Topic: Insider Loans
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Our branch manager has been asked to serve on the board of our County’s Rural Health Department. This organization has deposits and loans with our bank. Would our brank manager have a conflict of interest in taking action on matters that could impact the finances of the organization, possibly affecting its accounts at our bank?
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We are not aware of any federal or state laws or regulations that would prohibit your branch manager from serving on the board of a unit of local government when the unit also is a deposit and loan customer of the bank. Generally speaking, we believe this is a relatively common situation in Illinois and…
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A husband and wife both have individual loans with our bank, and neither spouse is obligated on the other spouse’s loans. For purposes of the legal lending limit, should we determine the limit for each spouse individually? Also, under Regulation O, if the husband is an executive officer of our bank, is it only his loans that must comply with Regulation O if he has not signed any of his wife’s loans?
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As to the general lending limits, we believe that your bank may calculate the lending limit for each spouse individually. The Illinois Banking Act’s lending limit provisions would not require that the spouses’ individual loans be aggregated, unless one of the spouses guaranteed the other spouse’s loans, or your bank relied on the non-borrowing spouse’s…
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Is real estate, such as farmland, considered “readily marketable collateral” for Regulation O proposes? Regulation O’s definition of “lending limit” references “loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations at least equal to the amount of the loan.”
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No, real estate (including farmland) is not considered to be “readily marketable collateral” under federal or state law. Although this term is not defined in Regulation O, the OCC’s lending limit rules define “readily marketable collateral” as “financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market…
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Are there any restrictions against allowing two or more members of the same family to serve as voting directors on community bank boards in Illinois?
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We are not aware of any restrictions on members of the same family simultaneously serving as voting directors on a community bank board, provided they are duly elected or appointed. We do recommend exercising caution regarding loans to directors or corporations in which the directors have a controlling interest when such loans require board approval…
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Can an officer of the bank pledge bank stock to a family member for collateral on a loan made to him or her by the family member?
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As a general rule, there is no prohibition against a bank officer pledging shares of their bank stock to a third party, including a family member (although both state and federal law prohibit a bank from making a loan secured by shares of its own stock). Under the Illinois Banking Act, bank stock may be…
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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?
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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…
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Can we set up an individual checking account for a large business customer? Can we pay a higher interest rate for this particular customer? Do we have to offer the interest rate to every customer?
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Yes, banks may offer interest-bearing checking accounts to businesses. The Dodd-Frank Act removed the prohibition on paying interest on ordinary demand deposit accounts held by businesses. We are not aware of any Illinois or federal laws prohibiting a bank from offering higher deposit interest rates to a particular business customer, provided that the customer is…
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If a bank insider subject to Regulation O has a two-year line of credit and requests a draw in month fifteen of the term, does the board need to approve that draw because the line has not been otherwise reviewed within the last fourteen months? We believe that Regulation O requires all loans to be “re-approved” by the board at least annually.
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Yes, we believe that the board’s preapproval is required before allowing a draw on a line of credit when more than fourteen months have passed since the initial approval of the line, assuming that your bank’s extensions of credit to the insider have exceeded Regulation O’s threshold for board preapproval. Generally, Regulation O requires preapproval…
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When calculating whether an extension of credit to a bank director requires board approval, do we consider the total amount available on a line of credit or the amount drawn on a line of credit? For example, if a director has been approved for a $250,000 line of credit, but has not yet taken a draw, do we use the $250,000 availability to determine whether board approval is required?
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If your bank has made a binding commitment for the whole amount of the $250,000 line of credit and does not retain a right of refusal for draws on the line, then your bank should use the entire $250,000 amount to determine whether board approval is required. As you have indicated, Regulation O imposes limitations…
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Does the Federal Reserve Act’s restriction on deposit account interest for bank directors and officers apply to state, non-member banks? Are there any Illinois laws that address preferential interest for “insiders”?
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No, we do not believe that the deposit account interest rate restriction in the Federal Reserve Act applies to state, nonmember banks. Section 376 of the Federal Reserve Act provides that “no member bank shall pay to any director, officer, attorney, or employee a greater rate of interest on the deposits of such director, officer,…