Info/Compliance...class of voting securities of the com-pany or bank; and (B) No other person owns,...

General Prohibitions and Restrictions of Regulation O

Is applicant an Insider of Bank, Holding Company, or Affiliate?

Is applicant an Insider of a Correspondent Bank?

Yes

No

Reg O provisions do not apply

Loan must be made on non-preferential terms

No Yes

1. No preferential terms unless available as part of benefit to all employees. 2. Underwriting at least as stringent as for similarly situated non‐insiders 3. Standard loan application provided 4. If aggregate credit (including to related interests) exceeds greater of $25,000 or 5% of

the bank’s unimpaired capital and surplus, but in any case if it exceeds $500,000 then: a. Prior board approval b. Insider did not vote and exerted no influence on others (should be noted in board

minutes) Is insider an Executive Officer or Director?

No further requirements

No

1. Limit payment of overdrafts to the following situations: ‐ Written, preauthorized interest‐bearing plan ‐ Written, preauthorized transfer plan ‐ Inadvertent overdrafts less than $1,000 and account not overdrawn for more than 5

business days ‐ Charge same fee assessed for similarly situated non‐insiders (best practice – charge

same fee as majority of customers) 2. Annually report to Board any loans to any creditor secured by EO/Director’s own bank

stock if that stock is not publicly traded Is insider an Executive Officer?

Yes

No further requirements

No

1. Demand clause required. Demand of loan is at option of Bank, but clause is required in all EO credit obligations. EO must report to Board when becoming indebted to other creditors in amount more than Bank could lend EO.

2. Aggregate credit cannot exceed higher of 2.5% of Bank’s unimpaired capital and surplus or $25,000, but in no case more than $100,000 excluding financing for: a. Purchase, construction, maintenance or improvement of a

residence of the EO (must be 1st lien and limit one such loan outstanding)

b. Education of EO’s children c. Secured in manner described in Sec. 215.4(d)(3(i)(A) thru

(d)(3)(i)(C) – generally specific marketable collateral such as US Treasury Bills

3. Current detailed financial statement provided before extension of credit

4. Promptly reported to Board of Directors

Yes

Notes: Insiders include Directors, Executive Officers, Principal Shareholders,

and all related interests of such persons. Correspondent Bank insider restrictions not in Reg O specifically, but in

12 U.S.C. §1972(2) Affiliate Directors and Executive Officers can be excluded from Reg O

restrictions by Board Resolution, but must not participate in major policy‐making functions of Bank

485

Federal Reserve System § 215.2

negotiations, agreements, contracts,

and understandings entered into, pur-

suant to this section shall be made to

the Board at least quarterly, and more

frequently if so requested by the Board,

by a duly authorized officer of the Fed-

eral Reserve Bank involved.

[Reg. N, 27 FR 1719, Feb. 22, 1962]

§ 214.6 Amendments.

The Board of Governors of the Fed-

eral Reserve System reserves the right,

in its discretion, to alter, amend or re-

peal these regulations and to prescribe

such additional regulations, condi-

tions, and limitations as it may deem

desirable, respecting relationships and

transactions of any kind entered into

by any Federal Reserve Bank with any

foreign bank or banker or with any

group of foreign banks or bankers or

with any foreign State.

[Reg. N, 8 FR 17290, Dec. 24, 1943. Redesig-

nated at 27 FR 1719, Feb. 22, 1962]

PART 215—LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS OF MEMBER BANKS (REGULATION O)

Sec.

215.1 Authority, purpose, and scope.

215.2 Definitions.

215.3 Extension of credit.

215.4 General prohibitions.

215.5 Additional restrictions on loans to ex-

ecutive officers of member banks.

215.6 Prohibition on knowingly receiving

unauthorized extension of credit.

215.7 Extensions of credit outstanding on

March 10, 1979.

215.8 Records of member banks.

215.9 Disclosure of credit from member

banks to executive officers and principal

shareholders.

215.10 Reporting requirement for credit se-

cured by certain bank stock.

215.11 Civil penalties.

APPENDIX TO PART 215—SECTION 5200 OF THE

REVISED STATUTES TOTAL LOANS AND EX-

TENSIONS OF CREDIT

AUTHORITY: 12 U.S.C. 248(a), 375a(10), 375b(9)

and (10), 1817(k); and Pub. L. 102–242, 105 Stat.

2236 (1991).

SOURCE: Reg. O, 59 FR 8837, Feb. 24, 1994,

unless otherwise noted.

§ 215.1 Authority, purpose, and scope. (a) Authority. This part is issued pur-

suant to sections 11(a), 22(g), and 22(h)

of the Federal Reserve Act (12 U.S.C.

248(a), 375a, and 375b), 12 U.S.C. 1817(k),

and section 306 of the Federal Deposit

Insurance Corporation Improvement

Act of 1991 (Pub. L. 102–242, 105 Stat.

2236 (1991)).

(b) Purpose and scope—(1) This part

governs any extension of credit made

by a member bank to an executive offi-

cer, director, or principal shareholder

of the member bank, of any company of

which the member bank is a sub-

sidiary, and of any other subsidiary of

that company.

(2) This part also applies to any ex-

tension of credit made by a member

bank to a company controlled by such

a person, or to a political or campaign

committee that benefits or is con-

trolled by such a person.

(3) This part also implements the re-

porting requirements of 12 U.S.C.

1817(k) concerning extensions of credit

by a member bank to its executive offi-

cers or principal shareholders (or to

the related interests of such persons).

(4) 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 cor-

respondent bank also are subject to re-

strictions set forth in 12 U.S.C. 1972(2).

[Reg. O, 71 FR 71474, Dec. 11, 2006]

§ 215.2 Definitions. For purposes of this part, the fol-

lowing definitions apply unless other-

wise specified:

(a) Affiliate means any company of

which a member bank is a subsidiary

or any other subsidiary of that com-

pany.

(b) Company means any corporation,

partnership, trust (business or other-

wise), association, joint venture, pool

syndicate, sole proprietorship, unincor-

porated organization, or any other

form of business entity not specifically

listed herein. However, the term does

not include:

(1) An insured depository institution

(as defined in 12 U.S.C. 1813); or

(2) A corporation the majority of the

shares of which are owned by the

United States or by any State.

VerDate Mar<15>2010 08:49 Feb 08, 2011 Jkt 223036 PO 00000 Frm 00495 Fmt 8010 Sfmt 8010 Y:\SGML\223036.XXX 223036ww

oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

486

12 CFR Ch. II (1–1–11 Edition) § 215.2

1 The term is not intended to include per-

sons who may have official titles and may

exercise a certain measure of discretion in

the performance of their duties, including

discretion in the making of loans, but who

do not participate in the determination of

major policies of the bank or company and

whose decisions are limited by policy stand-

ards fixed by the senior management of the

bank or company. For example, the term

does not include a manager or assistant

manager of a branch of a bank unless that

individual participates, or is authorized to

(c)(1) Control of a company or bank means that a person directly or indi-

rectly, or acting through or in concert

with one or more persons:

(i) Owns, controls, or has the power

to vote 25 percent or more of any class

of voting securities of the company or

bank;

(ii) Controls in any manner the elec-

tion of a majority of the directors of

the company or bank; or

(iii) Has the power to exercise a con-

trolling influence over the manage-

ment or policies of the company or

bank.

(2) A person is presumed to have con-

trol, including the power to exercise a

controlling influence over the manage-

ment or policies, of a company or bank

if:

(i) The person is:

(A) An executive officer or director of

the company or bank; and

(B) Directly or indirectly owns, con-

trols, or has the power to vote more

than 10 percent of any class of voting

securities of the company or bank; or

(ii)(A) The person directly or indi-

rectly owns, controls, or has the power

to vote more than 10 percent of any

class of voting securities of the com-

pany or bank; and

(B) No other person owns, controls,

or has the power to vote a greater per-

centage of that class of voting securi-

ties.

(3) An individual is not considered to

have control, including the power to

exercise a controlling influence over

the management or policies, of a com-

pany or bank solely by virtue of the in-

dividual’s position as an officer or di-

rector of the company or bank.

(4) A person may rebut a presumption

established by paragraph (c)(2) of this

section by submitting to the appro-

priate Federal banking agency (as de-

fined in 12 U.S.C. 1813(q)) written mate-

rials that, in the agency’s judgment,

demonstrate an absence of control.

(d)(1) Director of a company or bank means any director of the company or

bank, whether or not receiving com-

pensation. An advisory director is not

considered a director if the advisory di-

rector:

(i) Is not elected by the shareholders

of the company or bank;

(ii) Is not authorized to vote on mat-ters before the board of directors; and

(iii) Provides solely general policy advice to the board of directors.

(2) Extensions of credit to a director of an affiliate of a bank are not subject to §§ 215.4, 215.6, and 215.8 if—

(i) The director of the affiliate is ex-cluded, by resolution of the board of di-rectors or by the bylaws of the bank, from participation in major policy-making functions of the bank, and the director does not actually participate in such functions;

(ii) The affiliate does not control the bank;

(iii) As determined annually, the as-sets of the affiliate do not constitute more than 10 percent of the consoli-dated assets of the company that—

(A) Controls the bank; and (B) Is not controlled by any other

company; and (iv) The director of the affiliate is

not otherwise subject to §§ 215.4, 215.6, and 215.8.

(3) For purposes of paragraph (d)(2)(i) of this section, a resolution of the board of directors or a corporate bylaw may—

(i) Include the director (by name or by title) in a list of persons excluded from participation in such functions; or

(ii) Not include the director in a list of persons authorized (by name or by title) to participate in such functions.

(e)(1) Executive officer of a company or bank means a person who participates or has authority to participate (other than in the capacity of a director) in major policymaking functions of the company or bank, whether or not: the officer has an official title; the title designates the officer an assistant; or the officer is serving without salary or other compensation. 1 The chairman of


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

487


participate, in major policymaking functions

of the bank or company.

2 Where State law establishes a lending

limit for a State member bank that is lower

than the amount permitted in section 5200 of

the Revised Statutes, the lending limit es-

tablished by applicable State laws shall be

the lending limit for the State member

bank.

the board, the president, every vice

president, the cashier, the secretary,

and the treasurer of a company or bank

are considered executive officers, un-

less the officer is excluded, by resolu-

tion of the board of directors or by the

bylaws of the bank or company, from

participation (other than in the capac-

ity of a director) in major policy-

making functions of the bank or com-

pany, and the officer does not actually

participate therein.

(2) Extensions of credit to an execu-

tive officer of an affiliate of a bank are

not subject to §§ 215.4, 215.6, and 215.8

if—

(i) The executive officer is excluded,

by resolution of the board of directors

or by the bylaws of the bank, from par-

ticipation in major policymaking func-

tions of the bank, and the executive of-

ficer does not actually participate in

such functions;

(ii) The affiliate does not control the

bank;

(iii) As determined annually, the as-

sets of the affiliate do not constitute

more than 10 percent of the consoli-

dated assets of the company that—

(A) Controls the bank; and

(B) Is not controlled by any other

company; and

(iv) The executive officer of the affil-

iate is not otherwise subject to §§ 215.4,

215.6, and 215.8.

(3) For purposes of paragraphs (e)(1)

and (e)(2)(i) of this section, a resolution

of the board of directors or a corporate

bylaw may—

(i) Include the executive officer (by

name or by title) in a list of persons ex-

cluded from participation in such func-

tions; or

(ii) Not include the executive officer

in a list of persons authorized (by name

or by title) to participate in such func-

tions.

(f) Foreign bank has the meaning

given in 12 U.S.C. 3101(7).

(g) Immediate family means the spouse

of an individual, the individual’s minor

children, and any of the individual’s

children (including adults) residing in

the individual’s home.

(h) Insider means an executive offi-

cer, director, or principal shareholder,

and includes any related interest of

such a person.

(i) Lending limit. The lending limit for

a member bank is an amount equal to

the limit of loans to a single borrower

established by section 5200 of the Re-

vised Statutes, 2 12 U.S.C. 84. This

amount is 15 percent of the bank’s

unimpaired capital and unimpaired

surplus in the case of loans that are

not fully secured, and an additional 10

percent of the bank’s unimpaired cap-

ital and unimpaired surplus in the case

of loans that are fully secured by read-

ily marketable collateral having a

market value, as determined by reli-

able and continuously available price

quotations, at least equal to the

amount of the loan. The lending limit

also includes any higher amounts that

are permitted by section 5200 of the Re-

vised Statutes for the types of obliga-

tions listed therein as exceptions to

the limit. A member bank’s


surplus equals:

(1) The bank’s Tier 1 and Tier 2 cap-

ital included in the bank’s risk-based

capital under the capital guidelines of

the appropriate Federal banking agen-

cy, based on the bank’s most recent

consolidated report of condition filed

under 12 USC 1817(a)(3); and

(2) The balance of the bank’s allow-

ance for loan and lease losses not in-

cluded in the bank’s Tier 2 capital for

purposes of the calculation of risk-

based capital by the appropriate Fed-

eral banking agency, based on the

bank’s most recent consolidated report

of condition filed under 12 U.S.C.

1817(a)(3)

(j) Member bank means any banking

institution that is a member of the

Federal Reserve System, including any

subsidiary of a member bank. The term

does not include any foreign bank that

maintains a branch in the United

States, whether or not the branch is in-

sured (within the meaning of 12 U.S.C.

1813(s)) and regardless of the operation


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

488

12 CFR Ch. II (1–1–11 Edition) § 215.3

of 12 U.S.C. 1813(h) and 12 U.S.C.

1828(j)(3)(B).

(k) Pay an overdraft on an account means to pay an amount upon the

order of an account holder in excess of

funds on deposit in the account.

(l) Person means an individual or a

company.

(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 mem-

ber bank or company. Shares owned or

controlled by a member of an individ-

ual’s immediate family are considered

to be held by the individual.

(2) A principal shareholder of a mem-

ber bank does not include a company of

which a member bank is a subsidiary.

(n) Related interest of a person means:

(1) A company that is controlled by

that person; or

(2) A political or campaign com-

mittee that is controlled by that per-

son or the funds or services of which

will benefit that person.

(o) Subsidiary has the meaning given

in 12 U.S.C. 1841(d), but does not in-

clude a subsidiary of a member bank.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,

July 26, 1994, as amended at 60 FR 31054, June

13, 1995; 61 FR 57770, Nov. 8, 1996; 62 FR 13298,

Mar. 20, 1997; 71 FR 71474, Dec. 11, 2006]

§ 215.3 Extension of credit.

(a) An extension of credit is a making

or renewal of any loan, a granting of a

line of credit, or an extending of credit

in any manner whatsoever, and in-

cludes:

(1) A purchase under repurchase

agreement of securities, other assets,

or obligations;

(2) An advance by means of an over-

draft, cash item, or otherwise;

(3) Issuance of a standby letter of

credit (or other similar arrangement

regardless of name or description) or

an ineligible acceptance, as those

terms are defined in § 208.24 of this

chapter;

(4) An acquisition by discount, pur-

chase, exchange, or otherwise of any

note, draft, bill of exchange, or other

evidence of indebtedness upon which an

insider may be liable as maker, drawer,

endorser, guarantor, or surety;

(5) An increase of an existing indebt-

edness, but not if the additional funds

are advanced by the bank for its own

protection for:

(i) Accrued interest; or

(ii) Taxes, insurance, or other ex-

penses incidental to the existing in-

debtedness;

(6) An advance of unearned salary or

other unearned compensation for a pe-

riod in excess of 30 days; and

(7) Any other similar transaction as a

result of which a person becomes obli-

gated 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 whatso-

ever.

(b) An extension of credit does not in-

clude:

(1) An advance against accrued salary

or other accrued compensation, or an

advance for the payment of authorized

travel or other expenses incurred or to

be incurred on behalf of the bank;

(2) A receipt by a bank of a check de-

posited in or delivered to the bank in

the usual course of business unless it

results in the carrying of a cash item

for or the granting of an overdraft

(other than an inadvertent overdraft in

a limited amount that is promptly re-

paid, as described in § 215.4(e) of this

part);

(3) An acquisition of a note, draft,

bill of exchange, or other evidence of

indebtedness through:

(i) A merger or consolidation of

banks or a similar transaction by

which a bank acquires assets and as-

sumes liabilities of another bank or

similar organization; or

(ii) Foreclosure on collateral or simi-

lar proceeding for the protection of the

bank, provided that such indebtedness

is not held for a period of more than

three years from the date of the acqui-

sition, subject to extension by the ap-

propriate Federal banking agency for

good cause;

(4)(i) An endorsement or guarantee

for the protection of a bank of any loan

or other asset previously acquired by

the bank in good faith; or

(ii) Any indebtedness to a bank for

the purpose of protecting the bank


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

489


against loss or of giving financial as-

sistance to it;

(5) Indebtedness of $15,000 or less aris-

ing by reason of any general arrange-

ment by which a bank:

(i) Acquires charge or time credit ac-

counts; or

(ii) Makes payments to or on behalf

of participants in a bank credit card

plan, check credit plan, or similar

open-end credit plan, provided:

(A) The indebtedness does not involve

prior individual clearance or approval

by the bank other than for the pur-

poses of determining authority to par-

ticipate in the arrangement and com-

pliance with any dollar limit under the

arrangement; and

(B) The indebtedness is incurred

under terms that are not more favor-

able than those offered to the general

public;

(6) Indebtedness of $5,000 or less aris-

ing by reason of an interest-bearing

overdraft credit plan of the type speci-

fied in § 215.4(e) of this part; or

(7) A discount of promissory notes,

bills of exchange, conditional sales

contracts, or similar paper, without re-

course.

(c) Non-interest-bearing deposits to

the credit of a bank are not considered

loans, advances, or extensions of credit

to the bank of deposit; nor is the giving

of immediate credit to a bank upon un-

collected items received in the ordi-

nary course of business considered to

be a loan, advance or extension of cred-

it to the depositing bank.

(d) For purposes of § 215.4 of this part,

an extension of credit by a member

bank is considered to have been made

at the time the bank enters into a

binding commitment to make the ex-

tension of credit.

(e) A participation without recourse

is considered to be an extension of

credit by the participating bank, not

by the originating bank.

(f) Tangible economic benefit rule—(1)

In general. An extension of credit is

considered made to an insider to the

extent that the proceeds are trans-

ferred to the insider or are used for the

tangible economic benefit of the in-

sider.

(2) 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 exten-

sions of credit to insiders; and

(ii) The proceeds of the extension of

credit are used in a bona fide trans-

action to acquire property, goods, or

services from the insider.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,

July 26, 1994; 63 FR 58621, Nov. 2, 1998]

§ 215.4 General prohibitions.

(a) Terms and creditworthiness—(1) In

general. No member bank may extend

credit to any insider of the bank or in-

sider of its affiliates unless the exten-

sion of credit:

(i) Is made on substantially the same

terms (including interest rates and col-

lateral) as, and following credit under-

writing procedures that are not less

stringent than, those prevailing at the

time for comparable transactions by

the bank with other persons that are

not covered by this part and who are

not employed by the bank; and

(ii) Does not involve more than the

normal risk of repayment or present

other unfavorable features.

(2) Exception. Nothing in this para-

graph (a) or paragraph (e)(2)(ii) of this

section shall prohibit any extension of

credit made pursuant to a benefit or

compensation program—

(i) That is widely available to em-

ployees of the member bank and, in the

case of extensions of credit to an in-

sider of its affiliates, is widely avail-

able to employees of the affiliates at

which that person is an insider; and

(ii) That does not give preference to

any insider of the member bank over

other employees of the member bank

and, in the case of extensions of credit

to an insider of its affiliates, does not

give preference to any insider of its af-

filiates over other employees of the af-

filiates at which that person is an in-

sider.

(b) Prior approval. (1) No member

bank may extend credit (which term

includes granting a line of credit) to

any insider of the bank or insider of its

affiliates in an amount that, when ag-

gregated with the amount of all other

extensions of credit to that person and

to all related interests of that person,


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

490

12 CFR Ch. II (1–1–11 Edition) § 215.4

exceeds the higher of $25,000 or 5 per-

cent of the member bank’s unimpaired

capital and unimpaired surplus, unless:

(i) The extension of credit has been

approved in advance by a majority of

the entire board of directors of that

bank; and

(ii) The interested party has ab-

stained from participating directly or

indirectly in the voting.

(2) In no event may a member bank

extend credit to any insider of the

bank or insider of its affiliates in an

amount that, when aggregated with all

other extensions of credit to that per-

son, and all related interests of that

person, exceeds $500,000, except by com-

plying with the requirements of this

paragraph (b).

(3) Approval by the board of directors

under paragraphs (b)(1) and (b)(2) of

this section is not required for an ex-

tension of credit that is made pursuant

to a line of credit that was approved

under paragraph (b)(1) of this section

within 14 months of the date of the ex-

tension of credit. The extension of

credit must also be in compliance with

the requirements of § 215.4(a) of this

part.

(4) Participation in the discussion, or

any attempt to influence the voting, by

the board of directors regarding an ex-

tension of credit constitutes indirect

participation in the voting by the

board of directors on an extension of

credit.

(c) Individual lending limit— No mem-

ber bank may extend credit to any in-

sider of the bank or insider of its affili-

ates in an amount that, when aggre-

gated with the amount of all other ex-

tensions of credit by the member bank

to that person and to all related inter-

ests of that person, exceeds the lending

limit of the member bank specified in

§ 215.2(i) of this part. This prohibition

does not apply to an extension of credit

by a member bank to a company of

which the member bank is a subsidiary

or to any other subsidiary of that com-

pany.

(d) Aggregate lending limit—(1) General limit. A member bank may not extend

credit to any insider of the bank or in-

sider of its affiliates unless the exten-

sion of credit is in an amount that,

when aggregated with the amount of

all outstanding extensions of credit by

that bank to all such insiders, does not

exceed the bank’s unimpaired capital

and unimpaired surplus (as defined in

§ 215.2(i) of this part).

(2) Member banks with deposits of less than $100,000,000. (i) A member bank

with deposits of less than $100,000,000

may by an annual resolution of its

board of directors increase the general

limit specified in paragraph (d)(1) of

this section to a level not to exceed

two times the bank’s unimpaired cap-

ital and unimpaired surplus, if:

(A) The board of directors determines

that such higher limit is consistent

with prudent, safe, and sound banking

practices in light of the bank’s experi-

ence in lending to its insiders and is

necessary to attract or retain directors

or to prevent restricting the avail-

ability of credit in small communities;

(B) The resolution sets forth the

facts and reasoning on which the board

of directors bases the finding, including

the amount of the bank’s lending to its

insiders as a percentage of the bank’s


surplus as of the date of the resolution;

(C) The bank meets or exceeds, on a

fully-phased in basis, all applicable

capital requirements established by


cy; and

(D) The bank received a satisfactory

composite rating in its most recent re-

port of examination.

(ii) If a member bank has adopted a

resolution authorizing a higher limit

pursuant to paragraph (d)(2)(i) of this

section and subsequently fails to meet

the requirements of paragraph

(d)(2)(i)(C) or (d)(2)(i)(D) of this section,

the member 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 in

paragraph (d)(1) of this section.

(3) Exceptions. (i) The general limit

specified in paragraph (d)(1) of this sec-

tion does not apply to the following:

(A) Extensions of credit secured by a

perfected security interest in bonds,

notes, certificates of indebtedness, or

Treasury bills of the United States or

in other such obligations fully guaran-

teed as to principal and interest by the

United States;


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

491


3 This prohibition does not apply to the

payment by a member bank of an overdraft

of a principal shareholder of the member

bank, unless the principal shareholder is also

an executive officer or director. This prohibi-

tion also does not apply to the payment by a

member bank of an overdraft of a related in-

terest of an executive officer, director, or

principal shareholder of the member bank or

executive officer, director, or principal

shareholder of its affiliates.

(B) Extensions of credit to or secured

by unconditional takeout commit-

ments or guarantees of any depart-

ment, agency, bureau, board, commis-

sion or establishment of the United

States or any corporation wholly

owned directly or indirectly by the

United States;

(C) Extensions of credit secured by a

perfected security interest in a seg-

regated deposit account in the lending

bank; or

(D) Extensions of credit arising from

the discount of negotiable or nonnego-

tiable installment consumer paper that

is acquired from an insider and carries

a full or partial recourse endorsement

or guarantee by the insider, provided

that:

(1) The financial condition of each

maker of such consumer paper is rea-

sonably documented in the bank’s files

or known to its officers;

(2) An officer of the bank designated

for that purpose by the board of direc-

tors of the bank certifies in writing

that the bank is relying primarily upon

the responsibility of each maker for

payment of the obligation and not

upon any endorsement or guarantee by

the insider; and

(3) The maker of the instrument is

not an insider.

(ii) The exceptions in paragraphs

(d)(3)(i)(A) through (d)(3)(i)(C) of this

section apply only to the amounts of

such extensions of credit that are se-

cured in the manner described therein.

(e) Overdrafts. (1) No member bank

may pay an overdraft of an executive

officer or director of the bank or execu-

tive officer or director of its affiliates 3

on an account at the bank, unless the

payment of funds is made in accord-

ance with:

(i) A written, preauthorized, interest-

bearing extension of credit plan that

specifies a method of repayment; or

(ii) A written, preauthorized transfer

of funds from another account of the

account holder at the bank. (2) The prohibition in paragraph (e)(1)

of this section does not apply to pay-

ment of inadvertent overdrafts on an

account in an aggregate amount of

$1,000 or less, provided: (i) The account is not overdrawn for

more than 5 business days; and (ii) The member bank charges the ex-

ecutive officer or director the same fee

charged any other customer of the

bank in similar circumstances.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,

July 26, 1994, as amended at 61 FR 57770, Nov.

8, 1996; 62 FR 13298, Mar. 20, 1997]

§ 215.5 Additional restrictions on loans to executive officers of member banks.

The following restrictions on exten-

sions of credit by a member bank to

any of its executive officers apply in

addition to any restrictions on exten-

sions of credit by a member bank to in-

siders of itself or its affiliates set forth

elsewhere in this part. The restrictions

of this section apply only to executive

officers of the member bank and not to

executive officers of its affiliates. (a) No member bank may extend

credit to any of its executive officers,

and no executive officer of a member

bank shall borrow from or otherwise

become indebted to the bank, except in

the amounts, for the purposes, and

upon the conditions specified in para-

graphs (c) and (d) of this section. (b) No member bank may extend

credit in an aggregate amount greater

than the amount permitted in para-

graph (c)(4) of this section to a partner-

ship in which one or more of the bank’s

executive officers are partners and, ei-

ther individually or together, hold a

majority interest. For the purposes of

paragraph (c)(4) of this section, the

total amount of credit extended by a

member bank to such partnership is

considered to be extended to each exec-

utive officer of the member bank who

is a member of the partnership. (c) A member bank is authorized to

extend credit to any executive officer

of the bank: (1) In any amount to finance the edu-

cation of the executive officer’s chil-

dren;


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

492

12 CFR Ch. II (1–1–11 Edition) § 215.6

(2) In any amount to finance or refi-

nance the purchase, construction,

maintenance, or improvement of a resi-

dence of the executive officer, pro-

vided:

(i) The extension of credit is secured

by a first lien on the residence and the

residence is owned (or expected to be

owned after the extension of credit) by

the executive officer; and

(ii) In the case of a refinancing, that

only the amount thereof used to repay

the original extension of credit, to-

gether with the closing costs of the re-

financing, and any additional amount

thereof used for any of the purposes

enumerated in this paragraph (c)(2),

are included within this category of

credit;

(3) In any amount, if the extension of

credit is secured in a manner described

in § 215.4(d)(3)(i)(A) through (d)(3)(i)(C)

of this part; and

(4) For any other purpose not speci-

fied in paragraphs (c)(1) through (c)(3)

of this section, if the aggregate amount

of extensions of credit to that execu-

tive officer under this paragraph does

not exceed at any one time the higher

of 2.5 per cent of the bank’s unimpaired

capital and unimpaired surplus or

$25,000, but in no event more than

$100,000.

(d) Any extension of credit by a mem-

ber bank to any of its executive offi-

cers shall be:

(1) Promptly reported to the member

bank’s board of directors;

(2) In compliance with the require-

ments of § 215.4(a) of this part;

(3) Preceded by the submission of a

detailed current financial statement of

the executive officer; and

(4) Made subject to the condition in

writing that the extension of credit

will, at the option of the member 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 speci-

fied for a category of credit in para-

graph (c) of this section.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,

July 26, 1994; 60 FR 17636, Apr. 7, 1995]

§ 215.6 Prohibition on knowingly re-ceiving unauthorized extension of credit.

No executive officer, director, or

principal shareholder of a member

bank or any of its affiliates shall know-

ingly receive (or knowingly permit any

of that person’s related interests to re-

ceive) from a member bank, directly or

indirectly, any extension of credit not

authorized under this part.

§ 215.7 Extensions of credit out-standing on March 10, 1979.

(a) Any extension of credit that was

outstanding on March 10, 1979, and that

would, if made on or after March 10,

1979, violate § 215.4(c) of this part, shall

be reduced in amount by March 10,

1980, to be in compliance with the lend-

ing limit in § 215.4(c) of this part. Any

renewal or extension of such an exten-

sion of credit on or after March 10, 1979,

shall be made only on terms that will

bring the extension of credit into com-

pliance with the lending limit of

§ 215.4(c) of this part by March 10, 1980.

However, any extension of credit made

before March 10, 1979, that bears a spe-

cific maturity date of March 10, 1980, or

later, shall be repaid in accordance

with its repayment schedule in exist-

ence on or before March 10, 1979.

(b) If a member bank is unable to

bring all extensions of credit out-

standing on March 10, 1979, into com-

pliance as required by paragraph (a) of

this section, the member bank shall

promptly report that fact to the Comp-

troller of the Currency, in the case of a

national bank, or to the appropriate

Federal Reserve Bank, in the case of a

State member bank, and explain the

reasons why all the extensions of credit

cannot be brought into compliance.

The Comptroller or the Reserve Bank,

as the case may be, is authorized, on

the basis of good cause shown, to ex-

tend the March 10, 1980, date for com-

pliance for any extension of credit for

not more than two additional one-year

periods.

§ 215.8 Records of member banks.

(a) In general. Each member bank

shall maintain records necessary for

compliance with the requirements of

this part.


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

493


(b) Recordkeeping for insiders of the

member bank. Any recordkeeping meth-

od adopted by a member bank shall:

(1) Identify, through an annual sur-

vey, all insiders of the bank itself; and

(2) Maintain records of all extensions

of credit to insiders of the bank itself,

including the amount and terms of

each such extension of credit.

(c) Recordkeeping for insiders of the

member bank’s affiliates. Any record-

keeping method adopted by a member

bank shall maintain records of exten-

sions of credit to insiders of the mem-

ber bank’s affiliates by:

(1) Survey method. (i) Identifying,

through an annual survey, each insider

of the member bank’s affiliates; and

(ii) Maintaining records of the

amount and terms of each extension of

credit by the member bank to such in-

siders; or

(2) Borrower inquiry method. (i) Re-

quiring as part of each extension of

credit that the borrower indicate

whether the borrower is an insider of

an affiliate of the member bank; and

(ii) Maintaining records that identify

the amount and terms of each exten-

sion of credit by the member bank to

borrowers so identifying themselves.

(3) Alternative recordkeeping methods

for insiders of affiliates. A member bank

may employ a recordkeeping method

other than those identified in para-

graphs (c)(1) and (c)(2) of this section if


cy determines that the bank’s method

is at least as effective as the identified

methods.

(d) Special rule for non-commercial

lenders. A member bank that is prohib-

ited by law or by an express resolution

of the board of directors of the bank

from making an extension of credit to

any company or other entity that is

covered by this part as a company is

not required to maintain any records of

the related interests of the insiders of

the bank or its affiliates or to inquire

of borrowers whether they are related

interests of the insiders of the bank or

its affiliates.

§ 215.9 Disclosure of credit from mem-ber banks to executive officers and principal shareholders.

(a) Definitions. For the purposes of this section, the following definitions apply:

(1) Principal shareholder of a member bank means any person other than an insured bank, or a foreign bank as de-fined in 12 U.S.C. 3101(7), that, directly or indirectly, owns, controls, or has

power to vote more than 10 percent of

any class of voting securities of the

member bank. The term includes a per-

son that controls a principal share-

holder (e.g., a person that controls a

bank holding company). Shares of a

bank (including a foreign bank), bank

holding company, or other company

owned or controlled by a member of an

individual’s immediate family are pre-

sumed to be owned or controlled by the

individual for the purposes of deter-

mining principal shareholder status. (2) Related interest means: (i) Any company controlled by a per-

son; or (ii) Any political or campaign com-

mittee the funds or services of which

will benefit a person or that is con-

trolled by a person. For the purpose of

this section, a related interest does not

include a bank or a foreign bank (as de-

fined in 12 U.S.C. 3101(7)). (b) Public disclosure. (1) Upon receipt

of a written request from the public, a

member bank shall make available the

names of each of its executive officers

and each of its principal shareholders

to whom, or to whose related interests,

the member bank had outstanding as of

the end of the latest previous quarter

of the year, an extension of credit that,

when aggregated with all other out-

standing extensions of credit at such

time from the member bank to such

person and to all related interests of

such person, equaled or exceeded 5 per-

cent of the member bank’s capital and

unimpaired surplus or $500,000, which-

ever amount is less. No disclosure

under this paragraph is required if the

aggregate amount of all extensions of

credit outstanding at such time from

the member bank to the executive offi-

cer or principal shareholder of the

member bank and to all related inter-

ests of such a person does not exceed

$25,000.


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

494

12 CFR Ch. II (1–1–11 Edition) § 215.10

(2) A member bank is not required to disclose the specific amounts of indi-vidual extensions of credit.

(c) Maintaining records. Each member bank shall maintain records of all re-quests for the information described in paragraph (b) of this section and the disposition of such requests. These records may be disposed of after two years from the date of the request.

[Reg. O, 59 FR 8837, Feb. 24, 1994; 59 FR 37930,

July 26, 1994. Redesignated and amended at

71 FR 71474, Dec. 11, 2006]

§ 215.10 Reporting requirement for credit secured by certain bank stock.

Each executive officer or director of a member bank the shares of which are not publicly traded shall report annu-ally to the board of directors of the member bank the outstanding amount of any credit that was extended to the executive officer or director and that is

secured by shares of the member bank.

[Reg. O, 59 FR 8837, Feb. 24, 1994. Redesig-

nated at 71 FR 71474, Dec. 11, 2006]

§ 215.11 Civil penalties. Any member bank, or any officer, di-

rector, employee, agent, or other per-

son participating in the conduct of the

affairs of the bank, that violates any

provision of this part (other than

§ 215.9) is subject to civil penalties as

specified in section 29 of the Federal

Reserve Act (12 U.S.C. 504).

[Reg. O, 71 FR 71475, Dec. 11, 2006]

APPENDIX TO PART 215—SECTION 5200 OF

THE REVISED STATUTES TOTAL

LOANS AND EXTENSIONS OF CREDIT

(a)(1) The total loans and extensions of

credit by a national banking association to a

person outstanding at one time and not fully

secured, as determined in a manner con-

sistent with paragraph (2) of this subsection,

by collateral having a market value at least

equal to the amount of the loan or extension

of credit shall not exceed 15 per centum of

the unimpaired capital and unimpaired sur-

plus of the association. (2) The total loans and extensions of credit

by a national banking association to a per-

son outstanding at one time and fully se-

cured by readily marketable collateral hav-

ing a market value, as determined by reli-

able and continuously available price

quotations, at least equal to the amount of

the funds outstanding shall not exceed 10 per

centum of the unimpaired capital and

unimpaired surplus of the association. This

limitation shall be separate from and in ad-

dition to the limitations contained in para-

graph (1) of this subsection.

DEFINITIONS

(b) For the purposes of this section—

(1) The term loans and extensions of credit

shall include all direct or indirect advances

of funds to a person made on the basis of any

obligation of that person to repay the funds

or repayable from specific property pledged

by or on behalf of the person, and to the ex-

tent specified by the Comptroller of the Cur-

rency, such term shall also include any li-

ability of a national banking association to

advance funds to or on behalf of a person

pursuant to a contractual commitment; and

(2) The term person shall include an indi-

vidual, sole proprietorship, partnership, joint

venture, association, trust, estate, business

trust, corporation, sovereign government, or

agency, instrumentality, or political sub-

division thereof, or any similar entity or or-

ganization.

EXCEPTIONS

(c) The limitations contained in subsection

(a) of this section shall be subject to the fol-

lowing exceptions:

(1) Loans or extensions of credit arising

from the discount of commercial or business

paper evidencing an obligation to the person

negotiating it with recourse shall not be sub-

ject to any limitation based on capital and

surplus.

(2) The purchase of bankers’ acceptances of

the kind described in section 372 of this title

and issued by other banks shall not be sub-

ject to any limitation based on capital and

surplus.

(3) Loans and extensions of credit secured

by bills of lading, warehouse receipts, or

similar documents transferring or securing

title to readily marketable staples shall be

subject to a limitation of 35 per centum of

capital and surplus in addition to the general

limitations if the market value of the sta-

ples securing each additional loan or exten-

sion of credit at all times equals or exceeds

115 per centum of the outstanding amount of

such loan or extension of credit. The staples

shall be fully covered by insurance whenever

it is customary to insure such staples.

(4) Loans or extensions of credit secured by

bonds, notes, certificates of indebtedness, or

Treasury bills of the United States or by

other such obligations fully guaranteed as to

principal and interest by the United States

shall not be subject to any limitation based

on capital and surplus.

(5) Loans or extensions of credit to or se-

cured by unconditional takeout commit-

ments or guarantees of any department,


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

495

Federal Reserve System Pt. 216

agency, bureau, board, commission, or estab-

lishment of the United States or any cor-

poration wholly owned directly or indirectly

by the United States shall not be subject to

any limitation based on capital and surplus. (6) Loans or extensions of credit secured by

a segregated deposit account in the lending

bank shall not be subject to any limitation

based on capital and surplus. (7) Loans or extensions of credit to any fi-

nancial institution or to any receiver, con-

servator, superintendent of banks, or other

agent in charge of the business and property

of such financial institution, when such

loans or extensions of credit are approved by

the Comptroller of the Currency, shall not be

subject to any limitation based on capital

and surplus. (8)(A) Loans and extensions of credit aris-

ing from the discount of negotiable or non-

negotiable installment consumer paper

which carries a full recourse endorsement or

unconditional guarantee by the person trans-

ferring the paper shall be subject under this

section to a maximum limitation equal to 25

per centum of such capital and surplus, not-

withstanding the collateral requirements set

forth in subsection (a)(2) of this section. (B) If the bank’s files or the knowledge of

its officers of the financial condition of each

maker of such consumer paper is reasonably

adequate, and an officer of the bank des-

ignated for that purpose by the board of di-

rectors of the bank certifies in writing that

the bank is relying primarily upon the re-

sponsibility of each maker for payment of

such loans or extensions of credit and not

upon any full or partial recourse endorse-

ment or guarantee by the transferor, the

limitations of this section as to the loans or

extensions of credit of each such maker shall

be the sole applicable loan limitations. (9)(A) Loans and extensions of credit se-

cured by shipping documents or instruments

transferring or securing title covering live-

stock or giving a lien on livestock when the

market value of the livestock securing the

obligation is not at any time less than 115

per centum of the face amount of the note

covered, shall be subject under this section

notwithstanding the collateral requirements

set forth in subsection (a)(2) of this section,

to a maximum limitation equal to 25 per

centum of such capital and surplus. (B) Loans and extensions of credit which

arise from the discount by dealers in dairy

cattle of paper given in payment for dairy

cattle, which paper carries a full recourse en-

dorsement or unconditional guarantee of the

seller, and which are secured by the cattle

being sold, shall be subject under this sec-

tion, notwithstanding the collateral require-

ments set forth in paragraph (a)(2) of this

section, to a limitation of 25 per centum of

such capital and surplus. (10) Loans or extensions of credit to the

Student Loan Marketing Association shall

not be subject to any limitation based on

capital and surplus.

AUTHORITY OF COMPTROLLER OF THE

CURRENCY

(d)(1) The Comptroller of the Currency may

prescribe rules and regulations to administer

and carry out the purposes of this section,

including rules or regulations to define or

further define terms used in this section and

to establish limits or requirements other

than those specified in this section for par-

ticular classes or categories of loans or ex-

tensions of credit.

(2) The Comptroller of the Currency also

shall have authority to determine when a

loan putatively made to a person shall for

purposes of this section be attributed to an-

other person.

[48 FR 42806, Sept. 20, 1983]

PART 216—PRIVACY OF CON-SUMER FINANCIAL INFORMA-TION (REGULATION P)

Sec.

216.1 Purpose and scope.

216.2 Model privacy form and examples.

216.3 Definitions.

Subpart A—Privacy and Opt Out Notices

216.4 Initial privacy notice to consumers re-

quired.

216.5 Annual privacy notice to customers

required.

216.6 Information to be included in privacy

notices.

216.7 Form of opt out notice to consumers;

opt out methods.

216.8 Revised privacy notices.

216.9 Delivering privacy and opt out no-

tices.

Subpart B—Limits on Disclosures

216.10 Limitation on disclosure of nonpublic

personal information to nonaffiliated

third parties.

216.11 Limits on redisclosure and reuse of

information.

216.12 Limits on sharing account number in-

formation for marketing purposes.

Subpart C—Exceptions

216.13 Exception to opt out requirements for

service providers and joint marketing.

216.14 Exceptions to notice and opt out re-

quirements for processing and servicing

transactions.

216.15 Other exceptions to notice and opt

out requirements.


oods

2 on

DS

K1D

XX

6B1P

RO

D w

ith C

FR

Reproduced with permission from BNA’s Banking Report, 99 BBR 652, 10/16/12, 10/16/2012. Copyright � 2012 byThe Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

D i r e c t o r s a n d O f fi c e r s

Regulation O: Common Mistakes and Technicalities Explained

BY PETER G. WEINSTOCK AND DAVID A. SHIPLEY

R egulators often rely upon Regulation O, the statuteregarding transactions with affiliates, and statu-tory legal lending limits as the basis for regulatory

actions. Unfortunately, because of the technical natureof such rules, bankers have experienced difficulty abid-ing by them. In the current regulatory environment, theentire tone of an examination may shift as the result ofa possible Reg O violation. The purpose of this article isto provide an outline of the provisions of Reg O in thecontext of common mistakes that are often committedby bankers. Subsequent articles will outline the provi-sions of the statutes governing transactions between abank and its affiliates and discuss the statutory legallending limits.

Common Mistake #1 —Who is an Executive Officer?

Reg O governs ‘‘extensions of credit’’ to the ‘‘direc-tors,’’ ‘‘executive officers’’ and ‘‘principal sharehold-ers’’ (collectively referred to as ‘‘Insiders’’), and their‘‘related interests’’ of a federally regulated bank, its af-filiates or its parent bank holding company. It is typi-cally obvious who a director is, and the term ‘‘principalshareholder’’ refers to a person or enterprise (otherthan an insured bank) that directly or indirectly is act-ing through or in concert with others, owns, controls orhas the power to vote more than 10 percent of theshares of any class (not just common stock) of votingsecurities.

A more difficult determination is: who is an ‘‘execu-tive officer?’’ Reg O says individuals with the followingtitles are all executive officers: the chairman of theboard, the president, every vice president, the cashier,the secretary and the treasurer. In addition, any indi-vidual who participates, or has the authority to partici-pate, in a bank’s or a company’s major policy-makingdecisions is also considered an executive officer, even ifsuch person has no title or the person’s title designateshim as an assistant or that person is not paid.

Example #1: The son of a bank’s chairman of theboard serves as vice chairman of the board. The son hassignature authority and presides over the board in hisfather’s absence. Because the son has no banking expe-rience, the father never leaves the son in charge. Theson is considered an executive officer because he couldsign checks in his father’s absence even if he does notexercise such authority.

Example #2: An employee of the bank does not haveany policy role but always gives his opinions to those ina policy-making position and also helps implementpolicy. Such an employee does not possess policy-making authority and really does not participate in

Peter G. Weinstock is the practice groupleader of the Financial Institutions section ofHunton & Williams LLP. His practice isdevoted to corporate and regulatory represen-tation of a wide range of financial institutionfranchises. David A. Shipley is an associateat the firm, where he focuses on corporatetransactions and securities issuances.

COPYRIGHT � 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0891-0634

BNA’s

Banking Report™

policy-making and his decisions are also limited bypolicy standards set by senior management.

Example #3: The same employee as in Example #1advises the bank’s president that the bank should notloan money to persons with bad credit. The bank’spresident agrees and causes the bank’s loan policy to berewritten accordingly. The employee is still not an ex-ecutive officer because he only has sporadic input intobank policy making and his decisions are also limitedby policy standards set by senior management. In orderto avoid the employee being deemed as an executive of-ficer, the bank’s board can adopt a resolution statingthat the employee is not an executive officer. The em-ployee, however, must not actually participate in policy-making.

Example #4: The bank’s board adopts the resolutiondescribed in Example #3. The next year the same em-ployee is appointed to the executive officer’s strategicplanning committee, but the board reaffirms its earlierresolution. Now the employee is an executive officer be-cause he is participating in policy-making despite theexistence of the board resolution.

Common Mistake #2 —Who is a Related Interest?

As mentioned above, Reg O governs ‘‘extensions ofcredit’’ to the ‘‘directors,’’ ‘‘executive officers’’ and‘‘principal shareholders’’ and their ‘‘related interests’’of a bank, its affiliates or its parent bank holding com-pany. Reg O defines the term ‘‘related interest’’ as apartnership, company, trust or other enterprise that is‘‘controlled’’ by a person or enterprise, or a political orcampaign committee that is ‘‘controlled’’ by, or thefunds or services of which will benefit, a person or en-terprise. A person or enterprise is deemed to have con-trol over a company or a bank if that person or enter-prise, directly or indirectly, or acting through or in con-cert with one or more persons (i) owns, controls or hasthe power to vote 25 percent or more of any class of vot-ing securities of a company or a bank, (ii) controls inany manner the election of a majority of the directors ofa company or bank or (iii) has the power to exercise acontrolling influence over the management or policiesof a company or bank.

Example #5: A bank’s president owns 25 percent ofX Corp. and that entity owns 100 percent of Y Corp.Both X Corp. and Y Corp. are considered ‘‘related inter-ests’’ of the bank’s president because the president di-rectly controls X Corp. through a 25 percent ownershipinterest and controls Y Corp. through an indirect 25percent ownership interest by virtue of X Corp.’s 100percent ownership interest in Y Corp.

In addition to the control test mentioned above, a per-son is presumed to have control over a company orbank if (i) the person is (a) an executive officer or direc-tor of the company or bank and (b) directly or indirectlyowns, controls or has the power to vote more than 10percent of any class of voting securities of the companyor bank, or (ii) the person (a) directly or indirectlyowns, controls or has the power to vote more than 10percent of any class of voting securities of the companyor bank and (b) no other person owns, controls or hasthe power to vote a greater percentage of that class ofvoting securities.

A person may rebut a presumption of control by sub-mitting to the appropriate federal banking agency writ-ten materials that, in the agency’s judgment, demon-strate an absence of control.

Common Mistake #3 —What are the Restrictions on Loans to Insiders?

Reg O contains provisions designed to ensure consis-tent treatment between Insiders and third parties, in-cluding ensuring that loans to Insiders are creditworthyand contain terms, such as the interest rate, collateraland the repayment schedule, which are substantiallysimilar to that bank’s third-party loans. In addition, abank must apply the same standards for creditworthi-ness and repayment risks to loans to Insiders as it ap-plies to loans to other borrowers.

Example #6: In October, a bank loans funds to its ca-shier and his wife to open a restaurant, secured by therestaurant. The next June, the restaurant’s neighbor en-ters into a contract to store toxic waste for the U.S. gov-ernment. In October when the loan is up for renewal,may the bank renew it? The bank generally can renewthe loan if the bank would renew the same loan thatwas made to a third party.

Common Mistake #4 — How MuchCan Be Loaned to an Executive Officer?

A bank may only extend credit to an executive officer(this rule does not include executive officers of thebank’s parent holding company or the bank’s affiliates)in the following amounts and for the following pur-poses:

(a) In any amount for the education of the executiveofficer’s children;

(b) In any amount with respect to the acquisition,maintenance, construction or improvement of the ex-ecutive officer’s residence; provided, however, that theextension of credit must be secured by a first lien on theproperty; and

(c) For any other purpose in an aggregate amount notto exceed the higher of (i) $25,000 or (ii) 2.5 percent ofthe bank’s unimpaired capital and surplus (in no eventmay this percentage exceed $100,000).

This monetary limit also applies to a partnership inwhich one or more of the bank’s executive officers arepartners and either separately or together represent amajority interest. The total amount of the extension ofcredit is deemed extended to each of the bank’s execu-tive officers who is also a partner.

Example #7: A bank’s capital and surplus is$10,000,000. The bank loans $80,000 to a partnershipcreated by the bank’s senior vice president and execu-tive vice president. The senior vice president alreadyhas a $12,000 car loan and a $10,000 fully funded lineof credit. The loan to the partnership would violate RegO because although 2.5 percent of $10,000,000 is$250,000, the maximum amount a bank can loan to itsexecutive officers is $100,000 for a loan that is not forthe education of the executive officer’s children or forthe acquisition, maintenance, construction or improve-ment of the executive officer’s residence. Further, aloan to a partnership in which executive officers controla majority interest is deemed to be a loan to each execu-tive officer who is a partner. Thus, the loans to the se-nior vice president aggregate to $102,000.

2

10-16-12 COPYRIGHT � 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN 0891-0634

In addition, extensions of credit to Insiders (includingthe executive officers of a bank’s parent holding com-pany and a bank’s affiliates) and his related interestsmay not exceed 15 percent of the bank’s unimpairedcapital and surplus in the case of loans that are not fullysecured, and an additional 10 percent of the bank’s un-impaired capital and surplus in the case of loans thatare fully secured by readily marketable collateral.

Further, extensions of credit to all Insiders and theirrelated interests (including the executive officers of abank’s parent holding company and a bank’s affiliates)generally may not exceed the bank’s unimpaired capi-tal and surplus. Banks with deposits of fewer than $100million may increase this limit to a level not to exceedtwo times the bank’s unimpaired capital and surplus bya resolution of the board of directors if (a) such level isconsistent with prudent, safe and sound banking prac-tices and is necessary to attract or retain directors or toprevent restricting the availability of credit in smallcommunities, (b) the bank meets or exceeds all appli-cable regulatory capital requirements and (c) the bankreceived a satisfactory composite rating in its most re-cent report of examination.

Other Provisions of Reg O

1. Procedure for Approval for Loans to Insiders. Abank may not loan money to an Insider (including theexecutive officers of a bank’s parent holding companyand a bank’s affiliates) and his related interests in anaggregate amount in excess of $25,000 or 5 percent ofthe bank’s unimpaired capital and surplus (in no eventmay this percentage exceed $500,000), whichever ishigher, unless:

(a) the extension of credit has been approved in ad-vance by a majority of the bank’s entire board of direc-tors (not just a majority of the directors present), and

(b) the interested party has not voted, participated inthe discussion or attempted to influence the vote re-garding the extension of credit.

‘‘Unimpaired capital and surplus’’ is the aggregate ofthe bank’s Tier 1 and Tier 2 capital and the balance ofthe bank’s allowance for loan and lease losses not in-cluded in the bank’s Tier 2 capital.

2. Additional Procedures. Reg O contains additionalrequirements before a bank may extend credit to its ex-ecutive officers (this rule does not include executive of-ficers of the bank’s parent or the bank’s affiliates).These procedures are as follows:

(a) The loan must be promptly reported to the boardof directors of the bank. This requirement is only im-portant if the aggregate of all loans to that executive of-ficer and his related interests is less than the higher ofeither (i) $25,000 or (ii) 5 percent of the bank’s capitalplus unimpaired surplus. A loan in an amount in excessof the higher of $25,000 or 5 percent must not only bereported to the board, but as indicated earlier, the boardmust approve such a loan without the interested party’sbeing involved in the board’s deliberation;

(b) Before the loan may be made, the executive offi-cer must submit his current financial statements to thebank; and

(c) The loan must be subject to the condition that thebank at its option may ‘‘call in’’ the loan if the executiveofficer becomes indebted to another bank in an aggre-gate amount greater than the higher of (i) $25,000 or (ii)

2.5 percent of the bank’s unimpaired capital and sur-plus (in no event may this percentage exceed $100,000).

3. Overdrafts. In general, no bank may pay a direc-tor’s or executive officer’s (includes executive officersof the bank’s parent holding company and the bank’saffiliates as well) overdrafts, unless:

(a) The overdraft is pursuant to a written, pre-authorized, interest-bearing plan, specifying a methodof repayment, or

(b) The overdraft will be paid by a transfer of fundsfrom another account at the bank, and such transferwas pre-authorized in writing.

This rule does not apply to overdrafts of a director’sor executive officer’s related interests. Overdrafts areconsidered extensions of credit. Accordingly, the otherReg O rules such as the requirement of substantiallysimilar terms and prior approval also apply.

4. Records. A bank must maintain records in orderto enable it to comply with the provisions of Reg O.Among other things, these records must (a) identify allInsiders (including executive officers of the bank’s par-ent holding company and the bank’s affiliates) and theirrelated interests and (b) specify the amount and termsof each extension of credit to Insiders and their relatedinterests. The bank must annually request Insiders toidentify their related interests.

5. Reports. Reg O requires both executive officersand directors of a bank, the shares of which are notpublicly traded, to annually report to the board of direc-tors of the bank the outstanding amount of any creditthat was extended to the executive officer or directorthat is secured by shares of the bank.

6. Public Disclosure. Upon receipt of a written re-quest from the public, Reg O requires a bank to makepublicly available the names of each of its executive of-ficers and principal shareholders (not including execu-tive officers or principal shareholders of the bank’s par-ent holding company or the bank’s affiliates) to whom,or to whose related interests, the bank had outstanding,as of the end of the previous quarter, aggregate exten-sions of credit at least equal to the lesser of (a) 5 per-cent of the bank’s unimpaired capital and surplus or (b)$500,000. No disclosure is required if the aggregate ex-tensions of credit to any executive officer or principalshareholder and their related interests does not exceed$25,000. A record should be kept by the bank of all suchpublic requests and the disposition of such requests forat least 2 years from the date of request.

Penalties for Violations of Reg O

1. Civil Money Penalties. Any officer, director, em-ployee, agent or other person, or even the bank itself,participating in the conduct of the affairs of a bank, thatviolates any provision of Reg O (other than the provi-sions regarding public disclosure) may be subject tocivil money penalties of up to $1,000,000 for each day(or, for the bank itself, the lesser of $1,000,000 or 1 per-cent of the total assets of the bank) during which theviolation continues. A regulatory agency’s imposition ofcivil money penalties may be appealed within thatagency, and then to the courts. As a practical matter,unless a violation of Reg O has been particularly egre-gious, regulatory agencies do not impose civil moneypenalties if a violation has already been corrected or is

3

BANKING REPORT ISSN 0891-0634 BNA 10-16-12

corrected promptly after it is called to the attention ofbank management.

2. Cease and Desist Order. As discussed earlier, aregulatory agency may seek the imposition of an ad-ministrative action, such as a Cease and Desist Order, ifReg O has been violated. Even if a violation has beencorrected, the regulators take the position that adminis-trative action may still be appropriate to discouragerepetition of the violation.

3. Revocation of a Loan. Regulators have sometimesrequested a bank to ‘‘call in’’ an extension of credit thatwas in violation of Reg O.

In summary, regulators are increasingly scrutinizingtransactions between a bank and its insiders. Becauseof the complexity of the regulations governing suchtransactions, the result of this increased scrutiny hasbeen the discovery of a greater number of legal viola-tions. Bankers must become more cognizant of the re-strictions contained in Reg O if they are to avoid theregulation’s draconian penalties and the increased like-lihood that their bank will become subject to an admin-istrative action.

4

10-16-12 COPYRIGHT � 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. BBR ISSN 0891-0634

[BANK NAME] BOARD RESOLUTION FOR APPOINTMENT OF EXECUTIVE OFFICERS

WHEREAS, Federal Reserve Board Regulation O defines an “executive officer” as any person, regardless of title, who is involved in major policy making for [Bank Name] including, but not limited to, all individuals with the title of Chairman of the Board, President, every Vice President, Cashier, Secretary, or Treasurer; and WHEREAS, Federal Reserve Board Regulation O authorizes [Bank Name] to exclude, by Board resolution, any such persons from the definition of “executive officer” and from participation (other than in the capacity of Director) in major policy making functions of [Bank Name], if such person(s) do not actually participate therein; therefore BE IT RESOLVED, that only the following persons listed by name and/or title, and excluding those not listed but considered, for the purposes of Federal Reserve Board Regulation O, shall be empowered to participate in major policy making functions of [Bank Name] and thus, by definition, serve as an executive officer of [Bank Name]. Any Director holding any title included in the Regulation O definition of Executive Officer shall only participate in major policy making functions in the capacity of Director. The following positions are deemed to be executive officers for purposes of compliance with Federal Reserve Board Regulation O to the exclusion of all others:

Chief Executive Officer

President

Chief Financial Officer

Chief Credit Officer

Chief Risk Officer

Senior Lending Officer

Treasurer

QUESTIONNAIRE FOR INSIDERS OF BANKSOUTH

Name: Home Address: Social Security No.: Date of Birth: Home Phone: Home Fax Number: Home E-mail Address:

Place of Employment: Job Position/Title: Business Address: Business Phone: Business Fax Number: Business E-mail Address: Cell Phone Number: Assistant or Secretary’s Name: Assistant or Secretary’s Phone Number: Assistant or Secretary’s E-mail Address:

Immediate Family: (Spouse or other family member living in the same household) Spouse: Children’s Names and Ages: Other Dependents:

Board/Senior Executive Positions in Other Companies:

Are there any BankSouth loans currently outstanding to you, your immediate family, business or related interests?

RELATED INTERESTS Please complete the table giving the name of related interest, description of position held, and current percentage ownership interest. List only those with percentage ownership of 10% or greater. (Definitions are provided below.)

Name of Related Interest: Business/Political Campaigns/Trust Funds

Position Held % Ownership

Regulation O – Insider Lending requires the Bank to annually identify the “related interests” of each executive officer, director and principal shareholder.

“Related Interest” means 1. A company that is controlled by that person; or2. A political or campaign committee that is controlled by that person or the funds or services of which will benefit that

person.

“Company” means any corporation, partnership, trust (business or otherwise), association, joint venture, pool syndicate, sole proprietorship, unincorporated organization, or any other form of business entity not specifically listed herein.

“Control” means that a person directly or indirectly, or acting through or in concert with one or more persons 1. Owns, controls or has the power to vote 25 percent or more of any voting securities of the company; 2. Controls in any manner the election of a majority of the directors of the company; 3. Has the power to exercise a controlling influence over the management or policies of the company.

A person is presumed to have control, including the power to exercise a controlling influence over the management or policies, of a company if the person is:

1. An executive officer or director of the company; and directly or indirectly owns, controls, or has the power tovote more than 10 percent of any class of voting securities of the company; OR,

2. The person directly or indirectly own, controls, or has the power to vote more than 10 percent of any class ofvoting securities of the company; and no other person owns, controls, or has the power to vote a greaterpercentage of that class of securities.

An individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company solely by virtue of the individual’s position as an officer or director of the company.

REGULATION O - LOANS SECURED BY BANKSOUTHAS OF DECEMBER 31,

Federal Regulation 12 CFR 215.12 requires directors and executive officers of banks to annually report to the holding company board the outstanding amount of any credit secured by bank stock. The following is a list of loans outstanding as of the calendar year ending December 31, , which are collateralized by shares of BankSouth stock that I own.

If none, please indicate by writing “NONE” in the space provided below.

by .Please forward the completed form to

I, a BankSouth Insider, do hereby certify that the above listed information is true and complete as to my “related interests.” I further acknowledge that the above information may be used for internal and/or Compliance audi ing purposes and will be ma de available for Federal and/or State regulatory review. I acknowledge my responsibility to keep the Bank informed, on a timely basis, of any new relationships, changes in relationships or ceasing of relationships which may occur as a “related interest” during the coming year.

Signature: Date:

Printed Name:

Info/Compliance...class of voting securities of the com-pany or bank; and (B) No other person owns,...

Documents

Transcript of Info/Compliance...class of voting securities of the com-pany or bank; and (B) No other person owns,...