We are not aware of any Illinois or federal law or regulation that would prohibit a bank employee from using the proceeds of a home equity loan made by the bank to purchase the bank’s stock, provided that the transaction does not violate the insider lending limits in the Illinois Banking Act and Regulation O.

While both the Illinois Banking Act and the Federal Deposit Insurance Act prohibit banks from making loans secured by their own stock, we do not believe that prohibition would apply here, because the loan would be secured by the employee’s home and not by the bank’s stock.

Of course, since the employee is an officer of the bank, you should ensure that the loan complies with the applicable limits on loans to insiders. Regulation O will apply if the employee is considered an “executive officer” or “principal shareholder” of the bank. Under Regulation O, every vice president is automatically considered an executive officer, unless your bank takes steps outlined in the regulation to exclude that employee from participating in major policymaking functions. Additionally, this employee would be considered a principal shareholder if he or she owns more than 10% of the bank’s stock – including the stock purchased with the HELOC proceeds.

For more information on Regulation O and its limitations, please see the Insider Loans topic page on GoToIBA.com.

For resources related to our guidance, please see:

• Federal Deposit Insurance Act, 12 USC 1828(v)(1) (“(1) General prohibition. No insured depository institution may make any loan or discount on the security of the shares of its own capital stock. . . .”)

• Illinois Banking Act, 205 ILCS 5/37(2) (“It shall not be lawful for a state bank to make any loan or discount on the security of the shares of its own capital stock or preferred stock or on the security of its own debentures or evidences of debt which are either convertible into capital stock or are junior or subordinate in right of payment to deposit or other liabilities of the bank.”)

• Regulation O, 12 CFR 215.2(e) (“Executive officer 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: the officer has an official title; the title designates the officer an assistant; or the officer is serving without salary or other compensation.1 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 officers, unless the officer is excluded, by resolution of the board of directors 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 the officer does not actually participate therein. 1The term is not intended to include persons who may have official titles and may exercise a certain measure of discretion in the performance 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 limited by policy standards fixed by the senior management of the bank or company. For example, 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 of the bank or company.”)

• Federal Reserve Board Opinion Letter (April 22, 1997) (“Every vice president is considered to be an executive officer unless his or her bank or company takes the steps outlined in the regulation to exclude him or her from participating in major policymaking functions.”)

• 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.”)