Topic: Insider Loans
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We made a loan to a company in which one of our bank’s executive officers holds a controlling interest. However, the executive officer is not obligated on the loan in any way. We understand that the loan is subject to the restrictions on loans to bank insiders under Regulation O. But is the loan also subject to Regulation O’s specific restrictions on loans to executive officers?
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No, the loan to the corporation controlled by the executive officer is not subject to Regulation O’s specific restrictions on loans to “executive officers.” However, you are correct that the loan would be subject to all of Regulation O’s restrictions on loans to “insiders.” Under Regulation O, the definition of “insider” means any executive officer,…
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A bank employee recently was promoted to an executive officer position. Two years before her promotion, she obtained a home equity line of credit (HELOC) from our bank for $250,000. The HELOC was approved for any purpose, so we consider it an “other purpose” loan under Regulation O. Do we need to modify the HELOC to conform with Regulation O’s $100,000 limitation on “other purpose” loans to executive officers? Or is the HELOC “grandfathered” because it was extended before she became an executive officer? Will her future draws on the HELOC require prior board approval? Will this HELOC count toward her aggregate Regulation O limit?
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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…
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We have several closed employee loan files. What is the record retention period for these? Is it the same as for other loan files, or is the retention period longer for employee loan files?
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Loans to employees are not subject to longer record retention periods than loans to other customers, although Regulation O imposes certain additional recordkeeping requirements for loans to employees who are considered “insiders” of your financial institution. The statute of limitations for written contracts in Illinois is ten years. Consequently, the most conservative practice would be…
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Can our Vice President and Senior Lender use a home equity line of credit (HELOC) extended by the bank to purchase stock in our bank?
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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.…
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Do our insiders need to report personal trusts on our Regulation O form for insider loans? Or should we be concerned with reporting only business trusts?
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Yes, we recommend that your Regulation O reporting form cover personal trusts as well as business trusts. Regulation O’s definition of “related interest” includes trusts, “business or otherwise,” that are controlled by an insider. If an insider controls a trust as trustee, you would want the insider to report that information so that the bank…
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Can we make a home mortgage loan to an executive officer of our bank for $500,000 and a car loan to that same executive officer for $100,000 without exceeding the lending limits established under Regulation O?
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Yes, you may make both loans to the same executive officer at the same time, subject to the limitation discussed below. Under Regulation O, a bank may extend credit to any executive officer in any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer, provided the…
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One of our directors owns two businesses that have outstanding loans with our bank. Can we extend a loan to the director’s adult son, who also is a partial owner of both businesses? The son will use the loan proceeds to purchase additional shares in one of the businesses from his father.
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Yes, assuming that the loans to the director’s son will not be made on preferential terms, will not involve an abnormal risk of repayment, and will meet Regulation O’s “bona fide transaction” test. From what you have told us, the director’s son should not be treated as an insider of the bank, meaning that the…
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One of our directors has a line of credit that is up for renewal within the week. The loan complied with our insider lending limits when it was made, but because our capital levels are lower today (due to the new Basel III standards), the loan now exceeds our insider lending limits. Can we renew the loan without violating our insider lending limits?
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No, the loan must comply with Regulation O’s insider lending limits when it is renewed. Regulation O applies to any extension of credit, including the renewal of an existing loan. Regulation O’s lending limits are based on your institution’s “unimpaired capital and unimpaired surplus,” a calculation that includes all Tier 1 and Tier 2 capital…