Whether Regulation O applies to a particular transaction is a fact-specific determination that we cannot make without more information. From what you have told us, the director’s spouse would not be considered an insider of the bank, meaning that Regulation O would not apply to an extension of credit to the spouse or a company owned by the spouse. However, Regulation O still might apply if the director is found to have received a “tangible economic benefit,” unless the director also qualifies for an exception to the tangible economic benefit rule. We do not believe that the fact that the director’s spouse submitted a joint financial statement would affect this determination, unless it served as evidence that the director is receiving a tangible economic benefit from the loan.

Is the director’s spouse an insider of the bank? If the director’s spouse is deemed to be an “insider” of the bank, then Regulation O will apply. The Regulation O definition of “insider” does not include family members of an insider, except in the case of a principal shareholder. 12 CFR 215.2(h).

If the director is a principal shareholder of the bank, his spouse also would be considered a principal shareholder and the loan would be subject to Regulation O. 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.” 12 CFR 215.2(m). Because your institution has a mutual membership ownership structure, and the director and the director’s spouse control a very small percentage of the total available votes, we do not believe that either individual should be treated as a principal shareholder for Regulation O purposes.

Will the director receive a tangible economic benefit from the transaction? If the director receives a tangible economic benefit from the transaction, such as a payment from the borrower to the director, then the loan will be subject to Regulation O. 12 CFR 215.3(f)(1). But even if the director receives a tangible economic benefit from a transaction, an exception applies if (1) the loan terms would satisfy the Regulation O requirements in Section 215.4(a) and (2) if the loan proceeds are used in a “bona fide transaction to acquire property, goods, or services from the insider.” 12 CFR 215.3(f)(2).

For an example of the application of this rule, we recommend reviewing FRB Interpretive Letter (December 10, 1998). In that letter, a director was found to have received a tangible economic benefit when the bank made a loan to his adult son, because the son used the loan proceeds to pay back a loan to his father. However, the transaction qualified for the bona fide transaction exception, because the loan satisfied the criteria in Section 215.4(a) (it was extended on substantially the same terms and under the same credit underwriting procedures as other loans), and the transaction between the father and son qualified as a “bona fide transaction to acquire property, goods, or services from the insider.”

We hope this provides you with sufficient guidance. Please let us know if you have additional questions.