|
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
4000 - Advisory Opinions
Regulation O: Record of Board Approval Must Reflect More Than Mere
Notice of Insider Borrowing
FDIC--95--8
June 22, 1995
Mark A. Mellon, Senior Attorney
This is in response to your letter of May 1, 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 depository institution, (the
"Bank"), was examined by the "State" Department of Banking
and Finance (the "Department"). The Department cited minutes from
a meeting of the board of directors of the Bank in November, 1994
wherein lines of credit for insiders of the Bank were approved, as
containing insufficient information to meet the requirements of
section 215.4(b)(1) of
Regulation O. You enclose a copy of the board minutes and request our
opinion as to whether the minutes provide sufficient information to
satisfy Regulation O requirements. If we conclude that the minutes do
not satisfy Regulation O, you request that we advise you as to what
information should be provided.
Section 215.4(b)(1) of Regulation O requires the prior approval of
the board of directors of a bank before an extension of credit (to
include the granting of a line of credit) may be made to an insider of
the bank which is in excess of $25,000 or 5 percent of the bank's
unimpaired capital and unimpaired surplus, whichever is
higher. 1
The approval must be given by a majority of the entire board of
directors of the bank. The insider who is to receive the loan must
abstain from that vote. Prior approval is not required, however, for an
extension of credit pursuant to a line of credit that was approved by
the board of directors of the bank within 14 months of the date of the
extension of credit as long as that approval was in accordance with
section 215.4(b)(1).
When asked to address this issue in the past, the FDIC has stated
that the record of the board of directors' approval of an extension of
credit to an insider must reflect more than a mere notice of an insider
borrowing up to a stated amount, coupled with a recital that the terms
of the loan are not to be preferential. At a minimum, the record should
reflect the following information regarding the loan to be approved:
1) the name of the borrower;
2) the upper ceiling of the loan;
3) whether the loan is secured or unsecured;
4) the interest rate or range, if possible (e.g., "prime
plus"); 2
5) the type of loan; and
6) the terms of the loan, to the extent
possible.
{{2-29-96 p.4921}}
The board of directors should be aware of these basic aspects of the
loan at the time of approval. Regulation O places the responsibility
for insider loan review with the board of directors. Consequently, the
board of directors may only approve loans whose basic terms are known
to them. Where the board of directors approves a line of credit,
however, a loan officer or committee may approve draws by an insider on
that line of credit without further action by the board of directors
for up to 14 months from the date of approval as long as the line of
credit was originally approved by the board of directors in accordance
with section 215.4 (b).
Review of the minutes from the November, 1994 meeting of the board
of directors of the bank indicates that several of the criteria listed
above are unsatisfied, namely: the upper ceiling of the loan (a
definite sum must be listed, stating "up to legal lending limits"
will not suffice); whether the loans are secured or unsecured; the
loan's interest rate or range; the loan type; and the terms of the
loan, to the extent that they are known at the time of approval. We
therefore agree with the Department's finding that the minutes of the
November, 1994 meeting are insufficient to satisfy the requirements of
section 215.4 (b) of Regulation O.
We contacted staff of the Board of Governors of the Federal Reserve
System (the "FRS") to inquire whether there is any conflict
between the position set forth above and FRS staff opinions which you
cite in your letter of May 1, 1995. FRS staff have informed us that, in
their opinion, a "good faith assessment of the creditworthiness of a
bank official" which both FRS opinions state must be made by a board
of directors when approving an insider's line of credit, can be read to
require that the basic terms of the loan must be known by the board of
directors at the time of the prior approval. FRS staff cautioned that
the staff opinion on blanket resolutions should not be interpreted to
mean that the requirement may be satisifed by simply listing the
official's name and the phrase "up to the lending limit". There
therefore appears to be no inconsistency between FDIC and FRS advisory
opinions on this question.
We recommend that, in the future, the minutes of your board of
directors list the information listed above. If this step is taken, the
recordkeeping requirements of section 215.4 (b) should be satisfied. I
hope that this answer is responsive to your query. Please do not
hesitate to contact me if you should have any questions about this or
any other matter.
1An insider is defined by
section 215.2 (h) of Regulation
O to mean an executive officer, director or principal shareholder, or
their related interests (a company or a political campaign committee
which is controlled by such a person). Go Back to Text
2At a minimum, however, it is permissible to satisfy this
requirement by stating that the interest rate is not preferential. Go Back to Text
[Main Tabs]
[Table of Contents - 4000]
[Index]
[Previous Page]
[Next Page]
[Search]
|
