We believe the loan you described could be subject to Regulation O in certain circumstances, but it appears unlikely unless your director’s wife has a “controlling influence” over the HOA board.

If your bank’s director is a principal shareholder of the bank, his wife also would be considered a principal shareholder of the bank, and loans made to the HOA would be subject to Regulation O if the HOA qualifies as a “related interest” of his wife.

The definition of “principal shareholder” includes a person who owns, controls, or has voting power over more than 10% of any class of voting securities, including any “[s]hares owned or controlled by a member of an individual’s immediate family,” such as a spouse. If your director owns more than 10% of your bank’s stock, then his wife should be considered an insider of the bank.

If your director’s wife is an insider of the bank, the HOA will be considered a “related interest” subject to Regulation O if she owns, controls, or has the power to vote 25% or more of any class of voting securities of any company (including the HOA association), controls in any manner the election of a majority of the association’s directors, or has the power to exercise a controlling influence over the association’s management or policies.

Also note that Regulation O would apply if your director has received a “tangible economic benefit” from the loan, where the loan proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.

For resources related to our guidance, please see:

• Regulation O, 12 CFR 215.2(h) (“Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.”)

• Regulation O, 12 CFR 215.2(m)(1) (“Principal shareholder means a person (other than an insured bank) that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a member bank or company. Shares owned or controlled by a member of an individual’s immediate family are considered to be held by the individual.”)

• Regulation O, 12 CFR 215.2(g) (“Immediate family means the spouse of an individual, the individual’s minor children, and any of the individual’s children (including adults) residing in the individual’s home.”)

• Regulation O, 12 CFR 215.2(n) (“Related interest of a person means: (1) A company that is controlled by that person; or (2) A political or campaign committee that is controlled by that person or the funds or services of which will benefit that person.”)

• Regulation O, 12 CFR 215.2(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.”)

• Regulation O, 12 CFR 215.2(c) (“Control of a company or bank means that a person directly or indirectly, or acting through or in concert with one or more persons: (i) Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of the company or bank; (ii) Controls in any manner the election of a majority of the directors of the company or bank; or (iii) Has the power to exercise a controlling influence over the management or policies of the company or bank.”)

• Regulation O, 12 CFR 215.3(f)(1) (The tangible economic benefit rule: “An extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.”)
   
• Regulation O, 12 CFR 215.3(f)(2) (The tangible economic benefit exception: “An extension of credit is not considered made to an insider under paragraph (f)(1) of this section if: (i) The credit is extended on terms that would satisfy the standard set forth in § 215.4(a) of this part for extensions of credit to insiders; and (ii) The proceeds of the extension of credit are used in a bona fide transaction to acquire property, goods, or services from the insider.”)

• FRB Interpretive Letter (December 10, 1998) (“Based on your letter, it appears that the director made a loan to his son to finance the son’s construction of a house. . . . Under the tangible economic benefit rule, an extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider. In this case, all the proceeds of the loan from the bank to the son were transferred to the director. The bank’s loan to the son, therefore, is subject to the tangible economic benefit rule.”)

• Regulation O, 12 CFR 215.4(a)(1) (“No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit: (i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and (ii) Does not involve more than the normal risk of repayment or present other unfavorable features.”)