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4000 - Advisory Opinions
Regulation O: Employment Compensation Package
FDIC-80-17
July 28, 1980
Pamela E. F. LeCren, Attorney
Your letter of June 26, 1980 to FDIC's Madison Regional Office has
been forwarded to the Legal Division of the Washington, D.C. Office for
reply. According to your letter and its supporting documentation
(letter dated February 26, 1980 to ***) entered into an employment
agreement earlier this year with *** whereby *** was hired as senior
vice president of *** and was to be elected to the board of directors.
The employment compensation package included a commitment by *** to
finance the purchase of *** personal residence "on regular bank
terms" but with interest at 10 percent. *** assumed his position at
*** on March 17, 1980.
The employment compensation package extended to *** does, in our
opinion, present a potential problem under Federal Reserve Board
Regulation O (12 C.F.R. Part 215). In general, Regulation O requires
that a bank, in making extensions of credit to its executive
officers, 1
deal with those persons as if they were members of the general public.
Section 215.4(a) of Regulation O provides that all extensions of credit
made to executive officers must be made on substantially the same
terms, including interest rate and collateral, as those extended to
persons not employed by the bank. If the terms of the loan to *** are
not substantially the same as those that would be extended an equally
creditworthy customer not employed by the bank, the loan would be in
violation of section 215.4(a) of Regulation
O. 2
We are not persuaded that Regulation O is inapplicable simply
because the loan arrangement was part of an employment compensation
package. The bank is free to negotiate the terms of employment to be
offered prospective employees, however, those terms may not violate any
Federal law or regulation. If we were to find that such an employment
compensation package were not subject to Regulation O because at the
time of the commitment the individual was not an executive officer, the
prohibitions of the statute and its implementing regulations would be
significantly weakened in cases such as this where the commitment was
entered into in contemplation of the individual assuming the
responsibilities of a director or executive officer.
We are unable to determine whether or not the loan in question is in
violation of section 215.4(a) as we do not have sufficient facts. If
the loan is in violation of that section, it will have to be
renegotiated on terms that would have been available to *** had he not
been about to assume a position at the bank. The bank is free to raise
*** salary to compensate
{{4-28-89 p.4054}}him for the alteration of the terms of
his loan if it should desire to do so. Regulation O only applies to
extensions of credit. A bona fide salary does not fall within the
definition of extension of credit as used in Regulation O (section
215.3).
Should you have any questions regarding the substance of this
opinion or Regulation O in general, please contact
me.
1 Section 215.2(d) defines an executive officer as someone who
participates or has the authority to participate in major policymaking
functions. The term is presumed to include every vice president of a
bank. Go Back to Text
2 Regulation O prohibits a bank from making loans as a matter
of course to its executive officers, directors, and principal
shareholders at rates below those offered to members of the general
public. A bank "insider" may receive better terms than another
borrower if he or she qualifies for such terms and other
similarly situated borrowers may receive those terms. Go Back to Text
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