Full text of District Notices (Federal Reserve Bank of Dallas) : Final Amendments to Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks), Notice 94-31

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Federal R eserve Bank
O F DALLAS
R O B E R T D. M cT E E R , J R .
PRESIDE NT
AND C H IE F E X E C U T IV E O F F I C E R

March 14, 1994

DALLAS, TEXAS
75 265-590 6

Notice 94-31
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Final Amendments to Regulation 0
(Loans to Executive O ffic e rs , D irectors, and
Principal Shareholders o f Member Banks)
DETAILS

The Board of Governors of the Federal Reserve System announced
approval of a final rule amending several provisions of Regulation 0 (Loans to
Executive Officers, Directors, and Principal Shareholders of Member Banks).
The first amendment makes permanent an interim rule increasing
Regulation 0 ’s aggregate lending limit for small, adequately capitalized banks
from 100 percent of a bank’s unimpaired capital and surplus to 200 percent.
The second set of amendments is designed to reduce the burden and complexity
of the regulation. These amendments clarify the "tangible economic benefit"
rule, provide certain exceptions to the lending limit for insiders, permit
banks to follow alternative recordkeeping procedures, and narrow the
definition of "extension of credit."
Additionally, the final rule implements technical amendments to
Regulation 0 in order to make it more readily understandable and somewhat
shorter.
The rule became effective February 18, 1994.
ATTACHMENT

A copy of the Board’s notice as it appears on pages 8831-42, Vol.
59, No. 37, of the Federal Register dated February 24, 1994, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

MORE INFORMATION

For more information, please contact Jane Anne Schmoker at (214)
922-5101. For additional copies of this Bank’s notice, please contact the
Public Affairs Department at (214) 922-5254.
Sincerely yours,

Federal Register / Vol. 59, No. 37 / T h ursday, February 24, 1994 / Rules a n d Regulations
increased from 100 percent of
unim paired 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
m inor revisions clarifying certain
exemptions and conforming certain
provisions to the enabling statutes are
included as well.
EFFECTIVE DATE: Effective February 18,
1994.

8831

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
FOR FURTHER INFORMATION CONTACT:
the Federal Deposit Insurance
Gregory Baer. Senior Attorney (202/
Corporation Improvement Act of 1991
452-3236), Gordon Miller, Attorney
(FDICIA) >amended section 22(h) to
(202/452-2534), or Stephen Van Meter,
impose an aggregate limit on the amount
Attorney (202/452-3554), Legal
a bank may lend to its insiders as a
Division; Stephen M Lovette, Manager
class. See 12 U.S.C. 375b(5). In general,
of Policy Implementation (202/452the limit is equal to 100 percent of the
3469), or Mark Benton, Senior Financial bank’s unim paired capital and
Analyst (202/452-5205), Division of
unim paired surplus. The Board is
Banking Supervision and Regulation,
authorized, however, to make
Board of Governors of the Federal
exceptions to the general limit for banks
Reserve System. For the hearing
with deposits of less than $100 million
impaired only, Telecommunications
“ if the Board determines that the
Device for the Deaf (TDD), Dorothea
exceptions are important to avoid
Thompson (202/452-3544), Board of
constricting the availability of credit in
Governors of the Federal Reserve
small communities or to attract directors
System, 20th & C Streets, NW.,
of such banks." 12 U.S.C. 375b(5)(C).
Washington, DC 20551.
The higher limit may not exceed 200
percent of the bank’s unimpaired capital
SUPPLEMENTARY INFORMATION:
and unim paired surplus. Id.
I. Background
Effective May 18,1992, the Board
The Board is making permanent, with amended Regulation O, which
certain additional qualifications, its
implements section 22(h), to incorporate
interim rule permitting small,
the aggregate lending limit added by
adequately capitalized banks to extend
FDICIA. The general limit on lending to
credit to insiders up to 200 percent of
insiders and their related interests—100
unim paired capital and surplus, in
percent of the bank’s unim paired capital
circumstances where such lending is
and unim paired surplus—was adopted.
necessary to serve local credit needs or
The Board also decided as an interim
to attract directors. The Board also is
measure to perm it banks with deposits
adopting amendments to Regulation O
under $100 million to adopt a higher
(12 CFR part 215) designed to increase
limit, not to exceed 200 percent of the
the ability of banks to make extensions
bank’s unim paired capital and
FEDERAL RESERVE SYSTEM
of credit that pose minimal risk of loss,
unim paired surplus, for a period of one
to eliminate recordkeeping requirements year to expire May 18,1993. The
12 CFR Part 215
that impose a paperwork burden but do
interim period was intended to allow
[Regulation O; Docket Nos. R-0800 and R not significantly aid compliance with
the Board to consult with the other
0809]
the regulation, and to remove certain
federal banking agencies and collect
transactions
from
the
regulation’s
data
on the lending practices of banks
Loans to Executive Officers, Directors,
in order to analyze the effect of the
and Principal Shareholders of Member coverage consistent with bank safety
and soundness. The above amendments aggregate lending limit on the
Banks; Loans to Holding Companies
are expected to increase the availability
availability of credit and service of
and Affiliates
of credit, particularly in communities
directors. See 57 FR 22417, 22420, May
AGENCY: Board o f Governors of the
served by small banks, and to reduce the 28,1992.
cost of compliance w ith the regulation.
Federal Reserve System.
The Board subsequently extended the
In view of the extensive changes made interim rule for six months, through
ACTION: F in a l r u le .
to Regulation O as a result of this
November 18,1993, in order to obtain
SUMMARY: The Board is revising
rulemaking, the Board is restating
public comments on whether the
subpart A of Regulation O as amended,
Regulation O to permit the aggregate
rather than separately describing each
limit on lending to insiders by eligible,
>Pubic Law 102-242, Section 306.105 Slat. 2236
(1991).
adequately capitalized small banks to be amendment.

8832

Federal Register / Vol. 59, No. 37 / T hursday, F ebruary 24, 1994 / R ules a n d Regulations

interim rule should be made permanent,
modified, or penmitted 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 w ritten 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 unim paired capital and
unim paired 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 unim paired 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 m illion, 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, sixtytwo 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 lim it was a particular
hardship in « n a ll 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 unim paired 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

Federal Register / Vol. 59, No. 37 / T h ursd ay , F ebruary 24, 1994 / R ules a n d R egulations
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
m aintain 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.

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 w ith 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.
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 m ethods were identified:
III. Recordkeeping Procedures
(1) The “survey” method currently
Section 215.8 of Regulation O
required, under w hich all insiders are
currently requires that each bank
asked annually to identify all their
maintain records necessary for
related interests; and (2) the “borrower
compliance w ith the insider lending
inquiry” method, under which the bank
restrictions of Regulation O.
would (a) ask each commercial borrower
Specifically, banks are required to
as part of the loan application process
maintain records (1) identifying all
whether it is a related interest of an
directors, officers, and principal
insider of the bank, and (b) maintain a
shareholders of the bank and its
record of each affirmative response.
affiliates and all related interests of
Finally, the proposed rule sought
those persons (collectively, “insiders”), comment on whether any other
and (2) specifying the amounts and
recordkeeping methods would be
terms of all credit extended to these
effective in monitoring compliance with
insiders. Section 215.8 further requires
Regulation O.
each bank to request on an annual basis
The draft GAO report, discussed
that its insiders and insiders of its
above, urged the federal bank agencies
affiliates identify their related interests.
to emphasize the importance of accurate
The list of insiders is then used by the
and complete insider recordkeeping.
bank to identify all existing or proposed Management recordkeeping failures, the
extensions of credit covered by
GAO argued, were indicative of larger
Regulation O, to m onitor the amount
bank management problems, and
thereof subject to the individual and
management solutions in this area, the
GAO reasoned, would contribute to the
aggregate lending limits, and to ensure
that all appropriate approval procedures resolution of management’s larger
are followed.
problems. The Board believes that the
Since adoption of the initial
proposed recordkeeping amendments,
recordkeeping requirement, the annual
which attempt to eliminate unnecessary
survey has grown in size and
recordkeeping and allow for alternative
complexity. Bank holding companies
methods of recordkeeping, are
have become increasingly large and
consistent with the GAO’s
diversified, and commercial
recommendations.
organizations have acquired credit card
2 See 12 U.S.C. 1641(c)(2).
banks and limited purpose banks. Thus,

8833

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 0 . 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

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Federal Register / Vol. 59, No. 37 / T h ursday, F ebruary 24, 1994 / R ules a n d R egulations

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
m ust 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
For example, a nonbank credit card bank, in
order to maintain its exception from the definition

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’sIV. Definition of Extension of Credit
length 4 extension of credit by a bank to
a third party where the proceeds of the
The Board proposed three
credit are used to finance the bona fide
amendments to the definition of
“extension of credit” in Regulation O: a acquisition of property, goods, or
services from an insider or an insider’s
clarification of the “tangible economic
related interest.
benefit” rule; a new exception for the
Commenters supported the proposal,
discount by a bank of obligations sold
and no adverse comments were
by an insider w ithout recourse; and an
received. Three commenters objected to
increase in the threshold for treating
the requirement that any arm ’s-length
credit card debt as an extension of
loan satisfy the non-preferential
credit. See 58 FR 47400, September 9,
provisions for insider loans found in
1993.
§ 215.4(a), labelling that requirement
A. “Tangible Economic Benefit” Rule
overly restrictive. The Board has
retained the requirement, however, that
Regulation O provides that an
loans be on non-preferential terms, in
extension of credit is deemed to be
order to prevent banks from
made to an insider when the proceeds
participating in commercial promotions
of the credit are used for the tangible
that benefit the bank’s insiders to the
economic benefit of, or are transferred
detrim ent of the bank.5
to, the insider. 12 CFR 215.3(f). These
Continuing to be covered by the
extensions of credit are thereby counted
tangible economic benefit rule are
toward the lending limits of Regulation
extensions of credit to an insider’s
O.
nominee and transactions in which the
Following the enactment of FDICIA,
proceeds of the credit are loaned to an
which expanded the lending limit
provision of section 22(h) of the Federal insider. The Board also notes that
provisions of the definition of
Reserve Act to cover directors and their
“extension of credit” outside the
related interests, questions were raised
more frequently regarding the scope and tangible economic benefit rule will
continue to reach transactions in which
proper application of the tangible
an insider actually becomes obligated to
economic benefit rule. If interpreted
a bank, “whether the obligation arises
literally, the tangible economic benefit
directly or indirectly, or because of an
rule would apply whenever a bank
extended credit to any person, including endorsement on ail obligation or
otherwise, or by any means
a member of the general public with no
whatsoever.”
12 CFR 215.3(a)(8).
other relationship to the bank, and the
proceeds of the extension of credit were B. Discount o f Obligations without
transferred to or used for the benefit of
Recourse
an insider or an insider’s related
Regulation O includes w ithin the
interest. For example, as one commenter definition of “extension of credit” any
noted, loans on non-preferential terms
“discount of promissory notes, bills of
to members of the general puhlic to
exchange, conditional sales contracts, or
purchase homes from a builder who is
similar-paper, whether with or without
a director of the bank would be treated
as loans to the builder/director.
4 In order to satisfy this requirem ent, the
The tangible economic benefit rule is
extension of credit to the general public m ust be on
similar to a provision contained in
term s that w ould satisfy the standard set forth in
§ 215.4 of Regulation O if the extension of credit
section 23A of the Federal Reserve Act,
was being m ade directly to an insider or an
and was adopted at a time when the
in sid er’s related interest.
Board was required by section 22(h) of
’ One other com m enter sought clarification on
the Federal Reserve Act to use the
the relationship between the tangible econom ic
definition of “extension of credit” found benefit rule and another rule in Regulation O that
states that loans m ade by a bank to a partnership
in section 23A. See Public Law 95-630
in w hich one or more executive officers of the bank
Section 104, 92 Stat. 3644 (1978). The
ho ld a m ajority interest are to be attributed in full
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 w ith respect to related
interests is unnecessarily burdensome.

of "b an k ” in the Bank Holding Com pany Act, may
not engage in the business of m aking com m ercial
loans. See 12 U.S.C. 1841(c)(2)(E).

to each of the executive officers. 12 CFR 215.5(b).
T he introductory portion of § 215.5 has been
revised to clarify the interplay betw een § 215.5 and
the general provisions of Regulation O.

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Rules and Regulations
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.* However, the current statutory
definition does not require the inclusion
of such items where the transaction is
made w ithout recourse to the
transferor.? 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 w ould continue to be covered
under other provisions of the definition.
See 12 CFR 215.3(a)(4) and (8).
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
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
•T h e current definition o f "extension of cred it'’
in Regulation O was adopted in 1979, w hen the
Board substantially am ended the regulation in order
to im plem ent the Financial Institutions Regulatory
Act of 1978 (FIRA), Public Law 95-630 Section 104,
92 Stat. 3644 (1978). 44 FR 12963, M arch 9.1979.
FIRA added section 22(h) to the Act, w hich in turn
incorporated the definition of "extension of cred it"
contained in section 23A. At that tim e, section
23A’s definition Included the above-referenced
provision concerning the discount of paper
acquired w ith or w ithout recourse. See Public Law
69-485 Section 12, 80 Stat. 241 (1966).
7 The statutory cross-reference to section 23A w as
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), w hich applies w henever a m em ber
bank m akes or renew s a loan, grants a line of credit,
or enters into any sim ilar transaction as a result of
w hich a person becomes obligated to pay m oney 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.
®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.

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 openend 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

8835

prohibiting payment of overdrafts over
$5,000 pursuant to a permissible preapproved 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.
The legislative history of HCDA states
that the Board should make a “zerobased 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
’ Public Law 102-550 Section 9 5 5,106 Stat. 3672
(1992).
10 See 138 Cong. Rec. S17.914-15 (daily ed.
O cto b ers. 1992).
11 Although extensions o f credit m ade in
conform ity w ith the proposed exception w ould not
count tow ard a bank's aggregate lending lim it, such
extensions of credit w ould 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.
All interpretations by the Com ptroller of the
Currency of the exceptions contained in 12 U.S.C.
C ontir.je d

M 38

Federal Register > Vol. 58, No. 3? / Thursday, February 24* "1994 / Rules and Regulations

exception to th a individual leading
lim it in Regulation Q. See 12 U.S.C
84(cK»X 12 CFR 215.2(h) and 215.4(c).
Commenters generally supported the
new exception, an d no adverse
comments were received. Three
commenters argued that the proposed
requirement that a designated officer of
the bank certify in writing that th e bank
is relying primarily upon the m aker of
the discounted paper was too
burdensome because it did n ot
accommodate itself to bulk transactions
in w hich the bank m ay 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 m aintain
consistency with that A c t
Concerning consumer lease paper, the
Board notes that an interpretative letter
concerning the circum stances under
w hich a lease transaction may be
considered to be an extension of credit
for purposes of Regulation O h as
previously been issued. See
Interpretative Letter dated A pril &, 1976.
The Board believes that it w ould be
more appropriate to provide further
guidance as to the treatment of
particular transactions under Regulation
O on a case-by-case basis.
A dditional 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 w ould require statutory
change.
VI. Loans to Executive Officers
The Board proposed three
amendments to die 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
84 a r» applicable to Regulation O to the extent that
these exceptions are incorporated b y reference into
or otherw ise adopted in Regulation O.

category of borne mortgage loans; and a
restatement of the prior approval
requirement in section 22(g) of the
Federal Reserve A ct See 58 FR 47400,
September &, 1993.
A General Purpose Loans
Section 22(g) of d ie 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 lim ited to an amount equal to the
greater of $25,000 or 2.5 percent of d ie
bank's capital and unim paired 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 th e general individual
and aggregate lending lim its applicable
to all insiders under §215.4 of
Regulation 0 . 12 CFR 215.5(c)(1) and
(2). Also, unlike the general individual
and aggregate lending lim its, there has
been no exception to the executive
officer lending limit based on the
m anner 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 Stales or other
obligations fully guaranteed as to
principal and interest by the United
States; (b) commitments, or guarantees of
a departm ent 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
m inim al risk of loss to a bank. See 58
FR 26507, May 4,1991. In view of this
determination, the Board has concluded
that it is consistent w ith 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, th e 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 adop ted Nine
commenters requested" that the current
$100,000 cap on general purpose loans
be increased, and tw o commenters
suggested that the cap be elim inated
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 m ore readily to
loans made in a commercial context
rather than to personal loans. Section
215.5 prim arily governs personal loans,
however, an d die additional proposals
therefore are neither necessary nor
appropriate. T he Board also considers it
more appropriate to reconsider th e
appropriate lending Umit far executive
officers in connection w ith a m ore
general review of executive officer
restrictions. Finally, th e 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 w ill provide any fiirther guidance
on this issue on a case-by-case basis.
B. Refinancing o f Home Mortgage Loans
Section 22(g) of die Federal Reserve
Act provides that s hank m ay make a
loan to its executive officer, w ithout
restriction as to amount, if th e loan is
secured by a first hen cm a dwelling that
is owned by the executive officer and
used by the executive officer as a
residence after th e loan is made. 12
U.S.C 375a(2). Section 215.5(cM2}of
Regulation O implements this provision,
and sets forth additional restrictions on
such loans.
The Board proposedto revise the
regulation to provide clearly that the
refinancing of a home mortgage loan is
included w ithin this category to the
extent that the proceeds are used to pay
off the prior hom e mortgage loan or for
one or more of the permissible purposes
enum erated 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 o f 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

Federal Register / Vol. 59; No.; 27 /.• Thursday, February 24, 1994 /.*Riilbs andR egulations
375a(2). Regulation Q, 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 § 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.

V m . 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 crossreferences 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.

VII. Conforming Definition of “Bank”

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.

Subpart B of Regulation O partially
implem ents the reporting requirements
of title VIII of FIRA, as amended by the
Gam-St. Germain Depository
Institutions Act of 1982 « 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.
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 VIE 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.
>3Public Law 97-320. 96 Stat. 1469 (1982).

DC. 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.

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) ai>d 1972(2)(G)(ii);
Pub. L. 1 0 2 - 2 4 2 ,1 0 5 Stat. 2236.

6837

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 §§ 215.1 through
215.13, to read as follows:
§ 215.1

Authority, purpose, and scope.

(a) Authority. This subpart is issued
pursuant to sections ll(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. 102242, 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.
§215.2

Definitions.

For the purposes of this subpart A, the
following definitions apply unless
otherwise specified:
(a) A ffiliate 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 o f a com pany 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;

8838

Fedm l Register I Vol. 53, No. 37 I Thursday, February 24, 1994 / Rules and Regulations

Centrals- in any m anner t i e
election ef a majority of the* directors of
the com pany or bank; o r
(iii) Has the power to exercise a
controlling influence crver the
management or policies of the company
or baric.
(2) A person is presumed to have
control, including the pow er to exercise
a controlling influence over the
management or policies, of a company
or bank i t
(ij The person is:
{A) A n executive officer or director o f
the company or bank; and
(Bl Directly or indirectly owns,
controls, or has the power to vote m ore
than 10 percent of any class of voting
securities of the company or bank; or
(iiHA) The person directly or
indirectly ow ns, controls, or has the
power to vote m are than 10 percent of
any class of voting securities of th e
com pany or bank; and
(B) No other person owns, controls, o r
has the powrer to vote a greater
peromtagff of that class of voting
securities.
13} A n Individual is not considered to
have control, including the pow er to
exercise a controlling influence over th e
management or policies, of a com pany
or bank solely by virtue of th e
individual’s position as an officer or
director of the company or bank.
14} A person may rebut a presum ption
established far paragraph (b)£2l 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,
dem onstrate on absence of control.
(d) Director o f a m em ber bank m eans
any director of a member bank, w hether
or not receiving compensation. An
advisory director is not considered a
director if the advisory director
(1) Is n ot 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; th e title designates the
officer an assistant; or the officer is
serving w ithout salary or other
com pensation.« The chairman of the
►T h e term is not intended to tochide persons w h o
may have official tit Ws and m ayenerclae a. certain
measure of discretion In the performance of that*

The lending lim it also includes any
board, the president-,every vice
president, the cashier,, the secretary, and higher am ounts that are permitted by
section 5200 of the Revised Statutes for
the treasurer e f a company or bank are
considered executive officers, unless the the types of obligations listed therein as
exceptions to the limit. A member
officer is excluded, by resolution of the
bank’s unim paired capital and
board of directors or by the bylaws of
the bank or company, from participation unim paired surplus equals th e sum o£
(1) The “total equity capital” of the
(other than in the capacity of a director),
member bank reported o n its most
in major policymaking functions of th e
recent consolidated report of condition
bank or company, and the officer does
filed under 12 U.S.C iai7(aX3);
not actually participate therein.
12^ Any subordinated nates and
(2) Extensions o f credit to an
debentures that com ply with:
executive officer of an affiliate of a
requirements of the appropriate Federal
member bank (other than a company
banking agency far addition to die
that controls the bank) shall not be
member bank’s capital structure and are
subject to §§ 215.4, 215.6 and 215.8 of
reported on its most recent consolidated
this part, provided th a t
(i) The executive officer of the affiliatereport of condition filed under 12 U .S.C
1817(a)(3); and
is excluded (by nam e or by title) from
(3) Any valuation reserves created by
participation in major policymaking
charges to the member bank's income
mnctions of the m em ber bank by
reported on its m ost recent consolidated
resolutions of the boards o f directors o f
report of condition filed under 12 U.S.C.
both the affiliate and the member bank,
1817(a)(3).
and does not actually participate In
Q), Member bank means any banking
such major policymaking functions; an d
institution th a t is a member o f the
fn l The executive officer Is not
Federal Reserve System, Including any
otherwise subject to such requirem ents
subsidiary of a member bank The term
as a director or principal shareholder.
does not include any foreign bank that
(ff Foreign bank has the m eaning
maintains a branch in th e United States,
given in 12 U.S.C. 3101f?);
(g) Im m ediate fa m ily means the
whether or not the branch. Is insured
spouse o f a n fndividual, the individual's (withhi the meaning of 12 U.S.C
minor children^ and any of the
1813(s)l and regardless of the operation
individual's children (including adultsj of 12 U .S C 1 8 I3 (h |an d 12 U-S.C
residing in the individual’s home.
M28fjK3)(B),
(h) Insider m eans a n executive officer,
(k> Pay a n overdraft on an account
director, or principal shareholder, and
means to pay an am ount upon the order
includes any related Interest of such a?
of a n account holder hi excess of hinds
on deposit in tb e account
person.
(if Lending lim it. The lending lim it for
{!) Person m eens an individual o r a
a member bank » an am ount equal to
company.
(n»)|l> Principal shareholder m eans a
tb e lim it of loans to a single borrower
person (other than an insured bank)* that
established by section 5200 of the
directly or indirectly, or acting through
Revised Statutes,1 12 U.S.C 84. This
or in concert w ith one or more persons,
amount is 15 percent of the bank1*
owns, controls, or has the power to vote
unim paired capital and unim paired
more than 10 percent of any class of
surplus in th e case of loans that are not
voting securities of a member bank or
fully secured, and an additional 10
percent of the bank's unim paired capital company. Shares owned or controlled
by a member of an individual’s
and unim paired surplus in th e case of
immediate family are considered to be
loans that are fully secured by readily
held by the individual.
marketable collateral having a market
12} A principal shareholder of a
value, as determ inedby reliable and
continuously available price quotations, member bank does not include a
company of which, a member bank is a
at least equal to the amount of the loan.
subsidiary.
(n) Belated interest of a person means.
duties, including discretion- in the making of loans,
(1) A company that is controlled by
but who d o not participate in the determination of
that person; or
major policies of the bank or caropaay and w h ose
decisions are lim ited by policy standards fixed by
(2) A political or campaign committee
the senior management of the bank a t com pany Fox that is controlled by that person or the
example, the term does not include a manager ox
funds or services of w hich will benefit
assistant manager o f a branch of a bank unless that
that person.
individual participants, or i» authorized to
(o f Subsidiary has the meaning given
participate, in major policymaking functions o i the
bank or company.
in 12 U.S.C. 1841(d), but does not
> W h en State taw establishes a tending limit for include a subsidiary of a member bank.
a State member bank that is lower than the amount
permitted in section 5200 of the Revised Statutes,
the lending Omit established by applicable State
law s sk alih e th e tending [tmtt far th e State member
bank.

S 215.3

Extension of credit

(a) An extension of credit is a making
or renew al of any loan, a granting of a

Federal R egister / Vol. 59, No. 37 •/ T h u rsd a y , F eb ru ary 24, 1994 / R ules and R egulations
line o f credit, tar an e>atending of credit
in any m anner "whatsoever , and
indndes:
(1) A purchase under Tepmcbase
agreement of securities, other assets, or
t&ligjrtions;
(2) An advance by means of an
overdraft,-cash item, or Otherwise;
i(3) Issuance ctf a standby letter ■of
credit (or Other sim ilar -arrangement
regardless o f nam e <©r-description} o r an
ineligible acceptance, as those terms are
defined in § 20&iJ(d} of this -chapter;
(4) An acquisition by discount,
purchase, exchange, o r otherwise o f any
note, draft, bill «f exchange, or other
evidence o f indebtedness mrprxn which
an insider may be liable as maker,
drawer, endorser, guarantor, o r surety;
(5) An increase o f an existing
indebtedness, b a t n o t if th e additional
funds are advanced by tbe bank for ate
own protection for;
<(.i) Accrued interest; o r
Xii) Taxes, insurance, o r other
expenses incidental -to the existing
indebtedness;
(6j A n advance of-unearned salary or
other unearned com pensation fo ra
period in excess o f 30 days; and
17) Any other sim ilar transaction as a
result of which a person becomes
obligated to pay money lor its
equivalent) to a bank, -whether the
obligation arises directly o r indirectly,
or because of an endorsem ent o n an
obligation or otherwise, or by any m eans
whatsoever.
‘(b) A n extension Of credit does not
include:
(1) An-advance against accrued salary
or other accrued compensation, or an
advance for the paym ent of authorized
travel or other expenses incurred or to
be incurred on behalf of the bank;
(2) A receipt by a bank o f a check
deposited in or delivered to the bank in
the “usual course 'Ofbusiness unless it
results in th e -carrying of a cash item for
or the 'granting of an overdraft {other
than an inadvertent overdraft in a
limited am ount that is prom ptly repaid,
as described in '§ 215(4)(e) of this part");
(3^ An acquisition erf a note, draft, bill
of exchange, or other evidence of
indebtedness through:
© A merger or'consolidation of banks
or a similar transaction by which a bank
acquires assets and assumes liabilities of
another bank o r similar organization; or
(ii) Foreclosure o n collateral o r
sim ilar proceeding for die 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) Am endorsement or guarantee for
the protection of a bank ef any -loan or

other asset previously acquired by tbe
bank in good faith; er
'(ii) Any indebtedness to a bank for tbe
purpose o f protecting th e bank against
loss or of giving financial assistance to
it;
{5) Indebtedness of $15 ,©00 o r less
arising by reason o f any general
arrangement by which a bank:
(1) Acquires charge o r tim e credit
accoaanls; o r
(ii) Makes payments to or on behalf of
participants in a bank credit card plan,
check credit pflan, <or sim ilar open-end
credit plan, provided:
(A) The indebtedness does not
involve prior individual clearance or
approval by the bank other than far the
purposes of determ ining authority to
participate in tb e arrangement and
compliance w ith any dollar lim it Hinder
the arrangement; and
(B) The indebtedness is incmrred
under terms that are not m ore favorable
than those offered to tb e general paabHc;
(6) Indebtedness of JS5.;000 or less
arising by reason o f an interest-bearing
owardraJt 'Credit pflan o f (tbe type
specified in ■§ 215.-4i(ei) o f Ibis part; o r
{7) A discount <ef promissory notes,
bills o f exchange, oonditioral sales
contracts, o r sim ilar paper,, without
recourse.
(cl 'Nan interest -bearing -deposits to
the credit of a bank are not considered
loans, advances, o r extensions o f credit
to the bank of deposit; nor is tbe giving
of immediate credit to a bank upon
uncollected item s received in the
ordinary course Of business considered
to be a Joan, advance or extension o f
credit to th e depositing bank,
(d) For purposes of § 215.4 of this
part, an extension o f credit by a member
bank is considered to have been m ade
at tbe time the bank enters into a
binding commitment ito m ake tbe
extension of credit.
s(e>) A participation w ithout recourse is
considered to be an extension o f credit
by the participating bank., not by the
originating bank.
(£) Tangible -economic benefit rule—
(1) In general. A n extension o f credit is
considered m ade to an insider to tbe
extent that the proceeds are transferred
to the insider or are used for the tangible
economic benefit o f the insider.
(2) Exception. An extension of credit
is -not -considered made to an insider
under paragraph (Oil) o f this section if:
(i) The credit is extended on terms
that would satisfy -the standard set forth
in § 215.4(a) o f th is 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 servioes from th e insider.

8U39

§215.4 Gerteral prohibitions.
{a) Terms m rd creditworthiness. No
member bank may extend credit to any
insider of tbe bank o r insider of its
affiliates unless th e extension of credit:
(1) Is made on substantially tbe same
terms (including interest rates and
collateral) as, an d following credit
underwriting procedures that are not
less stringent than, those prevailing at
the time for comparable transactions try
tb e bank -with other persons that are not
covered by th is part and w ho are not
employed by the bank; and
(2) Does not involve more than tb e
normal risk of repayment -or present
other unfavorable features.
(b) Prior approval. f(l) No member
bank may extend credit {which term
includes granting a line of credit) to any
insider of the bank o r insider of its
affiliates in an am ount that, When
aggregated with the amount o f all other
extensions of-credit to that person and
tb all related interests o f that person,
exceeds tbe higher o f $25,000 or 5
percent of tbe member bank’s
unimpaired capital and unimpaired
surplus, unless:
(r) The extension of credit has been
approved in advance by a majority of
the entire board Of directors of that
bank;and
((ii) Tbe interested party has abstained
from participating directly or indirectly
in the voting.
{2) In no event m ay a member bank
extend credit 'to any insider o f th e bank
or insider o f its -affiliates in an amount
that, when aggregated with all other
extensions o f credit to th at person, and
all related interests o f th at person,
exceeds $300 ,©00, except by complying
with tbe requirem ents o f this paragraph
(b).
(3) Approval by th e board off directors
under paragraphs lb)(ll 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 o f tbe date of th e extension
of credit. The extension o f credit must
also be in com pliance w ith the
requirements of § 215.4'(a) o f th is part.
(4) Participation in the discussion, or
any attem pt to influence th e voting, by
the board of directors regarding an
extension o f credit constitutes indirect
participation in the voting by the board
o f 'directors on an extension of credit.
i(c) Individual tending lim it—N o
member bank may extend credit to any
insider of the bank or insider o f its
affiliates in an amount that, when
aggregated w ith -tbe 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

8840

Federal Register / Vol. 59, No. 37 / T hursday, February 24, 1994 / Rules a n d Regulations

of the member bank specified in
§ 215.2(i) of this part. This prohibition
does not apply to an extension of credit
by a member bank to a company of
which the memoer bank is a subsidiary
or to any other subsidiary of that
company.
(dj Aggregate lending lim it —(1)
General lim it. 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 unim paired capital
and unim paired surplus (as defined in
§ 215.2(i) of this part).
(2) Member banks with deposits o f
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
unim paired 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
unim paired 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 o f 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 instrum ent 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 bank 3 on an
account at the bank, unless the payment
of funds is made in accordance with:
(1) A written, preauthorized, interestbearing 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
3 This prohibition does not apply to the paym ent
by a m em ber bank of an overdraft of a principal
shareholder of the m em ber bank, unless the
principal shareholder is also an executive officer or
director. This prohibition also does not apply to the
paym ent by a m em ber bank of an overdraft of a
related interest of an executive officer, director, or
principal shareholder of the m em ber bank.

(ii) The member bank charges the
executive officer or director the same fee
charged any other customer of the bank
in similar circumstances.
§ 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 § 215.4(d)(3)(i)(A) through (d)(3)(i)(C)
of this part; and

Federal Register J VoL 59, N o. 37 ,/ T hursday, F eb ru ary 24, 1994 J R ules and Regulations
[4] For any other purpose not
specified in paragraphs 4c)(lJ 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 unim paired surplus or
$25,000, but in no event more than
$ 100 ,0 00 .

(d) Any extension o f 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 §215.4ta) of this part;
(3) Preceded by the submission of a
detailed current financial statement of
the executive officer; and
(43 Made subject to the condition in
writing th at the extension of credit will,
at the option of th e member bank,
become due Hnd payable at any time
that th e officer is indebted to any other
bank ot banks in an aggregate amount
greater than the am ount specified for a
category of credit in paragraph (c) of this
section.

Comptroller of the Currency, in the case
of a national bank, OTto 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.
§ 215.8

Records of member banks.

8841

or to inquire of borrowers whether they
are related interests of the insiders of
the bank o r its affiliates.
§ 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
§ 215.5(c) of this part, shall, within 10
days of the date the indebtedness
reaches suoh a level, make a written
report to the board of directors of.the
officer's bank. The report shali state the
lender’s name, the date and amount of
each extension o f credit, any security for
it, and the purposes for which the
proceeds have been o r are to be used.

(a) In general. Each member bank
shall maintain records necessary for
compliance with the requirements of
this part.
(b) Recordkeeping for insiders ■of tbe
member bank. Any recordkeeping
§215.10 Reports on credit to executive
method adopted by a member bank
officers.
shall:
Each member bank shall include with
(1) Identify, through an annual
(but not as part of) each report of
survey, all insiders of the bank itself;
condition tand copy thereof) filed
and
(2) Maintain records of all extensions
pursuant to 12 XJ.S.C. 1817(a)(3) a report
of credit to insiders of the bank itself,
of all extensions of credit made by the
including th e amount and terms of each member bank to its executive officers
such extension of credit.
since the date o f the bank’s previous
(c) Recordkeeping fo r insiders v f the
report of condition.
§ 215.-6 Prohibition on knowingly receiving member bank's ■affiliates. Any
§215.11 Disclosure of credit from member
unauthorised extension erf credit
recordkeeping method adopted by a
banks to executive officers and principal
member bank shall m aintain records of
No executive officer, director, or
shareholders.
principal shareholder of a member bank extensions of credit to insiders of the
(a) Definitions. T o t the purposes of
or any -of its affiliates shall knowingly
member bank’s affiliates by:
this section, the following definitions
tl) Survey method, (i) Identifying,
receive (or knowingly perm it any o f that
apply:
through an annual survey, -each insider
person’s related interests to receive)
(1) Principal shareholder o f a member
of the member bank's affiliates; and
from a member bank, directly or
(ii) Maintaining records of th e amount bank means any person ■»other than an
indirectly, any extension of credit not
and terms o f eech extension of credit by insured bank, or a foreign bank as
authorized under this part.
defined in 12 U.S.C. 3101(7), that,
the member bank to such insiders; or
§ 215.7 Extensions of credit outstanding
directly or indirectly, owns, controls, or
(2) Borrower inquiry method, {i)
on March 10,1979.
has power to vote more than 10 percent
Requiring as part o f each extension of
(a) Any extension of credit that was
of any class of voting securities of the
credit that the borrower indicate
outstanding on M arch 10,1979, and that whether th e borrower is an insider o f an member bank. T he term includes a
would, if made on or after March 10,
person that controls a principal
affiliate o f the member bank; and
1979, violate § 215.4(c) o f this part, shall
(ii) M aintaining records that identify shareholder te.g., a person that controls
be reduced in amount by March 10,
the amount and terms of each extension a bank holding company]. Shares of a
1980, to be in com pliance with the
bank (including a foreign bank), bank
of credit by th e member bank to
lending limit in § 215.4(c) of this p art
borrowers so identifying themselves.
holding company, o r other company
Any renewal or extension of such an
(33 Alternative recordkeeping m ethods owned or controlled by a member of an
extension of credit on or after March 10, for insiders o f affiliates. A member bank individual’s immediate family are
1979, shall be m ade only on terms that
may employ a recordkeeping method
presumed to be owned or controlled by
will bring the extension of credit into
other than those identified in
the Individual for the purposes of
compliance with the lending limit of
paragraphs (c)(1) and (c)(29 of this
determining principal shareholder
§ 215.4(c) of this part by March 10,
section if the appropriate Federal
status.
1980. However, any extension of credit
banking -agency determines that the
(2) Related interest means:
made before March 10,1979, that bears
bank’s method is at least as effective as
(i) Any company controlled by a
a specific maturity date of March 10,
the identified methods.
person’, or
%
(d) Special rule fo r non-commercial
1980, or later, shall be repaid in
(ii) Any political or campaign
accordance with its repayment schedule lenders. A member bank that is
committee the funds or services of
prohibited by law or by an express
in existence on or before March 10,
which will benefit a person o r that is
resolution of the board of directors of
1979.
controlled by a person. For the purpose
(b) If a member bank is unable to
the bank from m aking an extension of
of this section and subpart B o f this part,
bring all extensions of credit
credit to any com pany o r other entity
a related interest does not Include a
outstanding on M arch 10, 1979, into
that is covered by this part as a
compliance as required by paragraph (a) company is not required to m aintain
4The term ' 'stockholder o f .record" appearing in
any records of the related interests o f
of this section, tbe member bank shall
12 U.S.C. 1972(2)(G1 is sy nonym ous with the term
“ person.”
promptly report that fact to the
the insiders o f the bank o r its affiliates

8842

Federal Register / Vol. 59, No. 37 / T hursday, February 24, 1994 J Rules a n d Regulations

bank or a foreign bank (as defined in 12
U.S.C. 3101(7)).
(b) Public disclosure. (1) Upon receipt
of a w ritten 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) M aintaining records. Each member
bank shall m aintain 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.
§ 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.
§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
§ 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]
§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.

§215.22

[Amended]

4. Section 215.22 is amended by
removing “ 12 CFR 226.2(p)” where it
appears in paragraph (c)(l)(ii) and
adding in its place “12 CFR
226.2(a)(12)”.
By order o f the Board o f Governors of the
Federal Reserve System , February 15, 1994.
Dated: February 1 5 ,1 9 9 4 .

W illiam W. Wiles,
Secretary o f the Board.
(FR Doc. 9 4 -3 8 6 0 Filed 2 -1 8 -9 4 ; 3:20 pm)
BILLING CODE S210-01-P