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FEDERAL RESERVE SYSTEM
12 CFR Part 215
Regulation O; Docket No. R-1740
RIN 7100-AG 10
Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for comment.
SUMMARY: On April 17 and July 15, 2020, the Board issued two interim final rules to except
certain loans made through June 30 and August 8, 2020, respectively, that are guaranteed under
the Small Business Administration’s Paycheck Protection Program from the requirements of
section 22(h) of the Federal Reserve Act and the Board’s Regulation O. The Board is issuing
this interim final rule to further extend this relief to PPP loans, including PPP second draw loans,
made through March 31, 2021.
DATES: This interim final rule is effective [INSERT DATE OF PUBLICATION IN THE
FEDERAL REGISTER]. Comments on the interim final rule must be received no later than
[INSERT DATE 45 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL
REGISTER].
ADDRESSES: You may submit comments, identified by Docket No. R-1740 and RIN 7100
AG 10, by any of the following methods:
•

Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting
comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

•

Email: regs.comments@federalreserve.gov. Include docket and RIN numbers in the
subject line of the message.

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•

Fax: (202) 452-3819 or (202) 452-3102.

•

Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue NW, Washington, DC 20551.
All public comments will be made available on the Board’s web site at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified
for technical reasons or to remove personally identifiable information at the commenter’s request.
Accordingly, comments will not be edited to remove any identifying or contact information. Public
comments also may be viewed electronically or in paper form in Room 146, 1709 New York
Avenue NW, Washington, DC 20006, between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT:
Benjamin McDonough, Associate General Counsel, (202) 452-2036, Alison Thro,
Deputy Associate General Counsel, (202) 452-3236, Dan Hickman, Senior Counsel, (202) 9737432, Josh Strazanac, Senior Attorney, (202) 452-2457, Jasmin Keskinen, Attorney, (202) 4756650, Legal Division; or Anna Lee Hewko, Associate Director, (202) 530-6360, Juan Climent,
Assistant Director, (202) 872-7526, (202) 452-5239, Kathryn Ballintine, Manager, (202) 4522555, Rebecca Zak, Lead Financial Institution Policy Analyst, (202) 912-7995, Eusebius Luk,
Senior Financial Policy Analyst I, (202) 452-2874, Division of Supervision and Regulation;
Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW,
Washington, DC 20551. Users of Telecommunication Device for Deaf (TDD) only, call (202)
263-4869.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background

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II. The Interim Final Rule
III. Administrative Law Matters
A. Administrative Procedure Act
B. Paperwork Reduction Act
C. Regulatory Flexibility Act
D. Riegle Community Development and Regulatory Improvement Act of 1994
E. Use of Plain Language
I. Background
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and
Economic Security (CARES) Act which, among other things, created the Paycheck Protection
Program (PPP) to facilitate lending to small businesses affected by the outbreak of COVID-19
and imposition of associated containment measures (COVID event). Although the CARES Act
specified that the PPP would end on June 30, 2020, it was later extended to August 8, 2020.1 On
December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021
(Appropriations Act), which further extended the PPP to March 31, 2021.2 The Appropriations
Act also created “PPP second draw loans,” which are substantially similar to the PPP loans that
have been made to date.3
Regulation O sets forth quantitative and qualitative requirements for loans made by a
bank4 to its directors, executive officers, and principal shareholders, as well as to any companies

1

Prioritized Paycheck Protection Program Act, S. 4116, 116th Cong. section 1 (2020).

2

Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. section 323 (2020).

3

Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. section 311.

4

Sections 22(g) and 22(h), and Regulation O, apply to all banks that are members of the Federal
Reserve System. Other federal law subjects federally insured state non-member banks and
insured savings associations to sections 22(g) and 22(h) in the same manner and to the same
extent as if they were member banks. 12 U.S.C. 1828(j) (non-member banks); 12 U.S.C. 1468(b)
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owned by such persons (collectively, insiders).5 Regulation O also sets forth procedural and
recordkeeping requirements for loans by banks to their insiders. These requirements normally
would apply to PPP loans made by banks to the small businesses owned by their insiders. In
some cases, the restrictions in Regulation O could delay or entirely prohibit a bank from making
a PPP loan to such a business. This could be particularly challenging in small communities
where bank insiders often own small businesses and there are few alternative lenders.
On April 17, 2020, the Board issued an exception to section 22(h) of the Federal Reserve
Act6 and the corresponding provisions of Regulation O for PPP loans made to insiders that
would not be prohibited from receiving a PPP loan under the Small Business Administration
(SBA) lending restrictions (original IFR).7 The exception was intended to facilitate lending by
banks to a broad range of small businesses within their communities, consistent with applicable
law and safe and sound banking practices. The exception applied only to PPP loans made by
June 30, 2020, the original date on which the PPP was set to expire. The Board extended the
exception after Congress extended the PPP.8
The Board received a dozen comments in response to the IFRs it issued in April and July
from one trade association, several small businesses, and several individuals. Most of the

(savings associations); 12 CFR 337.3 (state non-member banks and state savings associations);
12 CFR 31.2 (national banks and federal savings associations). Accordingly, any reference to
“bank” in this notice applies to all member banks and institutions subject to sections 22(g) and
22(h) in the same manner and to the same extent as member banks.
5

See generally 12 CFR part 215.

6

12 U.S.C. 375b.

7

“Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks,”
85 FR 22345 (Apr. 22, 2020)).
8

“Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks,”
85 FR 43119 (July 16, 2020)).
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comments expressed support for the Board’s relief, indicating that it would bolster the
effectiveness of the PPP in providing support to small businesses. Several raised issues related
to the terms and administration of the PPP. One commenter asserted that no bank executives
should receive loans from their banks in excess of $15,000 because executives could take
advantage of their banks to the detriment of depositors.
In response to comments about the terms and administration of the PPP, the Board notes
that the SBA is the agency responsible for setting forth the requirements and administering the
program. Any comments concerning those matters are properly addressed to the SBA.
Regarding one commenter’s suggestion that no executive should be able to borrow more than
$15,000 from its banks because executives could exert undue influence and cause harm to a
bank, the Board notes that PPP loans have standardized terms and are fully guaranteed as to
principal and interest by the U.S. government. Accordingly, a bank may not amend the terms of
a PPP loan to be unduly favorable to an executive and the bank is unlikely to suffer a loss
because of the loan guarantee. The Board also notes that the relief only extends to insiders who
would not be prohibited from receiving a PPP loan by the SBA’s lending restrictions, which
currently prohibit an “officer” from receiving a PPP loan from his or her bank.9
The Board is issuing this interim final rule to extend the exception to PPP loans made
through March 31, 2021, and to PPP second draw loans.

9

13 CFR 120.110 (prohibiting an “Associate” of a lender from receiving a loan made by the
lender pursuant to section 7(a) of the Small Business Act); 13 CFR 120.10 (defining “Associate
of a Lender” to include “an officer”).
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II. The Interim Final Rule
Section 22(h) authorizes the Board to adopt, by regulation, exceptions to the definition of
“extension of credit” in section 22(h) for transactions that “pose minimal risk.” 10 Therefore, the
Board may except PPP loans and PPP second draw loans from the restrictions in section 22(h)
and the corresponding provisions of Regulation O upon a determination that such loans pose
minimal risk.
The Board determined in the original IFR that PPP loans pose minimal risk.11 Among
other things, this determination relieved member banks from ensuring that PPP loans made to
certain insiders complied with the qualitative, quantitative, and procedural requirements set forth
in section 22(h) and Regulation O. The Appropriations Act did not change any of the features of
PPP loans on which the Board relied in the original IFR to determine that PPP loans pose
minimal risk. Moreover, under the Appropriations Act, PPP second draw loans have the same
features as PPP loans, except that fewer borrowers are eligible for PPP second draw loans as for
PPP loans.12 Accordingly, for the same reasons cited in the original IFR, the Board has
determined that PPP loans and PPP second draw loans appear to pose minimal risk to bank safety
and soundness.13
SBA lending restrictions continue to apply to certain PPP loans and PPP second draw
loans that also would be subject to section 22(h) and the corresponding provisions of

10

12 U.S.C. 375b(9)(D)(ii).

11

85 FR 22346.

12

For example, only borrowers who already have received a PPP loan may obtain a PPP second
draw loan. PPP Second draw loans also are only available to employers with 300 or fewer
employees. Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. section 311.
13

85 FR 22345, 22346 (Apr. 22, 2020); 85 FR 43119, 43119-20 (July 16, 2020).
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Regulation O.14 Excepting loans that would be prohibited by the SBA lending restrictions from
the requirements of section 22(h) and the corresponding provisions in Regulation O would not
achieve any meaningful regulatory purpose. Excepting these loans from one regime and not the
other also may create confusion because some lenders may mistakenly interpret an exception
under one regime to extend to both regimes. Accordingly, the exception continues to apply only
for insiders that would not be prohibited from receiving a PPP loan or PPP second draw loan by
the SBA lending restrictions.
This interim final rule does not except a PPP loan or PPP second draw loan from other
restrictions that may apply to the loan, including section 22(g) of the Federal Reserve Act or
section 215.5 of Regulation O.15 This determination also does not affect application of SBA
lending restrictions to a PPP loan or PPP second draw loan. The SBA has stated that
“[f]avoritism by [a PPP] [l]ender in processing time or prioritization of [a] director’s or equity
holder’s PPP application is prohibited.”16 The Board will administer the interim final rule
accordingly.
Question 1: Are there any additional terms or conditions that should apply to the
exception? Why?
Question 2: Based on the experience with the PPP program, what, if any, terms or
conditions for PPP second draw loans would make it unreasonable for such loans to be
exempted from the requirements of section 22(h)?

14

Business Loan Program Temporary Changes; Paycheck Protection Program as Amended by
the Economic Aid Act, 86 FR 3712 (Jan. 6, 2021).
15

12 U.S.C. 375a; 12 CFR 215.5.

16

Id. at 14-15.
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III. Administrative Law Matters
A. Administrative Procedure Act
The Board is issuing the interim final rule without prior notice and the opportunity for
public comment and the delayed effective date ordinarily prescribed by the Administrative
Procedure Act (APA).17 Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a rulemaking when an “agency
for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the
rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary
to the public interest.”18
The Board believes that the public interest is best served by implementing the interim
final rule immediately in light of the short timeframe for execution of the renewed PPP mandated
by the Appropriations Act. Accordingly, the Board finds that there is good cause consistent with
the public interest to issue the rule without advance notice and comment.19
The APA also requires a 30-day delayed effective date, except for (1) substantive rules
which grant or recognize an exemption or relieve a restriction; (2) interpretative rules and
statements of policy; or (3) as otherwise provided by the agency for good cause.20 Because the
rules relieve a restriction by providing an exception to the definition of “extension of credit” in
section 22(h) and Regulation O, the interim final rule is exempt from the APA’s delayed
effective date requirement.21

17

5 U.S.C. 553.

18

5 U.S.C. 553(b)(B).

19

5 U.S.C. 553(b)(B); 553(d)(3).

20

5 U.S.C. 553(d).

21

5 U.S.C. 553(d)(1).
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While the Board believes that there is good cause to issue the rule without advance notice
and comment and with an immediate effective date, the Board is interested in the views of the
public and requests comment on all aspects of the interim final rule.
B. Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. 3501–3521) (PRA) states that no agency may
conduct or sponsor, nor is the respondent required to respond to, an information collection unless
it displays a currently valid OMB control number. On June 15, 1984, OMB delegated to the
Board authority under the PRA to approve and assign OMB control numbers to collections of
information conducted or sponsored by the Board, as well as the authority to temporarily
approve a new collection of information without providing opportunity for public comment if the
Board determines that a change in an existing collection must be instituted quickly and that
public participation in the approval process would defeat the purpose of the collection or
substantially interfere with the Board’s ability to perform its statutory obligation.
This interim final rule does not contain any collections of information subject to the PRA.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)22 requires an agency to consider whether the rules
it proposes will have a significant economic impact on a substantial number of small entities.23
The RFA applies only to rules for which an agency publishes a general notice of proposed
rulemaking pursuant to 5 U.S.C. 553(b). As discussed previously, consistent with section
553(b)(B) of the APA, the Board has determined for good cause that general notice and

22

5 U.S.C. 601 et seq.

23

Under regulations issued by the SBA, a small entity includes a depository institution, bank
holding company, or savings and loan holding company with total assets of $600 million or less
and trust companies with total assets of $41.5 million or less. See 13 CFR 121.201.
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opportunity for public comment are unnecessary, and therefore the Board is not issuing a notice
of proposed rulemaking. Accordingly, the Board has concluded that the RFA’s requirements
relating to initial and final regulatory flexibility analysis do not apply.
Nevertheless, the Board seeks comment on whether, and the extent to which, the interim
final rule would affect a significant number of small entities.
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and Regulatory
Improvement Act (RCDRIA),24 in determining the effective date and administrative compliance
requirements for new regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions (IDIs), the federal banking agencies must
consider, consistent with the principle of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository institutions, including
small depository institutions, and customers of depository institutions, as well as the benefits of
such regulations. In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting, disclosures, or other new
requirements on IDIs generally to take effect on the first day of a calendar quarter that begins on
or after the date on which the regulations are published in final form, with certain exceptions,
including for good cause.25 The Board believes that the public interest is best served by
implementing the interim final rule immediately. As discussed in the original IFR, the COVID
event has disrupted economic activity in the United States and other countries. The magnitude
and persistence of the COVID event on the economy remain uncertain. In light of the substantial

24

12 U.S.C. 4802(a).

25

12 U.S.C. 4802.
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disruptions in the economy, and the likelihood that this interim final rule would help ameliorate
those disruptions by promoting lending to small businesses, the Board finds good cause exists
under section 302 of RCDRIA to publish this interim final rule with an immediate effective date.
As such, the interim final rule will be effective immediately on publication.
Nevertheless, the Board seeks comment on RCDRIA.
E. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act26 requires the federal banking agencies to
use plain language in all proposed and final rules published after January 1, 2000. The Board
has sought to present the interim final rule in a simple and straightforward manner. The Board
invites comments on whether there are additional steps it could take to make the rule easier to
understand. For example:
•

Have we organized the material to suit your needs? If not, how could this material
be better organized?

•

Are the requirements in the regulation clearly stated? If not, how could the
regulation be more clearly stated?

•

Does the regulation contain language or jargon that is not clear? If so, which
language requires clarification?

•

Would a different format (grouping and order of sections, use of headings,
paragraphing) make the regulation easier to understand? If so, what changes to
the format would make the regulation easier to understand?

•

26

What else could we do to make the regulation easier to understand?

12 U.S.C. 4809.
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List of Subjects
12 CFR Part 215
Credit, Penalties, Reporting and Recordkeeping Requirements.
Authority and Issuance
For the reasons stated in the preamble, the Board of Governors of the Federal Reserve
System amends 12 CFR chapter II 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(a), 375a(10), 375b(9) and (10), 1468, 1817(k), 5412; and Pub.
L. 102-242, 105 Stat. 2236 (1991) (12 U.S.C. 1811 note)
2. In § 215.3, revise paragraphs (b)(8)(i)-(iii) to read as follows:
§ 215.3 Extension of credit.
*

*

*

*

*

(b) * * *
(8) * * *
(i) Made pursuant to the “Paycheck Protection Program” in which the participation by the
Small Business Administration on a deferred basis is 100 percent pursuant to section 1102 of
Pub. L. 116-136 or section 311 of Pub. L. 116-260;

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(ii) That is made during the period beginning on February 15, 2020, and ending on
March 31, 2021; and
(iii) That would not be prohibited by 13 CFR 120.110(o) or rules or interpretations
thereof issued by the Small Business Administration.
*

*

*

*

*

By order of the Board of Governors of the Federal Reserve System, February 9, 2021.
Ann Misback,
Secretary of the Board.

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