member 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 person4
other than an insured bank, or a foreign bank as defined 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 person that controls a principal
shareholder (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 presumed to be owned or controlled by the
individual for the purposes of determining principal shareholder
status.
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\4\ The term ``stockholder of record'' appearing in 12 U.S.C.
1972(2)(G) is synonymous with the term ``person.''
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(2) Related interest means:
(i) Any company controlled by a person; or
(ii) Any political or campaign committee the funds or services of
which will benefit a person or that is controlled by a person. For the
purpose of this section and subpart B of this part, a related interest
does not include a bank or a foreign bank (as defined 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 outstanding 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 percent of the member
bank's capital and unimpaired surplus of $500,000, whichever 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 officer or principal shareholder of the
member bank and to all related interests of such a person does not
exceed $25,000.
(2) A member bank is not required to disclose the specific amounts
of individual extensions of credit.
(c) Maintaining records. Each member bank shall maintain records of
all requests 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.
Sec. 215.12 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 annually 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.
Sec. 215.13 Civil penalties.
Any member bank, or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of the bank,
that violates any provision of this part (other than Sec. 215.11 of
this part) is subject to civil penalties as specified in section 29 of
the Federal Reserve Act (12 U.S.C. 504).
Subpart B--[Amended]
Sec. 215.21 [Amended]
3. Section 215.21 is amended by removing ``1841(c)'' where it
appears in paragraph (a) and adding in its place ``1971 and 1972'' and
by removing footnote 10 and redesignating footnotes 11 and 12 as
footnotes 5 and 6.
Sec. 215.22 [Amended]
4. Section 215.22 is amended by removing ``12 CFR 226.2(p)'' where
it appears in paragraph (c)(1)(ii) and adding in its place ``12 CFR
226.2(a)(12)''.
By order of the Board of Governors of the Federal Reserve
System, February 15, 1994.
Dated: February 15, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-3860 Filed 2-18-94; 3:20 pm]
BILLING CODE 6210-01-P