BCLP Banking Blog

Bank Bryan Cave

Insider Lending

Main Content

Reg O Violations and Director Loan Renewals

A common issue arising in bank exams during the first quarter of this year has been violations of Reg O as it deals with loans to bank directors. The problem stems from loan renewals.

Certain states and the OCC allow a bank whose capital has shrunk to renew a loan that was within the bank’s legal lending limit when made but which could not be made today based on the smaller capital base.  When renewing loans to directors a number of banks have made the assumption that loans to directors may be renewed in the same manner as loans to other customers.

Unfortunately, this is incorrect and is now resulting in a number of banks being cited for violations of Reg O.  According to the Federal Reserve, a loan renewal must be treated as a new extension of credit for purposes of Reg O analysis. Reg O limits total extensions of credit to any insider and the insider’s related interests to 15 percent of the bank’s unimpaired capital and unimpaired surplus.  This total generally may be increased by an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus to the extent the loans are fully secured by readily marketable collateral.

If the bank’s capital levels have declined since the loan was originally made, such that the loan could not now be made within the Reg O lending limits, the bank may not now renew or restructure that loan.

For further insights into this issue, please contact Jerry Blanchard at Jerry.Blanchard@bryancave.com or 404.572.6804 or your normal Bryan Cave contact.

Read More

More Insider Lending Pitfalls

This is Part Two of our two part article on common insider lending problems that we have identified in the industry.  (Read Part One here.) This installment focuses on the appropriate treatment and handling of lines of credit to insiders.

There are a number of types of line of credit, and the type can make a significant difference to the Regulation O requirements. “Extensions of credit” to insiders are subject to Regulation O and therefore are subject to dollar limits, board approval for larger loans, arms’ length requirements and, if made to executive officers, additional limitations. However, two types of line of credit are not “extensions of credit” for Regulation O purposes and therefore are not subject to these limitations. Lines of credit that are not extensions of credit are:

a) Open-end credit plans of $15,000 or less so long as:

(i) The debt does not involve prior individual approval by the bank other than for the purposes of determining authority to participate in the arrangement and compliance with any dollar limit under the line; and

(ii) The terms are not more favorable than those offered to the general public.

b) Indebtedness of $5,000 or less arising by reason of an interest-bearing overdraft credit plan of the type specified in 12 C.F.R. § 215.4(e), which requires a written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment.

Read More

Insider Lending Pitfalls

While the insider lending rules are always a source of headaches, the opportunities for error are greater in bad economic times.  To make matters worse, as the economy slowly improves and the regulatory focus moves from credit quality issues, we are seeing increased regulatory focus on insider lending.

This article is Part One of a two part article on common insider lending problems that we have identified in the industry.  (Read Part Two here.) This installment focuses on the regulatory impediments to renewing insider loans.  While most comments in this article will apply to any bank that is subject to Regulation O, we also discuss a lending limit problem unique to Georgia state banks.

Under Regulation O, any loan to an insider (a) must be made on substantially the same terms as the bank provides on comparable loans to non-insiders and (b) may not involve more than the normal risk of repayment or present other unfavorable features.  These requirements can be called the “arms’ length” and the “normal risk” requirements.

It is easy to think of the normal risk requirement as simply another way of saying that the loan must be on arms’ length terms.  However, neither the Federal Reserve nor the OCC see it that way.  Under current Federal Reserve and OCC interpretations, these are separate and distinct requirements.  Accordingly, a bank can never renew a troubled loan to an insider, even if the bank would have renewed a non-insider loan on the same terms and in the same circumstances.  OCC examiners in the Southeast Region have said that an insider loan cannot be renewed unless it is at least “pass” rated.

Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.