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4000 - Advisory Opinions
Changing Relationship Does Not Affect Determination
of Bank Insider Loan
FDIC-81-1
January 5, 1981
Pamela E. F. LeCren, Attorney
Background and Statement of Issue:
The Legal Division of the Washington, D.C. office has received
copies of your correspondence with Regional Director Stanley J. Poling
and Regional Counsel John Deal concerning certain loans outstanding as
of March 10, 1979 made by *** to *** and ***, a company controlled by
***. It was determined by the Columbus Regional Office that those loans
were subject to Federal Reserve Board Regulation O (12 C.F.R. Part 215)
in that the loans were made to a principal shareholder and a company
controlled by a principal
shareholder. 1
The loans were further determined to exceed the legal lending limit
imposed by Regulation O and therefore subject to section 215.6(a).
Section 215.6(a) provides that loans outstanding as of March 10, 1979,
that would be in violation of the legal lending limit imposed by
Regulation O if made after March 10, 1979, are to be reduced so as to
comply with the federal lending limit by March 10, 1980. Two one-year
extension periods are available upon a finding of good cause. The
authority to grant or deny such extensions was delegated to FDIC
regional directors by section 303.11(a)(15) of FDIC's regulations.
Regional Director Poling denied *** request for an extension of time
in which to pay down the subject loans. In connection with a subsequent
request for reconsideration of the denial, an opinion was sought from
the Legal Division regarding whether or not Regulation O is still
applicable to the outstanding loans in view of the fact that *** has
divested all of his stock in *** In short, you request a ruling on
whether or not *** is still required to reduce the subject loans in
accordance with section 215.6 even though *** is no longer a principal
shareholder. 2
In a letter dated September 3, 1980, Regional Counsel
Deal
{{4-28-89 p.4062}}informed *** that it was the opinion of
the regional office that Regulation O still applied and that section
215.6 was operative.
We have reviewed the arguments presented in your October 3, 1980
letter to John Deal supporting your contention that section 215.6 is no
longer applicable. Those arguments can be summarized as follows: (1)
the clear purpose of section 22(h) of the Federal Reserve Act and
Regulation O is to restrict loan transactions with "current"
insiders who exercise practical control or influence over the
operations of the banks with which they are associated; not
"former" insiders; (2) to apply section 215.6 in instances where
the debtor was originally an insider but is no longer leads to an
illogical result. Future loans would not be subject to Regulation O
therefore the continuation of existing loans should not be subject to
Regulation O; and (3) *** is free to obtain loans in excess of the 10
percent lending limit imposed by Regulation O now that he is no longer
a principal shareholder, therefore to insist that he pay down the
outstanding loan is illogical.
For the reasons detailed below, we do not find your arguments
persuasive. In our opinion, section 215.6 is operative despite the fact
that *** is no longer a principal shareholder.
Discussion:
We do not dispute that Regulation O and section 22(h) of the Federal
Reserve Act restrict loan transactions with bank insiders. We would
characterize those restrictions, however, as the means by which the
statutory purpose of protecting banks from abusive practices is
accomplished. To make the determination your request would not further
that purpose. On the contrary, your position would permit what the
statute characterizes as an abusive loan to remain on the books of the
bank. Your position would in effect permit an individual to use his or
her position at a bank to obtain a benefit prohibited by law and to
retain that benefit simply by changing the status of his or her
relationship to the bank. Any harm posed to the bank by the transaction
would continue unabated. If the FDIC were to adopt such a position, the
entire framework of Regulation O would be undermined and the statutory
purpose thwarted.
The position is also in conflict with FDIC's traditional enforcement
posture. In administrative enforcement proceedings under the Federal
Deposit Insurance Act and other statutes, the FDIC has proceeded
against banks in cases where a bank director, officer, or other person
involved in a violation of regulation or an unsafe or unsound banking
practice is no longer associated with the bank in the same capacity as
he or she was at the time the violation or unsafe or unsound banking
practice occurred. In short, violations based on status are not
rectified by a change in status nor is the FDIC's authority to address
them impaired.
Finally, we will not dispute the fact that any future borrower
relationship *** may have with *** is not subject to Regulation O. That
fact does not, however, mean that he will be able to borrow in excess
of the bank's lending limit. Presumably *** will not be in a position
to borrow as much money from *** as was formerly made available to him
because (1) he is no longer in a control position, and (2) his credit
worthiness is likely to have changed, even changed dramatically, as a
result of the stock transfer. For all the above reasons we decline to
adopt the position that Regulation O is no longer applicable to a loan
simply because the debtor is no longer a bank
insider.
1 Section 215.2(j) defines the term principal shareholder to
include an individual who directly or indirectly owns or controls more
than 10 percent of any class of voting securities of a bank. At the
time the subject loans were made, *** directly or indirectly owned or
controlled in excess of 10 percent of the voting stock of ***. He
presently owns or controls directly or indirectly approximately 59
percent of the stock of *** as reflected by the bank's stock ledger.
*** and his wife own the majority of the shares of ***, making *** his
related interest as that term is defined by section 215.2(a) and
(b)(1)(i) of Regulation O. Go Back to Text
2 According to the relevant correspondence, *** has executed
deeds of gift to the U.S. Department of Treasury. Several alternate
donees were named. We are not prepared to offer any opinion on whether
or not the gifts are complete and whether *** is in fact no longer a
principal shareholder as that term is defined by Regulation O. We will,
however, for the purposes of this opinion, presume that *** is not a
principal shareholder. Go Back to Text
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