No, we do not believe that you need to modify the preexisting HELOC to conform to the $100,000 “other purpose” loan limitation for executive officers. The OCC and FRB long have taken the position that “the requirements of Regulation O apply at the time a loan or extension of credit is made.” We reached out to an attorney at the FDIC who confirmed that the FDIC also takes this position, that loans made to a person before they assumed an executive officer position are not subject to the individual lending limit under Regulation O — until the loan is modified, increased, extended or renewed after the person has become an executive officer. Consequently, in this case you do not need to modify the existing HELOC to conform to the $100,000 “other purpose” limitation.

The FDIC attorney did note that the preexisting HELOC would count toward the executive officer’s aggregate lending limit with your bank. Here, the executive officer’s aggregate “other purpose” lending limit is $100,000, which she already has exceeded with her preexisting $250,000 HELOC. In other words, she is not permitted to receive additional “other purpose” loans. In addition, her preexisting HELOC must be counted toward her aggregate lending limit for all other loans, as well as toward your bank’s aggregate lending limit for loans to all insiders.

We also note that board approval will be required for each draw on the HELOC, because it was extended more than fourteen months ago, which may pose some inconvenience for your executive officer. With respect to future draws on a HELOC, Regulation O requires advance board approval when the total amount of loans or extensions of credit to one executive officer exceed $25,000 (or 5% of your institution’s unimpaired capital and unimpaired surplus, if that is a higher amount), unless the draws are made within fourteen months after the HELOC was approved by the board. The FDIC attorney opined that because the original HELOC amount was for more than $25,000, all future draws will be subject to board approval.

For resources related to our guidance, please see:

• Regulation O, 12 CFR 215.5(c)(4) (“A member bank is authorized to extend credit to any executive officer of the bank: . . . For any other purpose not specified in paragraphs (c)(1) through (c)(3) of this section, if the aggregate amount of extensions of credit to that executive officer under this paragraph does not exceed at any one time the higher of 2.5 per cent of the bank’s unimpaired capital and unimpaired surplus or $25,000, but in no event more than $100,000.”)

• OCC Interpretive Letter 1096 (March 20, 2008) (“Both the OCC and the Federal Reserve have long taken the position that the requirements of Regulation O apply at the time a loan or extension of credit is made. Thus, loans or extensions of credit that were made to an individual before he or she became an executive officer are grandfathered, as long as they were made in good faith and not in contemplation of the individual’s becoming an executive officer. If such loans exceed the amount permitted by Regulation O, they will be considered nonconforming rather than a violation of Regulation O.”)

• Regulation O, 12 CFR 215.4(d)(1) (“A member bank may not extend credit to any insider of the bank or insider of its affiliates unless the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to all such insiders, does not exceed the bank’s unimpaired capital and unimpaired surplus (as defined in § 215.2(i) of this part).”)

• Regulation O, 12 CFR 215.4(c)  (“No member bank may extend 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 by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in §215.2(i) of this part.”)

• Regulation O, 12 CFR 215.2(i) (Limiting loans to a single borrower to 15 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral.) 

• 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)(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.”)

• 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.”)