Topic: Insider Loans
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A bank director overdrew their account by more than $1,000, which we discovered when processing overdrafts for the day at 8:00 a.m. We contacted the director, who made a deposit to cover the overdraft before 8:30 a.m. Our cutoff for processing overdrafts occurs at 9:00 a.m. Are we violating Regulation O in this situation?
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We do not believe that your bank violated Regulation O in this situation unless your bank advanced funds to cover the director’s overdraft before the 9:00 a.m. deadline. Regulation O prohibits banks from paying overdrafts of an executive officer or director unless the payment is made in accordance with: “(i) A written, preauthorized, interest-bearing extension…
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One of our directors is the President and CEO (but not an owner) of company that would like to borrow money from our bank. If the director has “control” of the company for purposes of Regulation O, we believe we will exceed our legal lending limit for this borrower. Are we correct that an individual can have “control” of a company without having an ownership interest in the company?
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Yes, we believe it is possible for a person to have “control” of a company, as defined in Regulation O, without having an ownership interest in the company. Under Regulation O, a person has control of a company if the person “owns, controls, or has the power to vote 25 percent or more of any…
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Our affiliate bank has an executive officer who wants to bid on a foreclosed property at a public sheriff’s sale to become their principal residence. Our affiliate will be submitting the opening bid, and the officer will have no part in setting that bid, as the amount is set by the bank president and approved by the board. The officer is the secretary of the board but has no voting rights. However, the officer will have insider information of the opening bid. Does this violate any regulation? Can our affiliate finance the transaction if the executive officer contributes 10%? Can we provide the financing even though we are both members of the same holding company?
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We believe that a bank officer may bid in a foreclosure sale involving their bank, but this transaction could invite scrutiny from examiners and the court confirming the foreclosure sale, as well as reputational risks. The FDIC’s guidance stresses the importance of maintaining policies regarding conflicts of interest and a code of ethics. Bank directors…
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We have a loan request secured by an assignment of Homeowner Association (HOA) assessments. The borrower will be the HOA. One of the signing HOA board members is the wife of our bank director. Do we have any Regulation O, Z, or other regulatory concerns with making this loan?
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We believe the loan you described could be subject to Regulation O in certain circumstances, but it appears unlikely unless your director’s wife has a “controlling influence” over the HOA board. If your bank’s director is a principal shareholder of the bank, his wife also would be considered a principal shareholder of the bank, and…
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We are a national bank. An executive officer of our bank has a loan with our bank exceeding $100,000 secured by a first mortgage on their primary residence. The officer also has another loan of less than $100,000 secured by a first mortgage on an investment property; we sold the loan to Fannie Mae and still service the loan. The officer would like a loan to purchase another non-owner occupied investment property, secured by a first mortgage on the property. The loan for the new investment property would exceed $100,000. Would Regulation O (or any other regulation) prevent us from keeping this loan on our books rather than selling it? Also, does the term “readily marketable collateral” refer to real estate?
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Yes, we believe Regulation O’s $100,000 lending limit on loans to executive officers would prevent you from making this loan — even if you intend to sell it. Regulation O generally prohibits banks from making loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is…
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The chairman of our board of directors owns 10% of one business and 12% of another. Would these businesses be eligible for a Paycheck Protection Program (PPP) loan from our bank? We believe this would be permissible under Regulation O, but we are unsure if it would be permissible under the SBA’s recent interim final rule. Would the chairman be considered a “key employee” of the bank if they are not employed by the bank?
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No, the chairman of your board would not be considered a “key employee” if they are not employed by your bank, and businesses in which they have an interest would be eligible for a PPP loan from your bank — provided all other eligibility criteria are met. The SBA’s interim final rule addressing PPP eligibility…
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We have an officer subject to Regulation O whose spouse owns a business that would like to apply for a Paycheck Protection Program (PPP) loan under the new CARES Act. The officer is a joint owner of the business. Would we be required to count this loan against the officer’s general $100,000 lending limit since the loan is 100% guaranteed by the Small Business Administration (SBA)? Is there any guidance on Regulation O lending limits with respect to government-guaranteed loans?
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Irrespective of Regulation O’s lending limits for executive officers, a lender may not extend a PPP loan to an entity in which one of the lender’s officers or their spouse has an interest. The SBA regulations generally provide that neither lenders nor their associates can own an equity interest in a business that has received…
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Can a bank extend a majority stockholder (who owns more than 15% of the bank and is not an executive officer) more than $100,000 in loans and still comply with Regulation O’s lending limits if the loans are secured by a perfected security interest in liquid assets (such as a stock portfolio)?
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Yes, a bank generally may extend more than $100,000 in loans to a majority stockholder or “principal shareholder” (who controls or has the power to vote more than 10% of the bank’s voting securities), subject to the conditions noted below. Regulation O’s prohibition on loans to executive officers exceeding $100,000 is not applicable to principal…
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Can a bank extend one of its executive officers more than $100,000 in loans and still comply with Regulation O’s lending limits if the loans are secured by a perfected security interest in liquid assets (such as a stock portfolio)?
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There are several exceptions to Regulation O’s prohibition on loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is lower), as discussed below. However, we are not aware of any exceptions for loans to executive officers that are secured by stock portfolios (provided no other…
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A director of our national bank and their friend are purchasing a property. The director is paying cash for their portion of the purchase and the friend is paying their portion using funds from their home equity line of credit (HELOC) with our bank. Must the draw on the HELOC be applied to the director’s total borrowings from our bank, since the property is for the benefit of both the director and the friend? Is the shared use of the property a tangible economic benefit?
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We are not aware of any precedent or guidance indicating whether a loan to a director’s co-purchaser for the acquisition of a shared property would be considered to be providing a tangible economic benefit to the director. We contacted the OCC with this question (without identifying the type of bank asking the question), and an…