Yes, assuming that the loans to the director’s son will not be made on preferential terms, will not involve an abnormal risk of repayment, and will meet Regulation O’s “bona fide transaction” test.

From what you have told us, the director’s son should not be treated as an insider of the bank, meaning that the lending limits in Regulation O will not apply to this loan. However, you also must confirm that the transaction qualifies for an exception from the “tangible economic benefit” rule under the bona fide transaction test.

Regulation O applies to any transaction in which a bank insider receives a “tangible economic benefit,” unless an exception applies. In this case, the director could be viewed as receiving a tangible economic benefit from the transaction because the borrower will be using the loan proceeds to purchase company stock from the director. However, an exception will apply when: (1) the loan terms satisfy Regulation O’s requirements for any insider loan (meaning that it was made on “substantially the same terms” and was approved using the same credit underwriting procedures as for comparable transactions and “does not involve more than the normal risk of repayment”), and (2) the loan proceeds are used in a “bona fide transaction to acquire property, goods, or services from the insider.”

It is likely that this transaction could meet all of these requirements and qualify for an exception to the tangible economic benefit test — provided that the loan is not made on preferential terms or by using preferential underwriting, does not involve an abnormal risk of repayment, and is used to acquire property, goods or services (in this case, stock) from the director. If this is the case, the loan will not be subject to the lending limits under Regulation O.

For an example of the application of these requirements, we recommend reviewing the 1998 Federal Reserve Interpretive Letter referenced below. In the situation addressed by that letter, a director received a tangible economic benefit when the bank made a loan to his adult son, because the son used the loan proceeds to pay off a loan between him and his father. However, the transaction qualified for the bona fide transaction exception, because the loan satisfied the criteria for an insider loan, and the transaction between the father and son qualified as a bona fide transaction because the son received adequate consideration from his father (namely, the satisfaction of his outstanding obligation to his father). The FRB also noted the absence of any evidence that the amount of the original loan between the director and his son had been inflated, which would have suggested that the son was serving as his father’s nominee.

For resources related to our guidance, please see:

• 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.”)

• Regulation O, 12 CFR 215.4(a)(1) (The general requirements for insider loans: “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.”)

• FRB Interpretive Letter (December 10, 1998)