What impact would Regulation O have on a bank officer mortgaging their land to secure a loan made to a customer who is a relative of the bank officer?

We do not believe Regulation O’s prohibition on loans to insiders is applicable to an officer mortgaging property to secure a loan for a relative unless the proceeds of the loan will be transferred to the officer or used for the officer’s economic benefit.

Here, the extension of credit is not being made to the bank officer, and the officer is not co-signing or guaranteeing the loan. Consequently, we do not believe that the loan should be treated as an extension of credit to the bank officer. Additionally, the Regulation O definition of an “insider” does not include family members of an insider, except in the case of a principal shareholder.

Under the tangible economic benefit rule, a loan will be considered to be made to an insider, even if they are not obligated under the loan, if the proceeds of the loan are transferred to the insider or are used for the tangible economic benefit of the insider. In this case, there are no indications that the insider will receive any economic benefit from the transaction.

Additionally, an exception to the tangible economic benefit rule applies when the loan proceeds are used in a bona fide transaction to acquire goods or services from the insider, and the loan meets the general Regulation O requirements for extensions of credit to insiders. For example, an FRB Interpretive Letter found that while a bank director received a tangible economic benefit when the bank made a loan to his son and the son used the loan’s proceeds to repay his father for another loan, the loan qualified for this exception because the loan met the insider lending requirements for that bank, and therefore the transaction did not violate Regulation O.

For resources related to our guidance, please see:

Regulation O, 12 CFR 215.3(7) (“An extension of credit is. . . . an extending of credit in any manner whatsoever, and includes. . . . [a]ny other similar transaction as a result of which a person becomes obligated to pay money (or its equivalent) to a bank, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise, or by any means whatsoever.”)

Regulation O, 12 CFR 215.2(h) (“Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.”)

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.”)

Regulation O, 12 CFR 215.3(f) (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.”)

FRB Interpretive Letter (December 10, 1998) (“The exception requires that an extension of credit be used in a bona fide transaction to acquire property, goods, or services in order to prevent transactions from qualifying for the exception when the borrower from the bank serves merely as a nominee for the insider. . . . In this case, in the absence of any evidence that the amount of the original loan from the director (which the loan from the bank was used to repay) was inflated beyond the actual and reasonable construction costs for the son's house, the Board's concern that the exception to the tangible economic benefit rule not be used to shield nominee loans would be satisfied.”)