If a bank insider subject to Regulation O has a two-year line of credit and requests a draw in month fifteen of the term, does the board need to approve that draw because the line has not been otherwise reviewed within the last fourteen months? We believe that Regulation O requires all loans to be “re-approved” by the board at least annually.

Yes, we believe that the board’s preapproval is required before allowing a draw on a line of credit when more than fourteen months have passed since the initial approval of the line, assuming that your bank’s extensions of credit to the insider have exceeded Regulation O’s threshold for board preapproval.

Generally, Regulation O requires preapproval by a bank’s board of directors when the total loans made to an insider and the insider’s related interests exceed the higher of $25,000 or 5% of the bank’s unimpaired capital and unimpaired surplus, or $500,000. Each draw on a line of credit is treated as a new extension of credit for purposes of these preapproval requirements. However, draws from a line of credit do not require board preapproval if made within fourteen months after the board approved the line of credit. In other words, when board approval for a draw on a line of credit is required, re-approval of the line of credit should be completed every fourteen months (not necessarily every twelve months, as suggested by your question).

For resources related to our guidance, please see:

Regulation O, 12 CFR 215.4(b)(1) (“No member bank may extend credit (which term includes granting a line of credit) to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank’s unimpaired capital and unimpaired surplus, unless:
- (i) The extension 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.”)
Regulation O, 12 CFR 215.4(b)(2) (“In no event may a member bank extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of this paragraph (b).”)

Regulation O, 12 CFR 215.4(b)(3) (“Approval by the board of directors under paragraphs (b)(1) 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 of the date of the extension of credit. The extension of credit must also be in compliance with the requirements of §215.4(a) of this part.”)

Final Rule, Regulation O, 44 Fed. Reg. 12959, 12960 (March 9, 1979) (“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 drawdown; 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.”)

FRB Advisory Letter, Application of Regulation O to revolving commercial lines of credit (November 14, 1997) (“Under section 215.4(b)(1) and (2), a line of credit to an insider that triggers the bank’s prior approval requirement could not operate because the prior approval of the bank’s board of directors would be required for each draw. Section 215.4(b)(3), however, opens a window in which such lines of credit may operate. The window is open no more than 14 months, since the board of directors must approve a line of credit within 14 months of the time the credit is extended.”)
FDIC Advisory Opinion 94-38 (August 30, 1994) (“[W]here a borrower becomes immediately obligated when the bank grants a line of credit for the whole amount of the line of credit, that entire amount would be taken into consideration for purposes of Regulation O.”) The FDIC has informed the IBA that it has removed all of its advisory opinions from its website due to a high risk of staleness. We have provided links to archived versions of the advisory opinions for your convenience. If you have a question about an advisory opinion, the FDIC recommends that you contact your FDIC Field Office, which you can find by clicking here.