REGULATION 0
SUBPART A
Definitions
- Affiliate- any company of which bank is a subsidiary or any other subsidiary of that company
- Control – a person directly or indirectly controls 25% or more of any class of voting stock, controls the election of a majority of the directors, or has the power to exercise controlling influence over management or policies
- Presumptive Control – person who is an executive officer or director and directly or indirectly controls more than 10% of voting stock or the person directly or indirectly controls more than 10% of voting stock and no other person controls a greater percentage
- Executive Officer – a person who participates or has authority to participate (other than in the capacity of a director) in major policy making functions. Includes Chairman of the Board, the president, every vice president, the cashier, the secretary and treasurer of the bank, UNLESS excluded by a Board resolution or the bank’s bylaws from participation in major policy making functions)
- Insider – executive officer, director, or principal shareholder, and includes any related interest of such a person
- Lending Limit – amount equal to limit of loans to a single borrower. This amount is 15% of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured and an additional 10% if loans are fully secured by readily marketable collateral with a market value at least equal to the amount of the loan (Where state law establishes lending limit that is lower, that state law limit takes precedence)
- Unimpaired Capital and Surplus – the bank’s Tier 1 and Tier 2 capital (based on the most recent Call Report) and the balance of the ALLL not included in the bank’s Tier 2 capital
- Principal Shareholder – directly or indirectly controls more than 10% of any class of voting stock. Includes immediate family. This does not include the banks holding company
- Related Interest (of a person) - a company that is controlled by that person or a political or campaign committee that is controlled by that person
Extension of Credit
- Includes:
- Making or renewal of any loan
- Granting of a line of credit
- Purchase under a repurchase agreement of securities, other assets, etc.
- Advance by means of overdraft, cash item
- Issuance of standby letter of credit
- Increase in existing indebtedness (but not if additional funds are advanced to protect the banks own interest – accrued interest, taxes, insurance)
- Advance of unearned salary in excess of 30 days
- Tangible Economic Benefit Rule – an extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider
General Prohibitions
Terms and Creditworthiness
- No bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:
- Is made on substantially the same terms as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank: and
- Does not involve more than the normal risk of repayment or present other unfavorable features
Prior Approval
- No bank may extend credit to any insider of the bank or of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interest of that person, exceeds the higher of $25M or 5% (up to $500M) of capital and surplus, unless extension has been approved in advance by a majority of the entire Board and the interested party has abstained from participating directly or indirectly in the voting. (Participation in the discussion, or any attempt to influence the voting, by the Board, constitutes indirect participation.)
Individual Lending Limit
- No bank may extend credit to an insider of the bank or its affiliates (including all related interests of that insider) in an amount in excess of the individual lending limit (15% + 10% if secured).
Aggregate Lending Limit
- A bank may not extend credit to any insider of the bank or its affiliates unless the extensions is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to all such insiders, does not exceed capital and surplus.
Banks With Deposits Of Less Than $100M
- Banks with deposits of less than $100 million may by an annual resolution of its Board increase the general limit to a level not to exceed 2 times capital and surplus (Banks that have adopted this resolution and subsequently fail to meet the requirements (satisfactory composite rating) shall not extend any additional credit to any insider)
Exceptions
- Extensions secured by a perfected security interest in US Government or Agency securities or otherwise guaranteed by the US Government
- Extensions secured by a perfected security interest in a segregated deposit account in the lending bank
- Extensions arising from discount of negotiable or non-negotiable installment consumer paper that is acquired from an insider and carries a full or partial recourse endorsement by the insider (as long as, financial condition of the maker is known and the maker is not an insider)
Overdrafts
- No bank may pay an overdraft of an executive officer or director of the bank or executive officer or director of its affiliates (this does not apply to principal shareholders or related interest) UNLESS
- A written, pre-authorized, interest-bearing extension of credit plan that specifies a method of repayment; or
- A written, pre-authorized transfer of funds from another account of the accountholder at the bank is established
- Prohibition does not apply to payments of inadvertent overdrafts on an account in an aggregate amount of $1,000 or less provided:
- Account is not overdrawn more than 5 business days; and
- Bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances
Additional Restrictions on Loans to Executive Officers or Member Banks
Restrictions of this section apply only to executive officers of the bank and not to affiliates
- Bank may extend credit to an executive officer in any amount to finance the education of the executive officer’s children or to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer (must be secured by 1st lien)
- Bank may also extend credit to an executive officer in any amount if extension is secured by US Government obligations or segregated deposit accounts at the lending bank
- For any other purpose, a bank may lend an executive officer 2.5% of capital and surplus or $25M, but in no event more than $100M
- Any extension to executive officer shall be:
- Promptly reported to the bank’s Board
- In compliance with these requirements
- Have current and detailed financial statements
- Made subject to the condition in writing that the extension of credit will, at the option of the bank, become due and payable at any time the officer is indebted to any other bank or banks in an aggregate amount greater than the amount allowed for the lending bank.
Records of Banks
- Recordkeeping method adopted by a bank shall:
- Identify through annual survey, all insiders of the bank itself; and
- Maintain records of al extensions of credit to insiders of the bank itself, including the amount and terms of each such extension of credit
- Recordkeeping method adopted by a bank shall
- Maintain records of extensions of credit to insiders of affiliates by survey method (identifying through an annual survey each insider of affiliates) or
- (Borrower inquiry method) Requiring as part of each extension of credit that the borrower indicate whether the borrower is an insider of an affiliate. In either case, records identifying the amount and terms of extensions must be maintained.
- Alternative methods may be employed if at least as effective as the identified methods
Reports by Executive Officers
- Each executive officer of a bank who becomes indebted to any other bank or Banks in an aggregate amount greater than the amount specified for executive officers of the bank, shall within 10 days of the date the indebtedness reaches such a level, make a written report to the Board of the officer’s bank that states:
- The lender’s name, the date and amount of each extension of credit, any security for it, and the purpose of the proceeds