Pub. 5 2016 Issue 2

15 s U MM E R | 2016 F E A T U R E equity lines of credit, or even a director’s business’ standby letter of credit. To allow banks to recruit directors and offer credit to creditworthy insiders on fair and competitive terms, some Reg O exclusions were specifically identified. These loans are avail- able to insiders as long as they are originated on terms avail- able to an equally situated third party (i.e. non-preferential terms) and are not included in insider lending limits. Credit extension exclusions include: • A credit card of up to $15,000 in available credit; or • An interest-bearing overdraft line of credit of up to $5,000. Effective July 21, 2012, the Dodd-Frank Act broadened “extension of credit” to include credit exposure arising from a derivative transaction, repurchase agreement, reverse repur- chase agreement, securities lending transaction, or securities borrowing transaction. As a result, these transactions are now covered under Regulation O’s provisions. Credit Extension Limits Regulation O sets two types of credit extension limits for insiders, those applicable to all bank and affiliate insiders and those applicable to only bank EOs. The regulations impose accountability on both the individual insider and the financial institution. Specifically, no insider of a bank or any affiliate may knowingly receive, or permit, the insider or the insider’s relat- ed interests to receive any credit extension in violation of Reg O. Extensions of credit are deemed insider credit to the extent proceeds are transferred to or used for the tangible economic benefit of the insider. An individual insider and the bank that violates Reg O can be subjected to personal or professional liability and civil monetary penalties. Restrictions on All Insiders Insider credit extensions must be on substantially the same terms, and follow bank underwriting procedures, equal- ly applicable to insiders, non-insider employees and third par- ties. Fortunately, Reg O allows insiders to participate in any bank employee preferential loan programs available to ALL employees and insiders, regardless of bank hierarchy. EOs or DIRs of small affiliates may be excluded from these provisions, but be sure to carefully check the regulatory requirements for exclusion! Individual Lending Limits The aggregate credit a bank may extend to any insider must not exceed the bank’s legal lending limit. Due to the sensitivity of affiliate and insider transactions, it is a best practice to restrict the bank’s internal limit on loans to any one borrower even lower. Additionally, Reg O generally limits total aggregated insider credit extensions to 100% of the bank’s unimpaired capital and unimpaired surplus (UCUS). Small community banks may get approval to increase lending limits in certain circumstances up to 200%. Prior Approval: A credit extension bringing an individual insider’s aggregated credit above the individual limit (greater of $25,000 or 5% of the bank’s UCUS, but no more than $500,000), must be approved in advance by a majority of the bank board of directors. The insider borrower must abstain from voting. Overdrafts: Execu- tive officer or bank/affiliate director overdrafts are prohibited unless the payment is made per a written, preauthorized, in- terest-bearing credit plan with a specified repayment method or transfers from another account of the director or officer at the bank. Inadvertent overdrafts of $1,000 or less are exempt if the account is overdrawn for five business days or less and standard overdraft fees are assessed. Overdraft provisions don’t apply to principal shareholders or related interests. Executive Officer Restrictions The aggregate credit extension limit for any EO may not exceed the higher of 2.5% of the bank’s UCUS or $25,000, up to a maximum limit of $100,000. Fully secured credit extensions do not count toward this limit if secured by U.S. government obligations or guarantees, or segregated deposits in the lend- ing bank. Non-preferential EO credit in any amount (subject only to internal lending limits) is allowed if the loan’s purpose is to finance: • The education of the EO’s children; or • One first lien mortgage secured by any residence owned by the EO. EO credit extensions must be promptly reported to the bank’s board of directors and can only be originated upon receipt of the EO’s detailed current financial statement, regard- less of loan amount. Each EO loan must include a written demand feature that authorizes the bank to call the loan at its discretion at any time the EO’s aggregate borrowings from any other bank or banks exceed Reg O limits. Partnerships: If one or more of a bank’s EOs individually or collectively hold a majority interest in a partnership, the entire partnership loan is counted as if the loan was extended to each executive officer partner in calculating the bank’s aggregate and individual insider lending limit. For example, if two EOs own a cumula- tive 55% partnership interest, any bank loan to the partnership will be counted twice, once for each EO. As a result, if one EO has outstanding insider credit of $75,000, the bank could not make a new loan over $25,000 to the EO’s partnership unless fully secured by readily marketable securities or other readily marketable collateral qualifying as a Reg O exemption. Check Your List! More than Santa’s list needs to be checked this time of year! So be sure to see which of your insiders have been naughty or nice. COMPLIANCE ACTION™ (ISSN 1085-326) is published 16 times a year. Copyright© 2015 by ComplianceAction. Quota- tion by permission only. 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