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FEDERAL RESERVE BANK
OF N E W YORK
[
LO A N S B Y B A N K S T O
Circular No. 8 5 3 2
March 8, 1979
]
IN SID ER S
Com m ent Invited on Final Rules and Proposed Rules to Im plem ent FIR A
To AU Member Banks, and Others Concerned,
in the Second Federal Reserve District:
The Board of Governors of the Federal Reserve System has (a) adopted a revison of its
Regulation O, regarding loans to executive officers, directors, and principal shareholders of
member banks, in order to implement section 104 of the Financial Institutions Regulatory and
Interest Rate Control Act of 1978 (FIRA), and (b ) issued proposed rules, also regarding loans
by member banks to insiders, to implement Titles VIII and IX of FIRA. The Board has invited
comment on the revision of Regulation O and on the proposed changes. The following
statements have been issued by the Board of Governors regarding these actions:
Revision of Regulation O
[March
The Federal Reserve Board today
6 ] issued a final regulation implementing new
section 22(h ) of the Federal Reserve Act, a part of Title I of the Financial Institutions Regulatory
and Interest Rate Control Act of 1978 (F IR A ). The regulation applies to all member banks of the
Federal Reserve System, including all national banks.
The Board said that because the final regulation differs in some important respects from the
proposed regulation issued for public comment December 28, 1978, an additional 60-day comment
period will be allowed.
Section 2 2(h ) applies to loans by a member bank to the executive officers, directors and
principal shareholders ( 1 ) of the member bank, ( 2 ) the member bank’s parent bank holding
company, and (3 ) any other subsidiaries of the parent bank holding company. A "principal
shareholder” of the bank is defined as any individual or company that controls more than 10 per
cent of any class of voting shares of the bank (18 per cent in certain circumstances). Section
22(h ) also applies to related interests of bank officials. Related interests are companies controlled
by, and political or campaign committees controlled by or benefiting, bank officials.
Section 2 2(h ) establishes the following four requirements for loans by member banks to bank
officials or their related interests:1
3
2
1. An aggregate lending limit of 10 per cent of the bank’s capital and surplus on loans
(subject to certain exceptions) to any of its executive officers or principal shareholders and their
related interests.
2.
Prohibition of payment by the bank of an overdraft by an executive officer or director.
3. A requirement that every extension of credit by the bank to a bank official or to a related
interest be made on substantially the same terms as those prevailing at the time for comparable
transactions with other persons not associated with the bank, and not involve more than the
normal risk of repayment or present other unfavorable features.
4.
A requirement that every extension of credit by the bank to a bank official or any related
interest that would exceed $25,000 in the aggregate be approved in advance by a majority of the
bank’s entire board of directors, with the interested party abstaining.
The Board’s proposed regulation to implement section 22(h) was issued on December 28,
1978, and the comment period expired on January 29, 1979. More than 200 comment letters were
received.
Significant changes from the proposed regulation are:
(1 ) a rebuttable presumption of control is included in addition to a definition of control;
(2 ) a member bank’s loans to its parent bank holding company or the non-bank subsidiaries
of the holding company are excluded from the 10 per cent lending limit of section 22(h) , since
such loans are currently subject to a 20 per cent limit under section 23A of the Federal Reserve
Act;
(3 ) the requirement for prior approval by the board of directors of lending to bank officials
may be satisfied when the extension of credit is made under a line of credit previously approved
by the board;
(4 ) capital and surplus of a member bank for purposes of determining lending limits is
defined to include subordinated notes and debentures;
(5 ) inadvertent overdrafts of a nominal amount which are outstanding for a short period of
time have been excluded from the overdraft prohibition;
(6 ) term loans (including residential mortgage loans) made prior to March 10, 1979, have
been exempted from the deadlines for compliance with the lending limit and may be repaid in
accordance with their original repayment schedules.
In any enforcement action under section 22(h) during the first 60 days of the statute’s
effectiveness, the agencies will consider the complexities of the statute and the brief period of time
between publication of the regulation and March 10, 1979. The agencies have adopted this policy
in recognition of the fact that some may inadvertently violate the regulation before they have
developed procedures for compliance with the amended Regulation O.
The revision of Regulation O is effective March 10, 1979. However, comments thereon
will be received through May 9, 1979, and may be sent to our Consumer Affairs and Bank
Regulations Department. The text of the new regulation is enclosed for member banks; it will
also be published in the F e d e r a l R e g iste r . Copies in pamphlet form will be sent to you when
available.
Proposed changes
[March
The Federal Reserve Board and the Federal Deposit Insurance Corporation today
8]
published for comment proposed regulations to implement Titles VIII and IX of FIRA. The
Federal Reserve Board’s proposed regulation applies to all member banks, including national
banks.
Title VIII prohibits banks that maintain correspondent account relationships from extending
credit on preferential terms to each of their executive officers, directors and principal shareholders.
The legislation also prohibits banks from opening a correspondent account relationship when one
of the banks has outstanding a preferential extension of credit to an executive officer, director or
principal shareholder of the other bank. The proposed regulation defines a correspondent account
as an account that is maintanied by a bank with another bank for the deposit or placement of
funds. Comment is specifically requested on this definition.
Title VIII establishes certain reporting and public disclosure procedures for insured banks
and for their executive officers and principal stockholders of record, but not for directors.
2
Each executive officer and principal stockholder of an insured bank would report annually
to the bank’s board of directors on the maximum amount of indebtedness of the officer or stock
holder and each of his or her related interests to depository banks, the amount of such indebted
ness outstanding on December 31, the range of interest rates on the loans and the terms and
conditions. A depository bank is a bank that maintains a correspondent account for the insured
bank.
Each insured bank would be required to forward an annual report to the appropriate Federal
banking agency listing the name of each executive officer or principal stockholder who files a
report of indebtedness and the aggregate amount of indebtedness of these persons and their
related interests to the insured bank’s depository banks.
In implementing Title IX, the proposed regulation would require each insured bank to file
with the appropriate Federal banking agency an annual report listing the names of its executive
officers and principal stockholders and the aggregate amount of indebtedness from the insured
bank to these persons and their related interests.
Both of the reports filed with the bank agency would be made available to the public on
request. As proposed, the first reports would cover the period from March 10, 1979, to December
31, 1980. However, comment is specifically requested on whether the reporting period for 1979
should start on July 1. As proposed, officers and stockholders would file reports with the boards of
directors on January 10, 1980, and the insured banks would file their reports with the appropriate
agency by January 31, 1980.
Comment on this proposal will be received through April 20, 1979, and may be sent to
our Consumer Affairs and Bank Regulations Department. The full text of the proposal was
not available at the time this circular was printed. It will be published in the F e d e r a l R e g is te r
and copies will be mailed to member banks when available. Copies may also be obtained upon
request directed to the aforementioned department.
Paul
A.
V olcker,
P re sid e n t
«r
(
TITLE 12— BANKS AND BANKING
CHAPTER II— FEDERAL RESERVE SYSTEM
SDBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulation 0]
[Docket No. R-0194] \
PART 215— LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
Rules to Implement New Law
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final regulation.
SUMMARY:
The Board of Governors of the Federal Reserve System has
amended its Regulation 0 (12 C.F.R. Part 215), formerly entitled "Loans
to Executive Officers of Member Banks."
Amended Regulation 0 implements
new section 22(h) of the Federal Reserve Act, recently enacted by Con
gress as section 104 of the Financial Institutions Regulatory and In
terest Rate Control Act of 1978 ("FIRA")(P.L. 95-630).
The requirements
of section 22 (h) relate to loans by a member bank (1) to an executive
officer, director or principal shareholder of the member bank or of
any of its bank holding company affiliates or (2) to a company or po
litical or campaign committee controlled by any of these persons.
The amendments to the regulation were adopted after review
of the extensive public comment on the proposals.
The amendments will
become effective on March 10, 1979, to meet the effective date of sec
tion 22(h).
However, the Board has invited additional public comment
on the final rules for a further 60 day period.
The Board will consider
comments and adopt any appropriate amendments to the regulation as soon
as practicable.
-2 DATES:
The regulation is effective March 10, 1979.
Comments must
be received by May 9, 1979.
ADDRESS:
R—0194.
Comments should be in writing and should refer to Docket No.
They should be sent to Secretary, Board of Governors of the
Federal Reserve System, Washington, D.C.
20551.
"The comments will
be made available for inspection and copying as provided in the Board's
Rules Regarding Availability of Information (12 C.F.R. Part 261).
FOR FURTHER INFORMATION CONTACT:
James V. Mattingly or Michael E.
Bleier, Senior Attorneys, Legal Division (202-452-3430 or 3721), or
Mary v^urtin, Senior Attorney, Division of Banking Supervision and Regu
lation (202-452-2620), Board of Governors of the Federal Reserve System.
SUPPLEMENTARY INFORMATION:
On December 28, 1978, the Board of Governors
of the Federal Reserve System proposed amendments to it3 Regulation 0
to implement the requirements of new section 22(h) of the Federal Re
serve Act (44 F.R. 893).
Section 22(h) governs loans by a member
bank to any of its executive officers, directors or principal share
holders and to their related interests.
An executive officer, director
or principal shareholder of the member bank is defined to include any
person that has the same relationship with (1) a bank holding company
of which the member bank is a subsidiary or (2) any other subsidiary
of that bank holding c o m p a n y . A principal shareholder means an in
dividual or company that controls more than 10 per cent-^ of any class
1/ In certain circumstances, as discussed below, executive officers
of other subsidiaries of the member bank's parent bank holding company
are not considered to be executive officers of the member bank.
2/ If the member bank is located in a city, town or village with a
population of less than 30,000, this figure is 18 per cent for the pur
pose of the 10 per cent lending limit established by section 22(h).
If such a member bank is a subsidiary of a bank holding company, a per
son will not be a principal shareholder of the bank holding company*
unless the person controls more than 18 per cent of any class of voting
securities of the bank holding company.
-3 -
of voting shares of the bank or company.
(Shares held by a member of
an individual's immediate family are considered held by the individual
in determining principal shareholder status).
The limitations of sec
tion 22(h)(except for the overdraft prohibition) also apply to a related
interest of any of these persons.
A related interest is a company that
is controlled by, or a political or campaign committee that is controlled
by or that benefits, a person.
Section 22(h) has four limitations.
The statute generally:
(1)
establishes a lending limit of 10 per cent of a member
bank's^^apital and surplus (subject to certain excep
tions)— for the aggregate amount of all loans by the
bank to:
(a) each of its executive officers and the
officer's related interests, (b) each of its principal
shareholders and the shareholder's related interests,
or (c) the related interests of each of the bank's ex
ecutive officers and principal shareholders;—
(2)
prohibits the payment by a member -bank of an overdraft
of an executive officer or director on an account at
the bank;—
3/ These exceptions are set forth in section 5200 of the Revised
Statutes, 12 U.S.C. 84. The exceptions generally provide higher or
no limits for certain types of secured obligations. For exanqple, obli
gations fully secured by direct obligations of, or fully guaranteed
as to principal and interest by, the United States are not subject
to any limitation under section 5200 of the Revised Statutes.
12 C.F.R. 7.1580. A copy of that statute has been included as an appen
dix to the regulation. .See also 12 C.F.R. 7, Subpart A, for a discussion
of these exceptions.
£/ The 10 per cent lending limit does not apply to member bank loans
to a director of (a) the member bank, (b) the member bank's parent bank
holding company, or (c) any other subsidiary of the parent bank holding
company, unless the director is also an executive officer or principal
shareholder.
5/ The prohibition against payment by a member bank of an overdraft
does not apply to am overdraft of a principal shareholder of (a) the
member bamk, (b) its parent bank holding company, or (c) any other sub
sidiary of the parent bamk holding company, unless the principal share
holder is also an executive officer or director. The overdraft pro
hibition also does not apply to related interests.
-4 -
(3)
requires that every extension of credit by a member bank
to any of its executive officers, directors or principal
shareholders or to any related interest of such a person
(a) be made on substantially the same terms as those
prevailing at the time for comparable transactions with
other persons and (b) not involve more than the normal
risk of repayment or present other unfavorable features;
and
(4)
requires that every extension of credit by a member bank
to any of its executive officers, directors or principal
shareholders, or to any related interest of 3uch a per
son, that would exceed $25,000, when all loans to the
person and the person's related interests are aggregated,
be approved in advance by a majority of the entire board
of directors of the bank, with the interested party ab
staining from voting.
The Board has received well over 200 written comments concerning
the proposed regulation and has modified the regulation after consider
ing the concerns expressed by the comments.
The Board and the Comp
troller of the Currency are aware of the complexities of the new statute
and the brief period of time between publication of amended Regulation 0
and the effective date of the statute.
The agencies will consider these
factors in connection with any enforcement action for a violation oc
curring during the first 60 days that the regulation is in effect.
The agencies have adopted this policy in recognition of the fact that
some may inadvertently violate the regulation before they have developed
procedures for compliance with it.
DISCUSSION OF ISSUES
1.
Prior approval by the board of directors.
Most of the
comments received were directed to the statute's requirement that a
majority of the entire board of directors of the member bank approve
in advance loans by the member bank aggregating over $25,000 to any
of its executive officers, directors or principal shareholders ("bank
-5 -
officials") or the related interests of these persons.
The comments
advised that the prior approval requirement was unnecessarily harsh
and would tend to discourage qualified persons from serving as bank
directors due to delays they could face in obtaining credit.
After considering these comments, the Board has amended the
regulation to clarify that once a line of credit has been approved by
a majority of the bank's entire board of directors, drawdowns on that
line of credit do not require further approval by the board of directors
if two conditions are met.
The regulation requires (1) that the line
of credit have been approved within 14 months of the date of the draw
down; and (2) that the terms of the drawdown comply with the statute's
prohibition against preferential lending and not involve more than the
normal risk of repayment or present other unfavorable features.
This
modification is consistent with both the letter and spirit of section 22(h).
2.
Overdrafts.
About 65 of the comments received by the
Board suggested that provision be made in the regulation for inadvertent
overdrafts.
The regulation and the statute provide exceptions from
the prohibition against payment of an overdraft when the overdraft is
paid pursuant to:
(1) a written, preauthorized interest-bearing loan
plan that specifies a method of repayment, or (2) a written, preauthorized
transfer of funds from another account of the account holder at the
bank.
In addition, the Board has modified the regulation to allow the
payment of an inadvertent overdraft of a limited amount that will be
promptly repaid.
The regulation requires the member bank to charge
the director or officer the same fee charged any other customer of the
bank in similar circumstances.
The Board intends that this provision
-6 be used solely in the unusual case of an inadvertent overdraft.
This
amendment is consistent with the Board's previous definition of exten
sion of credit in Regulation 0, with the statutory exception for in
terest-bearing overdraft plans, and with the purpose of section 22(h)
to prevent self-dealing by bank officials.
3.
Lending limit.
A number of comments raised the question
whether the 10 per cent lending limit of section 22(h) applies to a
loan by a member bank to its parent bank holding company or a nonbank
subsidiary of that holding company.—^
Currently, loans by a member
bank to its parent bank holding company and to all other subsidiaries
of that holding company (including subsidiary banks) are subject, in
the aggregate, to a lending limit of 20 per cent of the member bank's
capital and surplus under section 23A of the Federal Reserve Act (12 U.S.C.
371c).
Under section 23A, a member bank's parent bank holding company
and any other subsidiary of that holding company would be considered
an affiliate of the member bank.
To subject loans within a bank holding company system to the
aggregate lending limit of section 22(h) would, in many situations,
result in an amendment of the 20 per cent lending limit of section 23A.
The Board finds no evidence of any Congressional intent to effect such
an amendment or significant modification of section 23A.
Indeed, a
Congressional intent that the two statutes be interpreted consistently
6 / Because insured banks are excluded from the definition of "company"
in section 22(h), loans by a member bank to any of its insured bank
affiliates are not subject to the restrictions of section 22(h)(includ
ing the 10 per cent lending limit).
-7 -
is evident from the requirement in section 22(h) that the term extension
of credit shall have the same meaning as in section 23A.
Accordingly,
the regulation excludes from the lending limit of section 22(h) an ex
tension of credit by a member bank to its parent bank holding company
or to any other subsidiary of that bank holding company.
The exclu
sion applies also to a foreign bank that controls a domestic bank and
to the other subsidiaries of the foreign bank.
However, a member bank's loans to its parent bank holding
company and to nonbank subsidiaries of that holding company remain sub
ject to the prior approval and preferential lending restrictions of
section 22(h).
In addition, a member bank's loans to a principal share
holder or executive officer of the member bank's parent bank holding
company or of any other subsidiary of that bank holding company and
to all related interests of these persons are subject to the 10 per
cent lending limit (and other applicable restrictions) of section 22(h).
The Board has also excluded from coverage as a member bank
under section 22(h) a foreign bank that maintains a branch in the United
States, whether or not the branch is insured.
Under the International
Banking Act of 1978 (P.L. 95-369), a foreign bank that has an insured
branch is treated as a nonmember insured bank (12 U.S.C. 1813(h)).
Without the exclusion, the foreign bank would be subject to the pro
visions of section 22(h), which are made applicable to nonmember insured
banks as if they were member banks (12 U.S.C. 1828(j)(2)).
This ex
clusion is consistent with the exemption from section 23A granted to
such foreign banks under the International Banking Act (12 U.S.C. 1828(j)(1))
and with the requirement of that statute (12 U.S.C. 3105(d)) that the
-8 Board submit to the Congressional banking committees within two years
a recommendation regarding limitations that should be placed on foreign
banks regarding loans to their affiliates.
It should be noted that
the Board maintains residual supervisory authority over all U.S. opera
tions of foreign banks.
4.
Preferential Lending.
Under the statute, a member
bank’s loans to bank officials and their related interests must be made
on "substantially the same terms* as "comparable transactions with other
persons."
The proposed regulation issued for comment reflected the
Board's view that "other persons" meant persons not associated with
the bank.
A number of the comments (mainly from State nonmeraber banks)
inquired whether, under the proposed Regulation 0 issued for comment,
executive officers may obtain preferential interest rates under bank
employee benefit plans.
The issue has arisen because State nonmember
banks are not subject to the prohibition of section 22(g) of the Federal
Reserve Act against lending by a member bank to its executive officers
at preferential rates.—^
The Board has decided that the preferential lending rules
should be uniform for all insured banks.
Since the Board finds little
basis to change its long-held view that preferential lending by a member
bank to its executive officers is not permitted by section 22(g) or
to conclude that new section 22(h) should be interpreted to allow pref
erential lending, the Board has rejected the requested change.
The
7/ Under Regulation 0, the Board has allowed executive officers of
member banks to participate in bank credit card, check credit and sim
ilar open end credit plans as long as the terms of such indebtedness
were not more favorable than those offered to the general public. The
Board has also required other indebtedness of executive officers to
a member bank to be on terms no more favorable than those available
to persons not associated with the bank. See footnote 8, below.
-9 -
Board believes the Congress has indicated a desire to prohibit preferential
lending by insured banks to their executive officers, directors, or
principal shareholders.
Indeed, in Title VIII of FIRA, Congress has
prohibited such preferential lending by banks that maintain a corre
spondent account relationship to each other's executive officers, di
rectors, or principal shareholders.
5.
Executive officer.
The Board has continued in Regulation 0
its previous definition of executive officer as one who participates
or is authorized to participate (other than in the capacity of a di
rector) in major policymaking functions of a bank or company.
Under
section 22(h), an "officer" of a bank holding company of which a member
bank is a subsidiary and an "officer" of any other subsidiary of that
holding company is deemed to be an "officer* of the member bank.
While
officers of a member bank's holding company affiliates are thus con
sidered officers of the member bank for purposes of section 22(h), the
statute's prohibitions run only to "executive officers".
Amended Regulation 0 makes it clear that the limitations of
section 22(h) regarding member bank loans to its executive officers
also apply to all executive officers of a bank holding company of which
the member bank is a subsidiary.
The regulation also includes, as ex
ecutive officers of the member bank, all executive officers of all other
subsidiaries of the member bank's parent bank holding company unless:
(1) the executive officer is excluded (by name or by title) from par
ticipation in major policymaking functions of the member bank by reso
lutions of the boards of directors of both the member bank and the
>-
-1 0 -
other subsidiary, and (2) the executive officer does not actually
participate in major policymaking functions of the member bank.
6.
Definition of Subsidiary.
A number of the comments have
raised the question whether a subsidiary of a member bank would be con
sidered to be an "other subsidiary" of the member bank's parent bank
holding company.
If so, member bank loans to its own subsidiaries would
be subject to the lending restrictions of section 22(h).
As noted in
paragraph 3 above, the Board has excluded member bank loans to its bank
holding company affiliates from the 10 per cent limitation of section 22(h).
Section 2 2 (h) applies to loans by a member bank to its principal
shareholders and to a company "controlled" by a principal shareholder.
There does not appear to be any Congressional intent to cover credit
transactions between a member bank and its own subsidiaries.
In ad
dition, the Board has long held that a credit transaction by a member
bank with an operations subsidiary of the bank is not an extension of
credit of the kind intended to be restricted by section 23A.
250.240).
(12 C.F.R.
The Board reasoned that the subsidiary is in effect part
of its parent bank just as though it were a department of the bank.
For these reasons and consistent with section 23A, the Board has revised
Regulation 0 to clarify that member bank loans to its own subsidiaries
are not subject to the limitations of section 22(h)
(including the prior
approval and preferential lending requirements) and that executive of
ficers, directors and principal shareholders of such subsidiaries will
not be deemed to have that same relationship with the parent member
bank.
To accomplish this, section 215.2(1) of the regulation specifies
-11that the term "subsidiary" does not include a subsidiary of a member
bank.
However, if an officer, director or principal shareholder
of a subsidiary of a member bank participates, or has authority to par
ticipate, in major policymaking functions of the member bank, that in
dividual is considered to be an executive officer of the member bank
under the definition of executive officer in amended Regulation 0,
whether or not the person holds any official position with the member
bank.
Such a person and all his related interests would then be subject
to all the restrictions of section 22(h).
The Board's rules concerning
member bank lending with respect to its own subsidiaries have been
adopted on the basis of the Board's experience in the supervision of
such relationships and-in the light of the purposes of the Act.
7.
Control of a bank or company.
A number of comments
questioned whether an individual would, by reason of a position as an
executive officer or director of a bank or company, be considered to
control the bank or company or to exercise a controlling influence over
its management or policies.
The Board has amended the regulation to
clarify that an individual will not be presumed to control a company
or a bank solely because of the individual's position as a director
or executive officer of the company or bank.
The regulation also es
tablishes rebuttable presumptions of control in the following two situa
tions:
1
where an executive officer or director controls more
than 10 per cent of the shares of the bank or company;
or
-12-
2.
where any person owns more than 10 per cent of the shares
of a bank or company and no other person owns or controls
a greater percentage of the institution's shares.
Provision has been made in the regulation for a person to rebut these
presumptions.
8.
Immediate family. Under the regulation, shares owned
or controlled by a member of an individual's immediate family are con
sidered to be owned or controlled by the individual for the purpose
of determining whether the individual is a principal shareholder.
The
Board has limited the definition of immediate family to an individual's
spouse, minor children, and the individual’s children (including adults)
living in the same household.
9.
Time to bring outstanding loans into compliance with
the lending limit.
The proposed regulation issued for comment provided
two different schedules for bringing loans outstanding on the effective
date of section 22(h)(March 10, 1979) into compliance with the 10 per cent
lending limit.
The Board proposed one schedule for loans made before
November 10, 1978 (the date section 22(h) was enacted), and another
schedule for loans made between November 10, 1978, and March 10, 1979.
Many of the comments stated that these periods were too short
(especially in the case of State banks not before subject to the general
10 per cent limit of section 5200 of the Revised Statutes) and that
the effect of the compliance deadlines would be particularly harsh in
the case of terra loans, such as residential mortgage loans, that are
payable on a fixed schedule.
-1 3 -
The Board has revised the proposed regulation to allow term
loans with fixed maturities (including residential mortgage loans) that
were made before March 10, 1979, to be repaid in accordance with their
existing payment schedules.
Other loans (typically demand loans) are
required to be reduced in amount to comply with the lending limit by
March 10, 1980 (with two one-year extensions available for good cause).
The Board has also revised the proposed regulation to eliminate
the separate compliance schedule for loans made between the enactment
date and effective date of section 22(h)— that is, between November 10,
1978, and March 10, 1979.
Loans made during this interim period (except
for terra loans with fixed maturities) must now be brought into compli
ance within the same time period as loans made before November 10, 1978,
that is, by March 10, 1980.
The Board expects that no extensions of
time beyond March 10, 1980, to bring these loans into compliance will
be granted.
The appropriate Federal banking agency will examine term loans
made during this interim period closely, particularly those made between
February 28, 1979 (the date of the Board meeting at which amended Regu
lation 0 was adopted), and March 10, 1979, to determine if they were
made to avoid the lending limit or preferential lending restrictions
of the statute.
If so, these loans may be subject to supervisory action
by the appropriate banking agency or to further regulatory action.
The prohibitions of section 22(h) against preferential lending
are prospective.
Preferential loans that are outstanding on March 10,
1979, are not specifically addressed in the statute or Regulation 0.
However, member banks should eliminate the preferential terms on such
\
-1 4 -
loans as soon as practicable.
may be subject to criticism.
If such terms are not eliminated, they
This policy applies particularly to demand
loans that are within the power of the bank to call and renegotiate
at any time.
Finally, consideration is being given to requiring that an
extension of credit by a member bank to a person that subsequently be
comes a bank official or to a related interest of such a person be brought
into compliance with the lending limit and preferential lending restric
tions of sections 215.4(a) and 215.4(c) within 2 years of the date the
person becomes covered by the regulation.
This 2 year time period would
be subject to extension by the appropriate Federal banking agency for
good cause.
Such a requirement may be necessary to prevent evasions
of section 22(h).
Public comment is requested specifically on this
possible amendment.
10.
Capital and Surplus.
As indicated, the lending limit
of section 22(h) is based on the member bank's capital stock and un
impaired surplus.
In its original notice, the Board requested comment
on whether subordinated notes and debentures should be included as
capital and surplus for the purposes of this lending limit.
The comments were virtually unanimous in urging the agencies
to adopt a common definition of capital to avoid any inequality that
might result between national and State banks.
The comments were also
virtually unanimous in urging that subordinated notes and debentures
be included as capital.
The regulation now defines a member bank's
capital stock and surplus to be an amount equal to the sum of (1) the
"total equity capital" of the member bank as reported in its most recent
-1 5 -
consolidated report of condition,
(2) subordinated notes and debentures
that have been approved as an addition to the bank's capital structure
by the appropriate Federal banking agency, and (3) valuation reserves
created by charges to the member bank's income.
The Board's inclusion of subordinated notes and debentures
in the definition of capital and surplus is solely for the purposes
of the lending limit established by section 22(h) and should not be
construed as reflecting any position of the Board on whether subordinated
notes and debentures should be considered part of a member bank's capital
or surplus for other purposes.
11.
Section 22(g) of the Federal Reserve Act.
Under the
Board's proposed regulation, the lending limit of section 22(h) would
not have applied to prevent an extension of credit authorized under
section 22 (g) of the Federal Reserve Act (which governs member bank
loans to its executive o f f i c e r s ) T h e Board received little favorable
comment on the proposal.
The proposed provision would not have been
available to national banks, because they are in any event subject to
a 10 per cent limit under section 5200 of the Revised Statutes.
The Board proposed the rule as a means to lessen the impact
of section 22(h) and the proposed compliance deadlines with respect
to home mortgage loans made before March 10, 1979, by State banks to
their executive officers.
As originally proposed, such loans would
8/ Section 22(g) of the Federal Reserve Act limits member bank loans
to each of its executive officers to $30,000 for home mortgage credit,
$10,000 to educate the executive officer's children, and $5,000 for
other purposes. Effective March 10, 1979, section 110 of Title I of
FIRA doubles these amounts.
-1 6 -
have been required to be reduced by March 10, 1980, to comply with
the 10 per cent lending limit.
Since the regulation now exempts home
mortgage loans made before March 10, 1979, from the compliance deadline
of March 10, 1980, and such mortgage loans may be reduced in accordance
with their original repayment schedules, the proposed exclusion is no
longer necessary.
Therefore, a loan by a member bank to any of its
executive officers must comply with the requirements of both sections 22(g)
and 22(h).
The Board has also decided to retain in amended Regulation 0
a recitation of the lending limitations and reporting requirements of
former Regulation 0, which implemented section 22(g).
However, the
regulation shortens and simplifies the language of former Regulation 0
with respect to these provisions.
Unlike the requirements of section 22(h), which are applicable
to member bank loans to executive officers of the member bank as well
as to executive officers of the member bank’s parent bank holding com
pany and other subsidiaries of that bank holding company, section 22(g)
is applicable only to member bank loans to its own executive officers.
A great many State nonmember insured banks questioned whether FIRA had
caused section 22(g) to apply to nonmeraber insured banks.
The answer
is that section 22(g) is not applicable, and has not been made appli
cable by FIRA, to nonmember insured banks.
Section 22(g) is applicable
only to member banks and their loans to their own executive officers.
The lending restrictions and reporting requirements of section 22(g)
are now contained in sections 215.5, 215.8, and 215.9 of amended Regu
lation 0.
-1 7 -
12.
Extension of Credit.
The regulation defines an extension
of credit as a making or renewal of any loan, the granting of a line
of credit, or an extending of credit in any manner whatsoever.
The
regulation specifically includes a purchase of securities under repur
chase agreement, the issuance of a standby letter of credit, and an
endorsement or guarantee.—
The regulation excludes certain indebted
ness necessary to protect the bank against loss and bank credit card
plans and other types of open end credit in an amount not to exceed
$5,000 if the credit is on terms not more favorable than those offered
to the general public.
It should be noted that the provisions of sec
tion 22(h) do not apply to credit transactions between insured bank
affiliates since an insured bank is excluded from the definition of
company in section 22(h)(see footnote 6, above).
£s
indicated above, the term extension of credit in section 22(h)
has the same meaning as in section 23A.
The Board intends to interpret
the term extension of credit for the purposes section 22(h) consistently
with its interpretations of section 23A.
The Board has also modified the definition of extension of
credit to clarify that when a bank official or a related interest re
ceives the proceeds or tangible economic benefit of an extension of
credit, the extension of credit will be considered made to that person
for purposes of section 22(h).
*
*
This provision is consistent with a
similar provision in section 23A and is designed to prevent evasion
t
€
of the statute through the use of nominee borrowers. When a lending
bank does not know, and has no reason to know, that the proceeds of
9/ To avoid double counting of extensions of credit to a bank official
and the related interests of the bank official, an endorsement or guarantee
by a bank official of an extension of credit to a related interest of
the bank official (or vice-versa) will be considered a single extension
of credit in the amount of the direct obligation of the related interest
for the purposes of the 10 per cent lending limit of section 2 2 (h).
-1 8 -
the extension of credit are used for the benefit of# or transferred
to, a Sank official or a related interest of that person, the lending
bank is not in violation of the provisions of Regulation 0.
The persons
involved in the nominee scheme may, of course, be in violation of the
regulation.
The regulation also makes clear that a participation with
out recourse is considered to be an extension of credit by the partici
pating bank, but not by the originating bank.
13.
Advisory Director.
The Board has excluded advisory
directors from coverage under the statute if they provide solely general
policy advice to the board of directors and do not vote.
14.
Miscellaneous.
The Board has drafted these rules to
effect the purposes of section 22(h) in the area of loans by a member
bank to bank officials and their related interests.
The Board will
review the regulation periodically and adopt any modifications to the
regulation that are shown by experience to be necessary or appropriate
to carry out the intent of the Congress in this area or to prevent
evasions of the statute.
The expanded procedures set forth in the Board's policy
statement of January 15, 1979 (44 F.R. 3957), were not strictly followed
in developing this regulation, since it was proposed for comment before
the policy statement was adopted.
In addition, a delay in promulgating
the regulation is inappropriate in light of the necessity to meet the
statute's effective date of March 10, 1979, and the necessity for pro
viding immediate guidance to persons affected by section 2 2 (h).
In
the development of this final regulation, the Board has, however, com
plied with the spirit and intent of its policy statement by making every
effort to reduce unnecessary regulatory burdens with due regard for
the purposes of the statute.
-1 9 -
The modifications to the regulation were made after full
consideration of the extensive public comments submitted to the Board.
In furtherance of the Board's policy to encourage full public partici
pation in its rulemaking proceedings and in response to specific re
quests and comments, the Board invites further public comment on the
rules for a further 60 days.
The Board will consider comments and
adopt any further amendments to the regulation that the Board finds
are necessary or appropriate.
The Board will make any changes as soon
as practicable after the comment period.
The Board finds that publication of the amended Regulation 0
for the full 30 day period specified in 5 U.S.C. 553(d) would not be
in the public interest because the statute takes effect on March 10,
1979.
Accordingly, the Board of Governors of the Federal Reserve
System amends its Regulation 0 (12 C.F.R. Part 215) to read as set forth
below:
PART 215 - LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND
PRINCIPAL SHAREHOLDERS OF MEMBER BANKS
CONTENTS
Sec.
215.1 Authority, Purpose, and Scope
215.2 Definitions
215.3 Extension of Credit
215.4 General Prohibitions
215.5 Additional R estrictions on Loans to Executive
O fficers of Member Banks
215.6 Extensions of Credit Outstanding
on March 10, 1979
21 5.7 Records of Member Banks
215.8 Reports by Executive O fficers
2 1 5 .9 Reports by Member Banks
215.10 Civil Penalties
SECTION 215.1 — AU TH O R ITY, PURPOSE, AND SCOPE
(a)
Authority.
This Part is issued pursuant to sections l l ( i ) , 22(g)
and 22(h) of the Federal Reserve A ct (12 U .S .C . 248(i), 375a, and 375b(7)).
(b)
Purpose and Scope.
This Part governs any extension of credit
by a member bank to an executive o fficer, director, or principal shareholder of
(1)
the member bank, (2) a bank holding company of which the member bank is a
subsidiary, and (3) any other subsidiary of that bank holding company.
It also
applies to any extension of credit by a member bank to (1) a company controlled
by such a person and (2) a political or campaign com m ittee that benefits or is
controlled by such a person.
SECTION 215.2 -
DEFINITIONS
For the purposes of this Part, the following definitions apply:
(a)
’'Com pany” 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.
H ow ever, the term does not include (1) an insured bank (as defined
✓
in 12 U .S .C . 1813(h)) or (2) a corporation the majority of the shares of which are
owned by the United States or by any State.
(b)(1) "C o n tro l of a company or bank" means that a person directly or
indirectly, or acting through or in concert with one or more persons:
(i)
owns, controls, or has the power to vote 25 per cent or
more of any class of voting securities of the company or bank;
(ii)
controls in any manner the election of a m ajority of the
directors of the company or bank; or
(iii)
has the power to exercise a controlling influence over the
m anagement or policies of the company or bank.
(2)
A person is presumed to have control, including
the power to
exercise a controlling influence over the m anagem ent or policies, of a company
or bank if:
(i)
the person is (A) an executive officer or director of the
company or bank and (B) directly or indirectly owns, controls, or has the power
to vote more than 10 per cent of any class of voting securities of the company or
bank; or
(ii)
(A) the person directly or indirectly owns, controls, or has
the power to vote m ore than 10 per cent of any class of voting securities of the
company or bank, and (B) no other person owns, controls, or has the power to
vote a greater percentage of that class of voting securities.
(3)
An individual is not considered to have control, including
the power to exercise a controlling influence over the m anagem ent or policies,
of a company or bank solely by virtue of the individual's position as an o fficer or
director of the company or bank.
-2 -
(if.)
A person may rebut a presumption established by para
graph (b)(2) of this section by submitting to the appropriate Federal banking
agency (as defined in 12 U .S .C . 1813 (q)) written m aterials that, in the agency s
judgment,
dem onstrate an absence of control.
(c)
"D irecto r
of a member bank" includes (1) any director of a
m em ber bank, whether or not receiving com pensation, (2) any director of a bank
holding company (as defined in 12 U .S .C . 18^1(a)) o f which the member bank is a
subsidiary, and (3) any director of any other subsidiary of that bank holding
company.
' An advisory director is not considered a director if the advisory
director (1) is not elected by the shareholders o f the company or bank, (2) is not
authorized to vote on m atters before the board of directors, and (3) provides
solely general policy advice to the board of directors.
(d)
"E xecutive o ffic e r " 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: (1) the o fficer has an o fficia l title ,
assistant, or
(2) the title designates the o ffic e r an
(3) the o fficer is serving without salary or other com pensation.-^
The chairman of the board, the president, every vice president, the cashier, the
secretary, and the treasurer of a company or bank are considered executive
o ffic e rs, unless (1) the o fficer is excluded, by resolution of the board of directors
1 / The term is not intended to include persons who may have o fficia l title s and
may exercise a certain measure of discretion in the perform ance of their duties,
including discretion in the making of loans, but who do not participate in the
determination of major policies of the bank or company and whose decisions are
lim ited by policy standards fixed by the senior m anagem ent of the bank or
company.
For exam ple, the term does not include a manager or assistant
manager of a branch of a bank unless that individual participates, or is
authorized to participate, in major policymaking functions o f the bank or
company.
-3 A
or by the bylaws of the bank or company, from participation (other than in the
capacity of a director) in major policymaking functions
of the bank or company,
and (2) the o fficer does not actually participate therein.
For the purpose of
sections 21 5.4 and 21 5 .7 below , an executive o fficer of a member bank includes
an
executive
U .S .C .
o fficer
of
(1)
a
bank
holding
company
(as
defined
in
12
1841(a)) of which the member bank is a subsidiary and (2) any other
subsidiary of that bank holding company, unless the executive officer of the
subsidiary (i) is excluded (by name or by title) from
participation in major
policymaking functions of the m em ber bank by resolutions of the boards of
directors of both the subsidiary and the member bank, and (ii) does not actually
participate in such major policymaking functions.
(e)
"Im m ediate
fa m ily "
means
the
spouse
of
an individual, the
individual's minor children, and any of the individual’s children (including adults)
residing in the individual's home.
(f)
The "lending lim it" for a member bank is an amount equal
to
the lim it on loans to a single borrower established by section 5200 of the Revised
Statutes, 12 U .S .C . 8 4 .
This amount is 10 per cent of the bank's capital stock
and unimpaired surplus or any higher amount perm itted by section 5200 of the
R evised Statutes for the types of obligations listed therein as exceptions to the
10 per cent lim it.
A m em ber bank's capital stock and unimpaired surplus equals
the sum of (1) the "to ta l equity ca p ita l" of the member bank reported on its most
recent consolidated report o f condition filed under 12 U .S .C . 1817(a)(3), (2) any
subordinated notes and debentures approved as an addition to the member bank's
capital
structure
by
the
appropriate
Federal
banking
agency,
and
(3)
any
valuation reserves created by charges to the member bank's incom e.
(g)
"M em ber bank" means any banking institution that is a member
of the Federal R eserve System .
The term does not include any foreign bank (as
-4 -
defined in 12 U .S .C .
3101(b)(7)) that maintains a branch in the United States,
whether or not the branch is insured (within the meaning of 12 U .S .C . IS 13(s))
and regardless of the operation of 12 U .S .C . 1813(h) and 12 U .S .C . 1828(j)(2).
(h)
"P ay an overdraft on an accou n t" means to pay an amount upon
the order o f an account holder in excess of funds on deposit in the account.
(i)
"P erson " means an individual or a com pany.
(j)
"Principal shareholder" means an individual or a company (other
than an insured bank) that directly or indirectly, or acting through or in concert
with one or more persons, owns, controls, or has the power to vote more than 10
per cent of
any class o f voting securities of
a m em ber bank or company.
However, for the purposes of section 215.4(c) below , this percentage shall be
"m o re than 18 per c e n t" if the member bank is located in a city , town, or village
with a population of less than 3 0 ,0 0 0 .
Shares owned or controlled by a member
of an individual’s im m ediate fam ily are considered to be held by the individual.
A principal shareholder o f a member bank includes (1) a principal shareholder of
a bank holding company (as defined in 12 U .S .C . 1841(a)) of which the m em ber
bank is a subsidiary and (2) a principal shareholder of any other subsidiary of that
bank holding company.
(k)
"R e la te d interest" means ( l ) a company that is controlled by a
person or (2) a political or campaign com m ittee that is controlled by a person or
the funds or services of which will benefit a person.
(l)
"Subsidiary" has the meaning given in 12 U .S .C . 1841(d), but
does not include a subsidiary of a member bank.
SECTION 215.3 (a)
EXTENSION OF CREDIT
An extension of credit is a making or renewal of any loan, a
granting of a line of credit, or an extending of credit in any manner w hatsoever,
and includes:
-5 -
(1)
a
purchase
under
repurchase
agreem ent
of
securities,
other assets, or obligations;
(2)
an
advance
by
means
of
an
overdraft,
cash
item ,
or
otherw ise;
(3)
issuance of a standby letter of credit (or other similar
arrangem ent regardless
ineligible
acceptance,
of
as
name
those
or
description)
term s
are
or
an
defined
in
section 208.S(d) of this Chapter;
(4)
an acquisition by discount, purchase, exchange, or other
wise
of
any
note,
draft,
bill
of
exchange,
or
other
evidence of indebtedness upon which a person may be
liable as maker, drawer, endorser, guarantor, or surety;
(5)
a discount of promissory notes, bills of exchange, condi
tional sales contracts, or similar paper, whether with or
without recourse; but the acquisition o f such paper by a
m em ber bank from another bank, without recourse, shall
not be considered a discount by the member bank for the
other bank;
(6)
an increase o f an existing indebtedness, but not if the
additional funds are advanced by the bank for its own
protection for (i) accrued interest or (ii) taxes, insurance,
or other expenses incidental to the existing indebtedness;
(7)
an advance of unearned salary or other unearned com
pensation for a period in excess of 30 days; and
(8)
any
other
transaction
as
a
result
of
which
a person
becom es obligated to pay money (or its equivalent) to a
bank, whether the obligation arises directly or indirectly,
-6 -
or because of an endorsement on an obligation or other
wise, or by any means whatsoever.
(b)
An extension of credit does not include:
(1)
an advance against accrued salary or other accrued com
pensation, or an advance for the payment o f authorized
travel or other expenses incurred or to be incurred on
behalf of the bank;
(2)
a receipt by a bank of a check deposited in or delivered to
the bank in the usual course of business unless it results in
the carrying of a cash item
overdraft
(other
than
an
for or the granting of an
inadvertent
overdraft
in
a
lim ited amount that is promptly repaid, as described in
section 215.4(d) below);
(3)
an acquisition of a note, d raft, bill of exchange, or other
evidence of indebtedness through (i) a merger or consoli
dation of banks or a similar transaction by which a bank
acquires assets and assumes liabilities of another bank or
similar organization
or (ii) foreclosure on collateral or
similar proceeding for the protection of the bank, pro
vided that such indebtedness is not held for a period of
more than three years from the date of the acquisition,
subject to extension by the appropriate Federal banking
agency for good cause;
(4)
(i) an endorsem ent or guarantee for the protection of a
bank of any loan or other asset previously acquired by the
bank in good faith or (ii) any indebtedness to a bank for
the purpose of protecting
the bank against loss
giving financial assistance to it; or
or
of
(5 )
indebtedness of $5,000 or less arising by reason of any
general arrangement by which a bank (i) acquires charge
or tim e credit accounts or (ii) makes payments to or on
behalf of participants in a bank credit card plan, check
credit plan, interest bearing overdraft credit plan of the
type specified in section 215.4(d) below , or similar openend credit plan, provided:
(A) the indebtedness does not
involve prior individual clearance or approval by the bank
other than for the purposes of determining authority to
participate in the arrangement and com pliance with any
dollar lim it under the arrangem ent, and (B) the indebt
edness is incurred under term s that are not more favor
able than those offered to the general public.
(c)
N on-interest-bearing deposits to the credit of a bank are not
considered loans, advances, or extensions of credit to the bank of deposit; nor is
the giving o f im m ediate credit to a bank upon uncollected item s received in the
ordinary course of business considered to be a loan, advance, or extension of
credit to the depositing bank.
(d)
For purposes of sections 215.4(b) and (c) below , an extension of
credit by a member bank is considered to have been made at the tim e the bank
enters into a binding com m itm ent to make the extension of credit.
(e)
A participation without recourse is considered to be an exten
sion o f credit by the participating bank, not by the originating bank.
(f)
An extension of credit is considered made to a person covered
by this Part to the exten t that the proceeds of the extension of credit are used
for the tangible econom ic benefit o f, or are transferred to, such a person.
-S -
SECTION 2 1 5 .* (a)
GENERAL PROHIBITIONS
Terms and Creditworthiness.
No member bank may extend
credit to any of its executive o fficers, directors, or principal shareholders or to
any related interest o f that person unless the extension of credit: (1) is made on
i
substantially the sam e term s, including interest rates and collateral, as those
prevailing at
the tim e for comparable transactions by the bank with other
persons that are not covered by this Part and who are not em ployed by the bank,
and (2) does not involve more than the normal risk o f repayment or present other
unfavorable features.
(b)
Prior Approval,
(i) No member bank may extend credit or
.
•
grant a line of credit to any of its executive o ffic e r s, directors or principal
shareholders or to any related interest of that person in an amount th at, when
aggregated with the amount of all other extensions of credit and lines of credit
..
u-..
„ ________ ____________
by the member bank to that person and to all related interests-'of that person,
exceeds $2 5,00 0, unless (i) the extension of credit or line of credit has been
approved in advance by a majority of the entire board of directors of that bank
and (ii)
the
interested
party
has abstained
from
participating
directly
or
indirectly in the voting.
(2)
Approval by the board of directors under paragraph (b X l) of this
section is not required for an extension of credit that is made pursuant to a line
o f credit that was approved under paragraph (b)(1) of this section within 1*
months of the date o f the extension of credit. The extension of credit must also
be in compliance with the requirements of section 215.4(a) above.
(3)
Participation in the discussion, or any attem pt to influence the
voting, by the board of directors regarding an extension of credit constitutes
indirect participation in the voting by the board of directors on an extension of
credit.
-9 -
(c)
A ggregate Lending Lim it.
to any of its executive
2/
interest of that p erso n -
o fficers
No member bank may extend credit
or principal shareholders or to any
related
in an amount that, when aggregated with the amount of
all other extensions of credit by the member bank to that person and to ail
related interests of that person, exceeds the lending lim it of the member bank
specified in section
2 1 5 .2 (f) above.
This prohibition
does
not
apply
to
an
extension of credit by a m em ber bank to a bank holding company (as defined, in
12 U .S .C .
1841(a)) of which the member bank is a subsidiary or to any other
subsidiary of that bank holding company.
(d)
O verd rafts.
No member bank may
pay an overdraft of an
executive o fficer or director of the bank-^ on an account at the bank, unless the
payment of funds is made
! » VI
in accordance
;r\
. >
t
with (1) a w ritten, preauthorized,
!
interest-bearing extension of credit plan that specifies a'm ethod of repayment or
(2) a written, preauthorized transfer
account holder at the bank.
of funds from
another account
of
the
This prohibition does not apply to payment of
inadvertent overdrafts on an account in an aggregate amount of $1,000 or less,
provided (1) the account is not overdrawn for more than
5
business days, and (2)
the member bank charges the executive o fficer or director the sam e fe e charged
any other custom er of the bank in similar circum stances.
2 / This prohibition does not apply to member bank loans to a director of the
m em ber bank or to a related interest of the director, unless the director is also
an executive o fficer or principal shareholder. See also the definition of principal
shareholder in section 215.2(j) above, in the case of a member bank located in a
city , town or village with a population of less than 3 0 ,0 0 0 .
3 / This prohibition does not apply to the payment by a member bank of an
overdraft of a principal shareholder of the member bank, unless the principal
shareholder is also an execu tive o fficer or director. This prohibition also does
not apply to the paym ent by a member bank of an overdraft of a related interest
of an executive o ffic e r , director, or principal shareholder of the m em ber bank.
-1 0 -
SECTION 215.5 -
A D D ITIO N A L RESTRICTIONS ON LO A NS TO
EXECUTIVE OFFICERS OF MEMBER BANKS
(a)
No member bank may extend credit to any of its executive
o ffic e r s ,-^ and no executive o fficer of a m em ber bank shall borrow from
or
otherw ise becom e indebted to the bank, excep t 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 $10,000 outstanding at any. one tim e to a partnership in which one
or more of the executive officers of the m em ber bank are partners and, either
individually or together, hold a m ajority interest.
For the purposes of paragraph
(c)(3) below , the total amount of credit extended by a member bank to such
partnership is considered
to be
extended
to
each
executive
o fficer
of
the
member bank who is a member of the partnership.
(c)
A member bank is authorized to extend credit to an executive
o ffic e r of the bank in an aggregate amount not to exceed:
(1)
$20,000
outstanding
at
any
one
tim e
to
finance
the
at
any
one
tim e
to
finance
the
education of the executive o fficer's children;
(2)
$60,000
outstanding
purchase, construction, m aintenance, or im provem ent of a residence
of
the
executive o ffic er, if 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 o ffic e r ; and
¥7 Sections 2 1 5.5, 215.S and 2 1 5 .9 of Regulation O im plem ent section 22(g) of
the Federal Reserve A c t and do not apply to nonmember banks. For the purposes
of these sections, an executive o fficer o f a member bank does not include an
executive o fficer of a bank holding company of which the m em ber bank is a
subsidiary or any other subsidiary of that bank holding company.
(3)
$1 0,000 outstanding at any one tim e for a purpose not
otherwise specifically authorized under this paragraph.
(d)
Any
extension
of
credit
by
a member
bank to
any
of
execu tive o fficers shall be: (1) promptly reported to the member bank's board of
directors; (2) in compliance with the requirements of section 215.4(a) above; (3)
preceded by the submission of a detailed current financial statem ent of the
executive o ffic er; and (4) made subject to the condition that the extension of
credit will, at the option of the m em ber bank, b ecom e due and payable at any
tim e that the officer is indebted to any other bank or banks in an aggregate
amount greater than the amount specified fo r -a category of credit in paragraph
(c) o f this section.
-
v
-
SECTION 21
(a)
-
EXTENSIONS O F CR ED IT O U T S T A N D IN G ON M A R C H 10, 1 9 7 9 '
Any extension
1979, and that would, if made
2 1 5 .4 (c )
above,
shall
be
-------- ■,--------- r ,
of credit that was outstanding on March
on or after
reduced
in
amount
March
by
10,
March
com pliance with the lending lim it in section 21 5.4(c).
10,
1979, violate section
10,
1980,
to
be
in
Any renewal or extension
o f such an extension of credit on or after March 10, 1979, shall be made only on
term s that will bring the extension of credit into com pliance with the lending
lim it of section 215.4(c) by March 10, 1980.
H ow ever, any extension of credit
made b efore March 10, 1979, that bears a sp ecific maturity date of March 10,
1980, or later, shall be repaid in accordance with its repayment schedule in
existen ce on or before March 10, 1979.
(b)
If a m em ber bank is unable to bring all extensions of credit
outstanding on March 10, 1979, into com pliance as required by paragraph (a) of
this section, the member bank shall promptly report that fa c t to the Com ptroller
of the Currency, in the case of a national bank, or to the appropriate Federal
-1 2 -
its
R eserve Bank, in the case of a State member bank, and explain the reasons why
all the extensions of credit cannot be brought into com pliance. The Com ptroller
or the R eserve Bank, as the case may be, is authorized, on the basis of good
cause
shown,
to
extend
the
March
10,
1980,
date
for
com pliance
for
any
extension of credit for not more than two additional one-year periods.
SECTION 21 5.7 -
R ECORDS OF MEMBER BANKS
Each m em ber bank shall maintain records necessary for com pliance
with the requirements of this Part.
These records shall (a) identify all executive
o ffic ers, directors, and principal shareholders of
the
m em ber bank
and the
related interests of these persons and (b) specify the amount and term s of each
extension of credit by the member bank to these persons and to their related
interests.
Each member bank shall request at. least annually that each executive
o ffic e r , director, or principal shareholder of
the member bank
identify
the
related interests of that person.
SECTION 215.8 -
REPORTS BY EXECUTIVE OFFICERS
Each executive o ffic e r -^ of a m em ber bank who becom es indebted to
any other
bank
or banks in an aggregate
amount greater
than the amount
specified for a category of credit in section 215.5(c) above, shall, within 10 days
of the date the indebtedness reaches such a level, make a written report to the
board of directors o f the o fficer's bank. The report shall state the lender's name,
the date and amount of each extension of credit, any security for it, and the
purposes for which the proceeds have been or are to be used.
5/
See note ^ above.
-13-
SECTION 2 1 5 .9 -
R EPORTS BY MEMBER BAN K S
Each m em ber bank shall include with (but not as part of) each report of
condition (and copy thereof) filed pursuant to 12 U .S .C . 1817(a)(3) a report of all
extensions of credit made by the m em ber bank to its executive o ffic e r s -^ since
the date of the bank's previous report of condition.
SECTION 2 1 5 .1 0 -
CIVIL PENALTIES
As specified in section 29 of the Federal R eserve A c t (12 U .S .C .
504),
any m em ber bank, or any o ffic e r , director, em ployee, agen t, or other
person participating in the conduct o f the affairs of the bank, that
violates any
provision of this Part is subject to a civil penalty of not more than $ 1 ,000 per
day for each day during which the violation continues.
E ffe c tiv e date:
March 10, 1979.
Board o f Governors of the Federal R eserve System , March 5, 1979.
(Signed) Theodore E. Allison
Theodore E. Allison
Secretary of the Board
(SEAL)
6/
See note 4 above.
-1 4 -
APPENDIX
SECTION 5200 OP THE REVISED STATUTES
The tota l o bligation s to any national banking association of any
person, copartnership,
a sso cia tio n , or corporation shall at no time ex
ceed 10 per centum of the amount of the cap ita l stock of such asso cia tio n
a ctu a lly paid in and unimpaired and 10 per centum of its unimpaired surplus
fund.
The term "o b lig a tio n s" shall mean the d ire ct l i a b i l i t y of the maker
or acceptor of paper discounting with or sold to such association and the
l i a b i l i t y of the indorser, drawer, or guarantor who obtains a loan from or
discounts paper with or s e lls paper under his guaranty to such a ssociation
and sh a ll include in the case of ob liga tio n s of a copartnership or a sso cia
tion the obligation s of the several members thereof and shall include in
the case of obligation s of a corporation a ll ob liga tion s of a ll su b sid ia ries
thereof in which such corporation owns or controls a majority in te r e s t.
Such lim itation of 10 per centum shall be subject to the following
e x c e p tio n s :
(1)
Obligations in the form of drafts or b i l l s of exchange drawn
in good fa ith against actually existin g values shall not be subject under
this section to any lim itation based upon such cap ita l and surplus.
(2)
Obligations arisin g out of the discount of commercial or busi
ness paper actually owned by the person, copartnership, a sso cia tio n , or
corporation negotiating the same shall not be subject under this section to
any lim itation based upon such capita l and surplus.
(3)
Obligations drawn in good faith against actually ex istin g
values and secured by goods or commodities in process of shipment shall not
be subject under this section to any lim itation based upon such ca p ita l and
surplus.
2
(4)
Obligations as indorser or guarantor of notes, other than
commercial or business paper excepted under (2) h e re o f, having a maturity
of not more than six months, and owned by the person, corporation, a s s o c i
a tio n ,
or copartnership indorsing and negotiating the same, shall be
subject under this section to a lim ita tio n of 15 per centum of such capital
and surplus in addition to such 10 per centum of such capital and surplus.
(5)
Obligations in the form of banker's acceptances of other
banks of the kind described in sections 372 and 373 of this t i t l e shall not
be subject under this section to any lim ita tio n based upon such capital
and surplus. (6)
Obligations of any person, copartnership, association or
corp oration, in the form of notes or drafts secured by shipping documents,
warehouse r e ce ip ts, or other such documents transferring or securing t i t l e
covering re a d ily marketable nonperishable staples when such property is
f u l l y covered by insurance, i f i t is customary to insure such staples shall
be subject under this section to a lim itation of 15 per centum of such
c a p ita l and surplus in addition to such 10 per centum of such capita l and
surplus when the market value of such staples securing such o b lig a tio n is
not at any time less than 115 per centum of the face amount of such o b lig a
tio n , and to an additional increase of lim itation of 5 per centum of such
ca p ita l and surplus in addition to such 25 per centum of such cap ita l and
surplus when the market value of such staples securing such additional
o b lig a tio n is not at any time less than 120 per centum of the face amount
of such additional o b lig a t io n , and to a further additional increase o f
lim ita tio n of 5 per centum of such capita l and surplus in addition to such
- 3 -
30 per centum of such capital and surplus when the market value of such
staples securing such additional o b lig a tio n is not at any time less than
125 per centum of the face amount of such additional o b lig a t io n , and to
a further additional increase of lim ita tio n of 5 per centum of such capital
and surplus when the market value of such staples securing such addi
tional o b lig a tio n is not at any time less than 130 per centum of the face
amount of such additional o b lig a tio n , and to a further additional
increase of lim ita tion of 5 per centum of such cap ita l and surplus in
addition to such 40 per centum of such c a p ita l and surplus when the
market value of
3 uch
staples securing such additional o b lig a tio n is not
at any time less than 135 per centum of the face amount of such additional
o b lig a tio n , and to a further additional increase of lim ita tio n of 5 per
centum of such ca p ita l and surplus in addition to such 45 per centum of
such cap ita l and surplus when the market value of such staples securing
such additional o b lig a tio n is not at any time less than 140 per centum of
the face amount of such additional o b lig a tio n , but this exception shall
not apply to o b lig a tio n s of any one person, copartnership, a s s o c ia t io n ,
or corporation arising from the same transactions and/or secured by the
id en tical staples for more than ten months.
Obligations of any person,
copartnership, a sso cia tio n , or corporation in the form of notes or
drafts secured by shipping documents, warehouse r e c e ip t s , or other such
documents transferring or securing t i t l e covering refrig e ra te d or
frozen r e a d ily marketable staples \«hen such property is fu lly covered
by insurance, shall be subject under this section to a lim ita tio n of
15 per centum of such capital and surplus in addition to such 10 per
- 4 centum of such ca p ita l and surplus when the market value of such staples
securing such o b lig a tio n is not at any time less than 115 per centum of
the face amount of such additional o b lig a tio n but this exception shall
not apply to o b ligation s of any one person, copartnership, a sso cia tio n ,
or corporation arisin g from the same transactions and/or secured by the
id e n tica l staples for more than six months.
(7 )
Obligations of any person, copartnership, a s s o c ia tio n , or
corporation in the form of notes or drafts secured by shipping documents
or instruments transferring or securing t i t l e covering liv e s to c k or
giving a lien on liv e s to c k when the market value of the liv e s to c k
securing the o b lig a tio n is not at any time less than 115 per centum of
the face amount of the notes covered by such documents shall be subject
under this section to a lim itation of 15 per centum of such ca p ita l and
surplus in addition to such 10 per centum of such capita l and surplus.
Obligations arisin g out of the discount by dealers in dairy c a t tle of
paper given in payment for dairy c a t t l e , which bear a f u l l recourse
endorsement or unconditional guarantee of the s e lle r and are secured
by the c a t tle being s o ld , shall be subject under this section to a
lim itation of 15 per centum of such cap ita l and surplus in addition to
such 10 per centum of such capita l and surplus.
(8 )
Obligations of any person, copartnership, a s s o c ia tio n , or
corporation secured by not less than a like amount of bonds or notes of
the United States issued since April 24, 1917, or c e r t i f i c a t e s of indebt
edness of the United States, treasury b i l l s of the United States or
obligation s f u l l y guaranteed both as to principal and in terest by the
- 5United States, shall (except to the extent permitted by rules and regula
tions prescribed by the Comptroller of the Currency, with the approval of
the Secretary of the Treasury) be subject under this section to a lim ita
tion of 15 per.centum of such ca p ita l and surplus in addition to such 10
per centum of such capita l and surplus.
(9)
Obligations representing loans to any national banking
a ssociation or to any banking in s t it u t io n organized under the laws of any
State, or to any re ce iv e r, conservator, or superintendent of banks, or to
any other agent, in charge of the business and property of any such
a sso cia tio n or banking in s t it u t io n , when such loans are approved by the
Comptroller of the Currency, shall not be subject under this section to
any lim ita tio n based upon such ca p ita l and surplus.
(10)
Obligations shall not be subject under this section to any
lim ita tio n based upon such capita l and surplus to the extent that such
o b lig a tio n s are secured or covered by guaranties, or by commitments or
agreements to take over or to purchase, made by any Federal Reserve bank
or by the United States or any department, bureau, board, commission, or
establishment of the United States, including any corporation wholly
owned d ir e c t ly or in d ir e c tly by the United States:
Provided,. That such
guaranties, agreements, or commitments are unconditional and must be
performed by payment of cash or it s equivalent within six ty days after
demand.
The Comptroller of the Currency is hereby authorized to define
the terms herein used i f and when he may deem i t necessary.
(11)
Obligations of a lo ca l public agency (as defined in
section 1460(h) o f T itle 42) or of a public housing agency (as defined
6
in the United States Housing Act of 1937, as amended; which have a
maturity of not more than eighteen months shall not be subject under
this se ctio n to any lim ita tio n , i f such ob liga tion s are secured by an
agreement between the o b lig o r agency and the Secretary of Housing and
Urban Development in which the agency agrees to borrow from the
Secretary, and the Secretary agrees to lend to the agency, prior to the
maturity of such o b lig a t io n s , monies in an amount which (together with
any other monies irrevocably committed to the payment of interest on
such o b lig a t io n s ) w ill s u ffic e to pay the principal of such obligation s
with in te re st to maturity, which monies under the terms of said agreement are required to be used for that purpose.
(12)
Obligations insured by the Secretary of Agriculture
pursuant to the Bankhead-Jones Farm Tenant Act, as amended, or the Act of
August 28, 1937, as amended (re la tin g to the conservation of water
re so u rce s ), or sections 1471-1485 o f T itle 42, shall be subject under
this section to a lim ita tio n of 15 per centum of such capital and surplus
in addition to such 10 per centum of such capital and surplus.
(13)
Obligations as endorser or guarantor of negotiable or
non-negotiable installment consumer paper which ca rrie rs a f u l l recourse
endorsement or unconditional guarantee by the person, copartnership,
a s s o c ia tio n , or corporation transferring the same, shall be subject under
this section to a lim ita tio n of 15 per centum of such capita l and surplus
in addition to such 10 per centum of such capita l and surplus:
Provided
however, That i f the bank's f i l e s or the knowledge of i t s o f f i c e r s of the
7
finan cial condition of each maker of such ob lig a tio n s is reasonably ade
quate, and upon c e r t i f i c a t i o n by an o f f i c e r of the bank designated for
that purpose by the board of directors of the bank, that the r e s p o n s ib ili t y
of each maker of such obligation s has been evaluated and the bank is
relying primarily upon each such maker for the payment o f such o b lig a t io n s ,
the lim itations of this section as to the obligation s of each such maker
shall be the sole applicable loan lim ita tio n :
Provided fu rth e r , That
such c e r t i f i c a t i o n shall be in writing and shall be retained as part of
the records of such bank.
(14)
Obligations of the Student Loan Marketing A ssociation s
not be subject to any lim itation based upon such capita l and surplus.
@FedFRASER