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4000 - Advisory Opinions
Regulation O: Applicability of Regulation O When Bank "B"
Provides Credit Cards to Bank "A" Insiders Under Bank B's Name
FDIC--95--13
August 28, 1995
Mark A. Mellon, Senior Attorney
This is in response to your letter of July 18, 1995 concerning
12 C.F.R. Part 215 - Loans to
Executive Officers, Directors, and Principal Shareholders of Member
Banks (Regulation O) ("Regulation O") which is made applicable to
insured nonmember banks by section 337.3 of FDIC regulations
(12 C.F.R. § 337.3).
You state in your letter that your institution ("Bank A") and
another insured nonmember bank ("Bank B") are both wholly owned
by a bank holding company along with a number of other banks. Under an
agreement between Bank A and Bank B, Bank B issues credit cards under
Bank A's name. Approval and processing of credit card applications is
handled by Bank B and Bank B carries the debt of the credit card
holders on its books. You have represented to me over the telephone
that the credit card agreement between the credit card holder and the
issuer specifies that the credit card is an obligation of Bank B. Bank
B and Bank A are correspondent banks.
You are concerned that the provision of credit cards by Bank B to
its insiders (executive officers, directors, and principal
shareholders) and the insiders of Bank A may cause problems under
Regulation O. Specifically, you request that we advise you on the
applicability of the requirement under
section 215.4 (b) of Regulation
O that certain extensions of credit to insiders must be approved
beforehand by the board of directors of the bank to the following
situations:
a) A director of Bank A who owes no debt to either Bank A or B
has a credit card approved with a limit of $15,000;
b) A director of Bank A who owes no debt to either Bank A or B
has a credit card approved with a limit of $16,000;
c) A director of Bank A who owes $1 million to Bank A but
nothing to Bank B has a credit card from Bank B approved with a limit
of $15,000 or alternatively $16,000;
d) An executive officer of either institution has a credit card
approved with a limit of $10,000;
e) A director of Bank A owes over $500,000 to Bank B and also
wants a credit card with a limit in excess of $15,000; and
f) An executive officer of Bank A owes over $100,000 to Bank B
and also wants a credit card with a limit in excess of
$15,000.
{{2-29-96 p.4926}}
Section 215.4 of Regulation O provides that a bank may not extend
credit to any insider of the bank or insider of its affiliates in an
amount that, when aggregated with the amount of all other extensions of
credit to that person and to all related interests of that person,
exceeds the higher of $25,000 or 5 percent of the member bank's
unimpaired capital and unimpaired surplus, unless the extension of
credit has been approved in advance by a majority of the entire board
of directors of that bank. 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
person, and all related interests of that person, exceeds $500,000,
except by complying with the requirements of prior approval.
An insider is defined by section
215.2 (h) of Regulation O to mean an executive officer,
director, or principal shareholder, or any related interest of such a
person (a company controlled by that person; or a political or campaign
committee that is controlled by that person or the funds or services of
which will benefit that person [see 12 C.F.R. § 215.2(n)]). Certain
financial transactions are exempted from the definition of an extension
of credit. Specifically, an extension of credit does not include an
indebtedness of $15,000 or less under a bank credit card plan. See
12 C.F.R. § 215.3(b)(5).
Banks must maintain records of their extensions of credit to their
insiders and to the insiders of their affiliates. See
12 C.F.R. § 215.8.
An executive officer of a bank is even further restricted in the
amount of credit which he or she may receive but only with respect to
extensions of credit from the bank where the executive officer works
and not from affiliates. See 12 C.F.R.
§ 215.5. An executive officer who becomes indebted to another
bank in an amount greater than $100,000 must report that indebtedness
to the board of directors of the executive officer's bank. See
12 C.F.R. § 215.9. Banks must
report their extensions of credit to their executive officers to the
appropriate federal banking agency. See
12 C.F.R. § 215.10.
The resolution of your questions turns in large part on the answer
to the question as to who is the issuer of the credit cards: Bank A or
Bank B? It is our opinion that Bank B should be deemed to be the issuer
of the credit cards even though they are issued in Bank A's name. We
reach this conclusion in light of the fact that the credit card
agreement specifies that a credit card is an obligation of Bank B and
because Bank B and not A handles the approval and processing of the
credit cards. As a result, if prior approval is required under
Regulation O before a credit card may be issued (that is, if the credit
card falls within the Regulation O definition of an extension of
credit), it should be the board of directors of Bank B that gives such
approval. Bank B must therefore comply with the prior approval
requirement of section 215.4 whenever an extension or extensions of
credit to an insider of Bank B or an insider of an affiliate of Bank B
are over $500,000.
After application of the above legal requirements to the
hypothetical situations discussed above, we have come to the following
conclusions:
With respect to the director of Bank A in situations a) and b), it
would not be necessary to seek the prior approval of the board of
directors of Bank B before a credit card may be issued to the director
with a limit of either $15,000 or $16,000. The credit card with a limit
of $15,000 falls outside the definition of an "extension of
credit" by operation of 12 C.F.R. § 215.3(b)(5). The credit card
with a limit of $16,000 would be an extension of credit for purposes of
Regulation O but because the director owes no other debt to Bank B,
there is no need for prior approval under 12 C.F.R. § 215.4. There
would be no need for the director to report the credit card approval to
the Bank A board of directors since a director has no duty to report
extensions of credit from other banks, unlike executive officers. Bank
B would have to maintain a record of the credit card with a $16,000
limit, however, as required by section 215.8.
With respect to the director of Bank A in situation c), prior
approval would not be required by the board of directors of Bank B if
the credit card has a limit of $15,000, again because the credit card
would fall outside the definition of an extension of credit. With
respect to the credit card with a limit of $16,000, the prior approval
of the board of directors of Bank B would also not be required, in
spite of the fact that this would count as an extension of credit under
Regulation O. This is because the director owes no other
debt
{{2-29-96 p.4927}}to Bank B. This is true even though the
director owes $1 million to Bank A. It is only the extensions of credit
made by a bank itself to its insiders and the insiders of its
affiliates that count for purposes of section 215.4. Again, the
director would have no duty to report a credit card with a $15,000 or
$16,000 limit to the board of directors of Bank A because only
executive officers have a duty to report extensions of credit from
other banks in excess of Regulation O limits to their board of
directors but Bank B would have to maintain a record of the credit card
with a $16,000 limit.
With respect to the executive officer of either Bank A or Bank B in
situation d), prior approval by the board of directors of Bank B would
not be necessary since a credit card with a limit of $10,000 would not
count as an extension of credit. It would therefore not be necessary
for the executive officer to report the credit card to his or her board
of directors nor would Bank B have to maintain a record of the credit
card for purposes of Regulation O.
With respect to the director in situation e), prior approval of the
board of directors of Bank B would be required before a credit card
with a limit in excess of $15,000 could be issued. This is because the
director has had over $500,000 in credit extended by Bank B. The
director would be under no obligation to report the credit card to the
board of directors of Bank A. Bank B would have to maintain a record of
the credit card for purposes of Regulation O along with records of the
previous extensions of credit.
With respect to the executive officer in situation f), it would be
permissible for Bank B to issue a credit card with a limit in excess of
$15,000 without first seeking prior approval from the board of
directors of Bank B, provided that the executive officer's aggregate
debt does not exceed $500,000. Bank B would have to maintain a record
of the credit card for purposes of Regulation O along with records of
any previous extensions of credit.
I hope that this letter is responsive to your query. Please do not
hesitate to contact me if you should have any questions about this
matter.
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