Pub. 5 2016 Issue 2

The CommunityBanker 14 F E A T U R E Insider Credit Checkup By Patti Blenden O ne reason I find regulatory compliance so intriguing is its role as a retrospective archive of the social and political pressures preceding new rules. Generally speaking, new regulations are frequently the result of unethical industry players “shooting themselves in the foot” by playing dirty. Reg O is a perfect example of just that! Following passage of the Financial Insti- tutions Regulatory and Interest Rate Control Act of 1978 (FIRA), Regulation O implemented FIRA’s maze of lending restrictions, prohibitions and reporting mechanisms to deter and identify insider abuse, a primary threat to successful bank operations in the 1970’s. Three primary classes of insiders were defined with detailed requirements applicable in different ways by cat- egory. Reg O remains important with only a few amendments to mitigate the possibility of influential individuals using the bank as a personal piggy bank as noted in an FDIC 1978 report in the US Code Congressional and Administrative Report. The FDIC’s research indicated almost 60% of all bank failures between 1960 and 1975 were the result of insider abuse. We saw repeated cases of that in the late 1980’s in the savings and loan failures and yet again in the recent mortgage market meltdown. Many banks annually poll their insiders for updated information, including his or her related interests. To help with Reg O monitoring, we’ll summarize the insider requirements and provide a quick reference guide on page 4. Check Reg O directly for the many nuances! Insiders Reg O defines three primary insider classes to reduce confusion and to specifically exclude individuals without significant policy influence. Executive Officers (EO) of a bank or bank affiliate is a person who participates or has authority to participate (other than as a director) in major policymak- ing functions. The chairman of the board, president, cashier, secretary, treasurer and each vice president is presumed to be an EO unless declared otherwise, such as in a board resolution or bylaws. With the volume of vice presidents in many orga- nizations that truly don’t have policymaking authority, it’s a great practice to specifically designate who is, or is not, an EO. A Director (DIR ) is a member of the bank or affiliate’s voting board of directors (e.g. advisory board member without policy voting rights are excluded). A Principal Shareholder (PS) is an individual or company owning more than 10% of voting class securities of a bank or bank affiliate, excluding a bank holding company. If a PS’s immediate family member owns voting stock, those shares are attributed to the individual PS. Credit extensions to a bank’s holding company are governed instead by the Federal Reserve Board’s Regulation W, a sepa- rate subject entirely. Related Interests The proverbial stepchild of Reg O is the indirect insider categorized as a Related Interest (RI) . An RI can be many things. Any entity controlled by the insider or a political or campaign committee controlled by or benefitting the specific insider is an RI. Control is defined as when a person owns at least 25% of voting securities or stock or controls the elec- tion of a majority of the company’s directors. RI could also be defined as a company in which an insider serves as executive officer and owns more than 10% of voting securities if no other person owns more. All RI credit extensions are treated as an insider’s credit extension and must be Reg O compliant. Credit Extensions A credit extension is broadly defined to include com- mon loans and lines of credit plus transactions in which a person becomes obligated to repay a bank. Examples include insider or RI consumer or commercial mortgages, home