Regulation O Questions

Issue/Inquiry

The Bank has three questions concerning Regulation O:

1. Can the general lending limit of Regulation O be increased?
2. Does the demand requirement concerning loans to executive officers from other banks pertain only to correspondent banks or to all other banks?
3. Does purchasing or selling a participation interest in a loan from or to another bank create a correspondent relationship?

Response Summary

1. The general lending limit of Regulation O can be increased upon a vote of the Board of Directors. However, this option is only available to banks with deposits less than $100 million.
2. The requirement to have a demand clause in the promissory note or agreement evidencing a loan to an executive officer pertains to loans from any other bank as well as correspondent banks.
3. For the purposes of Regulation O, a correspondent relationship is one in which a correspondent account has been opened by one bank with another, so this would not pertain to purchasing or selling a participation interest in a loan.

Response Detail

1. In the case of loans that are not fully secured, Regulation O does not permit a bank to extend credit to any Insider of the Bank unless the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by the Bank to such Insiders, does not exceed 15 percent of the Bank’s unimpaired capital and unimpaired surplus, and does not exceed an additional 10 percent of the Bank’s unimpaired capital and unimpaired surplus for loans that are fully secured by readily marketable collateral. This is considered the “general limit.”

Banks with deposits of less than $100,000,000 may, through an annual resolution of the Board of Directors, increase the general limit to a level that is not to exceed two times the Bank’s unimpaired capital and unimpaired surplus under the following circumstances:

• The Board of Directors determines that such higher limit is consistent with prudent, safe, and sound banking practices in light of the Bank’s experience in lending to its Insiders, and is necessary to attract or retain directors or to prevent restricting the availability of credit in small communities.
• The resolution sets forth the facts and reasoning on which the Board of Directors based the finding, including the amount of the Bank’s lending to its Insiders as a percentage of the Bank’s unimpaired capital and unimpaired surplus as of the date of the resolution.
• On a fully phased-in basis, the Bank meets or exceeds all applicable capital requirements established by the appropriate federal banking agency.
• The Bank receives a satisfactory composite rating in its most recent report of examination.

If a bank has adopted a resolution authorizing a higher limit pursuant to this option and subsequently fails to meet the capital or composite rating requirements, the Bank shall not extend any additional credit (including a renewal of any existing extension of credit) to any Insider of the Bank or its affiliates unless such extension or renewal is consistent with the general limit. 12 CFR 215.4(d)(2).

There is no similar provision for banks with deposits or assets of $100,000,000 or greater.

1. An extension of credit from a bank to one of its executive officers must be made subject to the condition in writing that the extension of credit will, at the option of the bank, become due and payable at any time that the officer is indebted to any other bank or banks in an aggregate amount greater than the amount specified by Regulation O for a category of credit extended to executive officers. 12 CFR §215.5(d)(4).

For the purposes of Regulation O, a correspondent bank is a bank with which the Bank has opened a correspondent account. Since the demand clause provision concerns loans from “any other bank or banks”, it would not be restricted to loans from correspondent banks.

1. Regulation O provides that extensions of credit made to an executive officer, director, or principal shareholder of a bank (or to a related interest of such person) by a correspondent bank are subject to restrictions set forth in 12 U.S.C. 1972(2). 12 CFR §215.1(b)(4).

The restrictions of 12 U.S.C. 1972(2) forbid preferential lending to executive officers, directors, and principal shareholders of a bank in which the bank maintains a correspondent account.

This means that, for the purposes of Regulation O, the purchase or sale of a participation interest in a loan would not create a correspondent relationship.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, March 16th, 2020 at 6:00 am.