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4000 - Advisory Opinions
Loans to Executive Officers and Related Interests
Thereof
FDIC-79-15
December 3, 1979
Pamela E.E. LeCren, Attorney
The following is in response to your September 6, 1979 letter
requesting an opinion from the Legal Division regarding the application
of Federal Reserve Board Regulation O (12 C.F.R. Part 215) to a
particular set of circumstances all of which involve lending to
executive officers and related interests thereof. Specifically you
inquired as to how the Legal Division would treat (1) loans by a bank
to a common related interest of two or more of its executive officers,
(2) a loan to an executive officer the proceeds of which are used to
invest in his/her related interest, (3) a loan to an executive
officer the proceeds of which are
{{4-28-89 p.4033}}in turn loaned to his/her related
interest, and (4) a loan to an executive officer used for his/her
personal use coupled with use by the executive officer of other
resources for the benefit of his/her related interest.
1. Loans to a common related interest.
It is the position of the Legal
Division 1
that the entire amount of an extension of credit made to a
related interest of more than one executive officer or principal
shareholder of an insured nonmember bank is to be counted against each
executive officer's or principal shareholder's borrowing limit under
Regulation O. In our opinion the clear language of sectin 104 of Title
I of the Financial Institutions Regulatory and Interest Rate Control
Act of 1978 requires this result. That clear language has been carried
over into the restatement of the statutory prohibitions as found in the
regulation (section 215.4(c)). To read the language of the statute and
the regulation as you suggest (prorating the extension of credit among
the executive officers or principal shareholders in accordance with
their control interest) runs contrary to the intent of the statute in
several respects. The statute does not require that an individual
benefit from an extension of credit, only that an extension of credit
be made. Pro rata treatment embodies the concept of proportionate
benefit. The protections embodied in the statute would be weakened if
the approach you suggest is adopted. Under your approach, a bank could
extend credit to insiders in an aggregate amount greatly exceeding the
total amount permissible under our reading of the statute. The ultimate
result would be to jeopardize the safety or soundness of the
institution. Lastly, the statute could have utilized a pro rata
approach but it did not. A related interest is considered to be one and
the same as those who control it, thus extensions of credit to a
related interest are extensions of credit to the persons who control
that related interest.
2. Investment of proceeds in related interest.
We will presume from the manner in which you phrased your question
that an executive officer of a bank is taking out a loan and the
proceeds are used to purchase a controlling interest in a company. In
short the loan is used to create a related interest. We agree that the
above fact pattern does not qualify as a loan to a related interest
under section 215.3(f). 2
If the related interest status has already been established, and the
proceeds of the loan are used to purchase partnership assets for
example, the loan would be an extension of credit to the related
interest under section 215.3(f) and not an extension of credit to the
executive officer. The practical result is the same however no matter
whether the loan is treated as made to the executive officer personally
or treated as made to the related
interest. 3
3. Proceeds loaned to related interest.
If an executive officer obtains a loan from his/her bank and in turn
loans the money to a related interest, under section 215.3(f) the loan
is treated as made to the related interest. That the executive officer
and not the related interest is obligated to the bank is not
determinative of the question to whom was the extension of credit made.
4. Use of other resources to benefit related interest.
There has been no extension of credit to a related interest when an
executive officer transfers funds obtained from some other source than
the bank to the related interest. The restrictions embodied in section
215.3(f) only apply to the proceeds of extensions of credit and do not
reach transfers from other resources.
{{4-28-89 p.4034}}
1 The staff of the Federal Reserve Board has informally agreed
to the position the Legal Division is taking in this opinion. Go Back to Text
2 An extension of credit is considered made to a person covered
by this Part to the extent that the proceeds of the extension of credit
are used for the tangible economic benefit of, or are transferred to,
such a person. Go Back to Text
3 If a portion of the loan is considered under section 215.3(f)
to be made to the related interest, that portion is not added to the
total amount of the loan taken out by the executive officer as to do so
would result in counting the proceeds twice. Go Back to Text
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