[Federal Register Volume 59, Number 37 (Thursday, February 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3860]


[[Page Unknown]]

[Federal Register: February 24, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket Nos. R-0800 and R-0809]

 

Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks; Loans to Holding Companies and Affiliates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is revising Regulation O to permit the aggregate 
limit on lending to insiders by eligible, adequately capitalized small 
banks to be increased from 100 percent of unimpaired capital and 
surplus to 200. The Board also is revising Regulation O to permit banks 
to follow alternative recordkeeping procedures on loans to insiders of 
affiliates, to narrow the definition of ``extension of credit,'' and to 
adopt certain exceptions to the general restrictions on lending to 
insiders and the special restrictions on lending to executive officers. 
Other minor revisions clarifying certain exemptions and conforming 
certain provisions to the enabling statutes are included as well.

EFFECTIVE DATE: Effective February 18, 1994.

FOR FURTHER INFORMATION CONTACT: Gregory Baer, Senior Attorney (202/
452-3236), Gordon Miller, Attorney (202/452-2534), or Stephen Van 
Meter, Attorney (202/452-3554), Legal Division; Stephen M. Lovette, 
Manager of Policy Implementation (202/452-3469), or Mark Benton, Senior 
Financial Analyst (202/452-5205), Division of Banking Supervision and 
Regulation, Board of Governors of the Federal Reserve System. For the 
hearing impaired only, Telecommunications Device for the Deaf (TDD), 
Dorothea Thompson (202/452-3544), Board of Governors of the Federal 
Reserve System, 20th & C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

I. Background

    The Board is making permanent, with certain additional 
qualifications, its interim rule permitting small, adequately 
capitalized banks to extend credit to insiders up to 200 percent of 
unimpaired capital and surplus, in circumstances where such lending is 
necessary to serve local credit needs or to attract directors. The 
Board also is adopting amendments to Regulation O (12 CFR part 215) 
designed to increase the ability of banks to make extensions of credit 
that pose minimal risk of loss, to eliminate recordkeeping requirements 
that impose a paperwork burden but do not significantly aid compliance 
with the regulation, and to remove certain transactions from the 
regulation's coverage consistent with bank safety and soundness. The 
above amendments are expected to increase the availability of credit, 
particularly in communities served by small banks, and to reduce the 
cost of compliance with the regulation.
    In view of the extensive changes made to Regulation O as a result 
of this rulemaking, the Board is restating subpart A of Regulation O as 
amended, rather than separately describing each amendment.
    The Board is making the rule effective immediately in order to 
prevent a lapse in the 200 percent lending limit available to eligible 
banks under the interim rule for loans to insiders, and to make all 
other provisions effective at the same time.

II. The 200 Percent Aggregate Lending Limit

    Section 22(h) of the Federal Reserve Act (12 U.S.C. 375b) restricts 
the amounts and terms of extensions of credit from a bank to executive 
officers, directors, and principal shareholders of the bank and its 
holding company affiliates and to any related interest of those persons 
(insiders). Section 306 of the Federal Deposit Insurance Corporation 
Improvement Act of 1991 (FDICIA)1 amended section 22(h) to impose 
an aggregate limit on the amount a bank may lend to its insiders as a 
class. See 12 U.S.C. 375b(5). In general, the limit is equal to 100 
percent of the bank's unimpaired capital and unimpaired surplus. The 
Board is authorized, however, to make exceptions to the general limit 
for banks with deposits of less than $100 million ``if the Board 
determines that the exceptions are important to avoid constricting the 
availability of credit in small communities or to attract directors of 
such banks.'' 12 U.S.C. 375b(5)(C). The higher limit may not exceed 200 
percent of the bank's unimpaired capital and unimpaired surplus. Id.
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    \1\Pubic Law 102-242, Section 306, 105 Stat. 2236 (1991).
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    Effective May 18, 1992, the Board amended Regulation O, which 
implements section 22(h), to incorporate the aggregate lending limit 
added by FDICIA. The general limit on lending to insiders and their 
related interests--100 percent of the bank's unimpaired capital and 
unimpaired surplus--was adopted. The Board also decided as an interim 
measure to permit banks with deposits under $100 million to adopt a 
higher limit, not to exceed 200 percent of the bank's unimpaired 
capital and unimpaired surplus, for a period of one year to expire May 
18, 1993. The interim period was intended to allow the Board to consult 
with the other federal banking agencies and collect data on the lending 
practices of banks in order to analyze the effect of the aggregate 
lending limit on the availability of credit and service of directors. 
See 57 FR 22417, 22420, May 28, 1992.
    The Board subsequently extended the interim rule for six months, 
through November 18, 1993, in order to obtain public comments on 
whether the interim rule should be made permanent, modified, or 
permitted to expire. See 58 FR 28492, May 14, 1993. The Board 
thereafter extended the interim rule an additional three months, 
through February 18, 1994, in order to review the written comments, 
call reports of small banks, and relevant information from other 
governmental agencies. See 58 FR 61803, November 23, 1993.
    The interim rule established requirements that a small bank had to 
meet in order to adopt a higher aggregate lending limit. Under that 
rule, the board of directors of the bank had to determine by resolution 
that a higher aggregate lending limit was consistent with prudent, 
safe, and sound banking practices in light of the bank's experience in 
lending to its insiders, and that a higher limit was necessary to 
attract or retain directors or to prevent restricting the availability 
of credit in small communities. The resolution had to set forth the 
facts and reasoning that supported this determination, including the 
amount of the bank's aggregate lending to insiders, expressed as a 
percentage of unimpaired capital and unimpaired surplus, as of the date 
of the resolution. The bank also was required to submit its resolution 
to the appropriate federal banking agency, with a copy to the Board. 
Finally, the bank had to meet or exceed all applicable capital 
requirements. See 12 CFR 215.4(d)(2).
    In response to the notice of the extension of the interim rule, the 
Board received 147 written comments, with 144 respondents in favor of 
making the 200 percent limit permanent. Small banks subject to the rule 
submitted the large majority of comments. Other commenters included 
numerous state and national banking trade associations, several state 
banking superintendents and Federal Reserve Banks, individual bank 
directors, bank holding companies, and law firms.
    Adverse comment focused on the relatively low level of use of the 
interim provision. Two of the three adverse commenters argued that a 
higher aggregate lending limit was not important to credit or director 
availability because very few banks had used the interim rule. One 
state banking commissioner noted that of the 88 small banks it 
supervised, only one had aggregate insider loans in excess of 60 
percent of unimpaired capital and unimpaired surplus as of March 31, 
1993.
    Call report data reflected a similar low level of aggregate insider 
lending. As of September 30, 1993, of a total population of 7,435 banks 
with deposits of less than $100 million, only 17 reported loans to 
insiders in an amount greater than 100 percent of capital. A total of 
131 banks reported insider loans greater than 60 percent of capital. 
Only 54 banks have notified the Board pursuant to the interim rule that 
they have adopted a higher aggregate lending limit.
    In support of the proposed rule, sixty-two commenters stated that a 
higher aggregate lending limit was important in order that small banks 
not be forced to choose between refusing credit to qualified insiders 
and asking insiders to resign as directors. Several banks observed that 
this was a particular hardship because qualified directors typically 
are active businesspersons whose businesses have substantial yet 
healthy credit requirements.
    Fifteen commenters observed that the aggregate lending limit was a 
particular hardship in small communities and rural markets because in 
those settings small banks were dependent on insiders as a loan source, 
insiders had fewer alternative credit sources, and insiders tended to 
be closely identified with their banks, making it difficult for them to 
seek credit from a competitor.
    In order to demonstrate that the higher limit was being used and 
would have important benefits if made permanent, the Independent 
Bankers Association of America (IBAA) presented in its comment a survey 
of 8,057 small banks. Of 1,060 banks that responded to the survey, 152 
reported that the general aggregate lending limit had prevented them 
from making a loan to an insider; 95 respondents reported that the 
aggregate lending limit had prevented them from naming an individual as 
a director; and 53 respondents reported that they had accepted a 
director resignation attributable to the aggregate lending limit.
    Additional commenters presented a variety of reasons for the low 
level of use of the interim 200 percent limit: concern that the interim 
rule would be eliminated, thereby forcing banks to retract credit 
extended in reliance on it; historically low lending levels; loan 
participations as an alternative to approving a higher limit; and 
deferral of consideration of the issue by small banks whose insider 
loans had not matured since adoption of the interim rule. Some 
commenters also observed that the interim rule imposed detailed 
requirements and that some banks may have feared attracting additional 
regulatory scrutiny by adopting the interim rule.
    After the close of the comment period, the General Accounting 
Office (GAO) provided to the Board a draft report on bank insider 
activities. The GAO reviewed banks that failed during 1990 and 1991 in 
order to determine whether insider practices contributed to the banks' 
failures. (The GAO did not evaluate any existing or proposed regulation 
in this area.) The GAO found that insider problems (which the GAO 
defined very broadly) were prevalent at failed banks, that banks with 
less than $100 million of assets were more likely than larger banks to 
be cited for insider problems, and that the most frequently cited 
violations were loans to insiders made in excess of lending limits and 
on preferential terms not available to the general public.
    However, the GAO report did not establish a causal link between 
insider problems and bank failures. Rather, the GAO appeared to 
conclude that insider problems, as broadly defined by the GAO, were 
correlated with poor internal controls and underwriting practices. The 
GAO was not able to measure the actual level of insider lending at 
failed or troubled banks, and therefore was not able to address 
specifically the relationship of the actual level of insider lending to 
bank failures. The major GAO recommendations were for increased 
monitoring of insider lending and more effective follow-up on 
violations.
    The Board has concluded that the concerns raised in the GAO report 
do not justify preventing qualified banks from utilizing a higher 
aggregate lending limit. If the higher limit should present safety and 
soundness problems at an institution, then the appropriate banking 
supervisor retains general authority to require a reduction in the 
level of insider loans. If problems should occur more generally, the 
Board retains authority to eliminate or reduce the exemption.
    Although the 100 percent aggregate lending limit does not appear to 
be currently creating a widespread problem with credit or director 
availability, the Board has concluded that it does appear to pose 
important problems for banks in certain communities. Given the 
available data and the comments, the Board believes that the 100 
percent limit is restricting the availability of credit and the 
recruitment of directors in communities where the proper certification 
can be made. In such circumstances, the Board believes that an eligible 
small bank should be permitted to establish a higher lending limit up 
to 200 percent of unimpaired capital and unimpaired surplus. Each 
eligible bank's board of directors will still be required to certify 
that the higher limit is necessary to avoid restricting credit or to 
assist in attracting directors and is consistent with prudent, safe, 
and sound banking practices.
    The Board emphasizes that, as was the case prior to FDICIA, 
borrowing by insiders will continue to be subject to scrutiny during 
the examination process, including an evaluation of whether such 
borrowing represents an inappropriate concentration of loans.
    In the final rule, the Board has adopted three modifications to the 
proposed rule. First, the Board has provided that to qualify for the 
higher lending limit, a bank must be in satisfactory overall condition 
as determined in the most recent report of examination of the bank, as 
well as being adequately capitalized, as was already required in the 
interim rule. Second, a provision has been added clarifying that a bank 
operating above the 100 percent limit that subsequently becomes 
ineligible for the higher limit may retain its existing insider loans 
but may not extend credit that would maintain aggregate insider lending 
in excess of 100 percent of unimpaired capital and surplus. Third, 
banks are not be required to file the required resolutions with their 
primary regulator or the Board, as was required by the interim rule. 
The resolutions are to be made available for inspection during the 
examination process.

III. Recordkeeping Procedures

    Section 215.8 of Regulation O currently requires that each bank 
maintain records necessary for compliance with the insider lending 
restrictions of Regulation O. Specifically, banks are required to 
maintain records (1) identifying all directors, officers, and principal 
shareholders of the bank and its affiliates and all related interests 
of those persons (collectively, ``insiders''), and (2) specifying the 
amounts and terms of all credit extended to these insiders. Section 
215.8 further requires each bank to request on an annual basis that its 
insiders and insiders of its affiliates identify their related 
interests. The list of insiders is then used by the bank to identify 
all existing or proposed extensions of credit covered by Regulation O, 
to monitor the amount thereof subject to the individual and aggregate 
lending limits, and to ensure that all appropriate approval procedures 
are followed.
    Since adoption of the initial recordkeeping requirement, the annual 
survey has grown in size and complexity. Bank holding companies have 
become increasingly large and diversified, and commercial organizations 
have acquired credit card banks and limited purpose banks. Thus, for 
example, a small, grandfathered bank owned by a large diversified 
holding company may have hundreds of affiliates with thousands of 
officers and directors. Although the bank may have no contact with 
these officers and directors and companies controlled by them, it 
currently is required to collect information on all these parties. In 
another example, a CEBA credit card bank is prevented by law from 
making loans to anyone but individuals,2 and is thus effectively 
prohibited from lending to insiders' related interests, but the current 
rule nonetheless requires the bank to conduct an annual survey of 
related interests.
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    \2\See 12 U.S.C. 1841(c)(2).
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    On September 9, 1993, the Board published notice of proposed 
rulemaking and requested comment concerning alternative recordkeeping 
procedures that banks may follow to monitor loans to insiders of the 
bank and its affiliates. See 58 FR 47400. The Board proposed to allow 
each bank to decide on its own how to gather information on related 
interests, so long as its method was effective. For example, in the 
case of a nonbank credit card bank or other bank that does not make 
commercial loans, the bank could decide not to keep records on related 
interests. For banks that make commercial loans, two acceptable 
recordkeeping methods were identified: (1) The ``survey'' method 
currently required, under which all insiders are asked annually to 
identify all their related interests; and (2) the ``borrower inquiry'' 
method, under which the bank would (a) ask each commercial borrower as 
part of the loan application process whether it is a related interest 
of an insider of the bank, and (b) maintain a record of each 
affirmative response. Finally, the proposed rule sought comment on 
whether any other recordkeeping methods would be effective in 
monitoring compliance with Regulation O.
    The draft GAO report, discussed above, urged the federal bank 
agencies to emphasize the importance of accurate and complete insider 
recordkeeping. Management recordkeeping failures, the GAO argued, were 
indicative of larger bank management problems, and management solutions 
in this area, the GAO reasoned, would contribute to the resolution of 
management's larger problems. The Board believes that the proposed 
recordkeeping amendments, which attempt to eliminate unnecessary 
recordkeeping and allow for alternative methods of recordkeeping, are 
consistent with the GAO's recommendations.
    Commenters supported the recordkeeping amendments as a means of 
decreasing unnecessary paperwork burden. Commenters uniformly supported 
no longer requiring credit card banks and other institutions that do 
not make commercial loans to keep records on the related interests of 
insiders. No commenter proposed any general recordkeeping methods in 
addition to those identified in the rule.
    A few commenters expressed concerns about the second recordkeeping 
option put forth in the proposed rule--the ``borrower inquiry'' method. 
Commenters noted that in some cases a corporate borrower might be 
unaware that it is a related interest of a bank insider and therefore 
might inadvertently misinform a bank's loan officer. For example, a 
corporate employee negotiating a loan may not know that one of his 
company's controlling shareholders is also a director of one of the 
lending bank's affiliates. Citing this possibility, several bank 
commenters supported the recordkeeping provision but requested that the 
Board specify that use of the borrower inquiry method would give a bank 
a ``safe harbor'' from criticism during an examination in the event 
that inaccurate certifications were accepted from borrowers. On a 
related point, two commenters sought assurance that internal controls 
consistent with the proposed recordkeeping alternatives would meet the 
compliance certification requirements of section 112 of FDICIA.
    The Board believes protections currently exist to prevent 
intentional misreporting by borrowers under the borrower inquiry 
method. Intentional misreporting could bring criminal or civil 
penalties. First, a borrower that knowingly misstates whether it is a 
related interest of the lending bank is criminally liable. 18 U.S.C. 
1014. Second, a bank insider to whom the corporate borrower is related 
and who is aware of the loan violates Regulation O if the insider 
permits the related interest to receive any extension of credit not 
authorized under Regulation O. 12 CFR 215.6.
    The Board has also concluded that any unintentional misreporting 
should not be a matter of serious concern. While there could be cases 
in large multi-bank holding companies where a borrower and lender are 
genuinely ignorant of the relationship between them, there is no 
potential in those circumstances for an insider's status to improperly 
affect the credit decision.
    The Board has decided to adopt the recordkeeping provisions, as 
proposed, with three amendments. First, in order to address concerns 
about inaccurate reporting, the Board has adopted an additional 
safeguard to prevent the occurrence of those reporting errors, both 
intentional and unintentional, that are likely to occur most frequently 
and that raise the greatest concern. The final rule establishes a 
minimum requirement that every bank, regardless of the recordkeeping 
method it selects, must conduct an annual survey to identify its own 
insiders (that is, its own executive officers, directors, and principal 
shareholders and their related interests, but not those of its holding 
company affiliates). Every bank is expected to check this short list 
before extending credit, even if it is employing the borrower inquiry 
method of recordkeeping for affiliates in lieu of the survey method. In 
addition to addressing possible violations of Regulation O, the limited 
survey and the short list it produces will be available for monitoring 
compliance with section 23A of the Federal Reserve Act.
    As for concerns about a ``safe harbor,'' the Board believes that an 
implicit safe harbor exists for banks electing either one of the two 
recordkeeping options included in the final rule, and that following 
either of these options would allow the necessary certification to be 
made for purposes of section 112 of FDICIA. Furthermore, under the 
enforcement guidelines, the federal banking agencies should not assess 
civil money penalties for an inadvertent or accidental violation of 
their rules.
    Second, because the commenters did not identify any recordkeeping 
methods other than the two proposed by the Board, the Board has adopted 
a presumption in the final rule that a bank must use either one of the 
two identified methods unless it can demonstrate that another method is 
equally effective. The suitability of any alternative procedure for 
monitoring lending to insiders and their related interests must be 
determined, of course, on the basis of the effectiveness of the 
procedure in preventing violations of law and insider abuse. Any 
alternative recordkeeping procedure must sufficiently identify 
extensions of credit covered by Regulation O to ensure that proper 
monitoring of and compliance with insider lending restrictions is 
maintained.
    Finally, the Board has made an explicit exemption from the 
requirement that a bank keep records of, or inquire about related 
interests of insiders of the bank or its affiliates, for banks that are 
prohibited from making commercial loans in the first place.3 
Related interests consist only of companies or other similar entities, 
as a result of which a bank that is prohibited from making commercial 
loans is prohibited from making loans to any company or other entity 
that may be a related interest. When such a prohibition exists, 
recordkeeping or inquiries with respect to related interests is 
unnecessarily burdensome.
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    \3\For example, a nonbank credit card bank, in order to maintain 
its exception from the definition of ``bank'' in the Bank Holding 
Company Act, may not engage in the business of making commercial 
loans. See 12 U.S.C. 1841(c)(2)(E).
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IV. Definition of Extension of Credit

    The Board proposed three amendments to the definition of 
``extension of credit'' in Regulation O: a clarification of the 
``tangible economic benefit'' rule; a new exception for the discount by 
a bank of obligations sold by an insider without recourse; and an 
increase in the threshold for treating credit card debt as an extension 
of credit. See 58 FR 47400, September 9, 1993.

A. ``Tangible Economic Benefit'' Rule

    Regulation O provides that an extension of credit is deemed to be 
made to an insider when the proceeds of the credit are used for the 
tangible economic benefit of, or are transferred to, the insider. 12 
CFR 215.3(f). These extensions of credit are thereby counted toward the 
lending limits of Regulation O.
    Following the enactment of FDICIA, which expanded the lending limit 
provision of section 22(h) of the Federal Reserve Act to cover 
directors and their related interests, questions were raised more 
frequently regarding the scope and proper application of the tangible 
economic benefit rule. If interpreted literally, the tangible economic 
benefit rule would apply whenever a bank extended credit to any person, 
including a member of the general public with no other relationship to 
the bank, and the proceeds of the extension of credit were transferred 
to or used for the benefit of an insider or an insider's related 
interest. For example, as one commenter noted, loans on non-
preferential terms to members of the general public to purchase homes 
from a builder who is a director of the bank would be treated as loans 
to the builder/director.
    The tangible economic benefit rule is similar to a provision 
contained in section 23A of the Federal Reserve Act, and was adopted at 
a time when the Board was required by section 22(h) of the Federal 
Reserve Act to use the definition of ``extension of credit'' found in 
section 23A. See Public Law 95-630 Section 104, 92 Stat. 3644 (1978). 
The definition of extension of credit in section 22(h), however, is no 
longer tied to section 23A, and the Board is authorized to adopt 
appropriate definitions of terms in the statute. See 12 U.S.C. 
375b(9)(D) and 375b(10). The Board therefore proposed to revise the 
tangible economic benefit rule to clarify that it was not intended to 
reach such transactions, by providing explicitly that the rule does not 
apply to an arm's-length4 extension of credit by a bank to a third 
party where the proceeds of the credit are used to finance the bona 
fide acquisition of property, goods, or services from an insider or an 
insider's related interest.
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    \4\In order to satisfy this requirement, the extension of credit 
to the general public must be on terms that would satisfy the 
standard set forth in Sec. 215.4 of Regulation O if the extension of 
credit was being made directly to an insider or an insider's related 
interest.
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    Commenters supported the proposal, and no adverse comments were 
received. Three commenters objected to the requirement that any arm's-
length loan satisfy the non-preferential provisions for insider loans 
found in Sec. 215.4(a), labelling that requirement overly restrictive. 
The Board has retained the requirement, however, that loans be on non-
preferential terms, in order to prevent banks from participating in 
commercial promotions that benefit the bank's insiders to the detriment 
of the bank.5
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    \5\ One other commenter sought clarification on the relationship 
between the tangible economic benefit rule and another rule in 
Regulation O that states that loans made by a bank to a partnership 
in which one or more executive officers of the bank hold a majority 
interest are to be attributed in full to each of the executive 
officers. 12 CFR 215.5(b). The introductory portion of Sec. 215.5 
has been revised to clarify the interplay between Sec. 215.5 and the 
general provisions of Regulation O.
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    Continuing to be covered by the tangible economic benefit rule are 
extensions of credit to an insider's nominee and transactions in which 
the proceeds of the credit are loaned to an insider. The Board also 
notes that provisions of the definition of ``extension of credit'' 
outside the tangible economic benefit rule will continue to reach 
transactions in which an insider actually becomes obligated to a bank, 
``whether the obligation arises directly or indirectly, or because of 
an endorsement on an obligation or otherwise, or by any means 
whatsoever.'' 12 CFR 215.3(a)(8).

B. Discount of Obligations without Recourse

    Regulation O includes within the definition of ``extension of 
credit'' any ``discount of promissory notes, bills of exchange, 
conditional sales contracts, or similar paper, whether with or without 
recourse.'' 12 CFR 215.3(a)(5) (emphasis added). At the time this 
provision was adopted, the Board was required by section 22(h) to 
include such items in the regulatory definition of extension of 
credit.6 However, the current statutory definition does not 
require the inclusion of such items where the transaction is made 
without recourse to the transferor.7 The Board proposed to delete 
this provision so as to exclude non-recourse transactions from 
Regulation O coverage. Transactions entered into with recourse to the 
transferor would continue to be covered under other provisions of the 
definition. See 12 CFR 215.3(a)(4) and (8).
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    \6\The current definition of ``extension of credit'' in 
Regulation O was adopted in 1979, when the Board substantially 
amended the regulation in order to implement the Financial 
Institutions Regulatory Act of 1978 (FIRA), Public Law 95-630 
Section 104, 92 Stat. 3644 (1978). 44 FR 12963, March 9, 1979. FIRA 
added section 22(h) to the Act, which in turn incorporated the 
definition of ``extension of credit'' contained in section 23A. At 
that time, section 23A's definition included the above-referenced 
provision concerning the discount of paper acquired with or without 
recourse. See Public Law 89-485 Section 12, 80 Stat. 241 (1966).
    \7\The statutory cross-reference to section 23A was deleted from 
section 22(h) in 1982. See Public Law 97-230 Section 410, 96 Stat. 
1520 (1982). FDICIA added a new definition of ``extension of 
credit'' to section 22(h), which applies whenever a member bank 
makes or renews a loan, grants a line of credit, or enters into any 
similar transaction as a result of which a person becomes obligated 
to pay money or its equivalent to the bank. See 12 U.S.C. 
375b(9)(D). This definition does not cover all transactions, such as 
the purchase of assets, covered by section 23A.
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    The Board has adopted this amendment as proposed. Non-recourse 
transactions resemble a purchase of assets more than the lending of 
money, and the final rule conforms the treatment of these transactions 
to the treatment of other asset pruchases between a bank and its 
insiders. Moreover, these non-recourse transactions do not constitute 
``extensions of credit'' to the transferor under the National Bank Act 
as interpreted by the Office of the Comptroller of the Currency. See 12 
U.S.C. 84(b)(1); 12 CFR 32.2(a). These transactions will continue to be 
governed, however, by general standards of safety and soundness, 
prohibitions against fraud and abuse, and corporate fiduciary 
duties.8
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    \8\In addition, sections 23A and 23B of the Act may be 
applicable to such transactions if the insider or the insider's 
related interest is an affiliate, as defined in section 23A, of the 
lending bank.
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    Commenters supported the proposal, and no adverse comments were 
received. One commenter asked the Board to clarify whether limited or 
partial recourse transactions would be treated as extensions of credit. 
The Board believes that it is more appropriate to address the numerous 
possible recourse arrangements on a case-by-case basis.

C. Credit Card Plan Indebtedness

    Regulation O exempts from the definition of ``extension of 
credit,'' and thus from Regulation O's lending limits, indebtedness of 
$5,000 or less arising through any general arrangement by which a bank: 
(1) Acquires charge or time credit accounts; or (2) makes payments to 
or on behalf of participants in a bank credit card plan or other open-
end credit plan. 12 CFR 215.3(b)(5). To qualify for the exemption, the 
indebtedness must be on market terms and must not involve prior 
individual clearance or approval by the bank other than for the purpose 
of determining the borrower's eligibility and compliance with any 
applicable dollar limit. Id.
    The Board proposed to increase from $5,000 to $15,000 the threshold 
above which standard credit card loans to insiders would be counted as 
extensions of credit. This proposed increase reflected widespread 
increases by credit card issuers in pre-approved lending limits and, to 
some extent, inflation since the initial adoption of the $5,000 limit 
in 1979. The Board did not propose raising the limit for extensions of 
credit through overdraft plans, leaving that limit at $5,000. 
Extensions of credit through overdrafts in amounts up to $15,000 have 
not become routine.
    Commenters supported the proposed increase. Many commenters, 
however, requested that the increase be expanded. Thirteen commenters 
suggested that the proposed $15,000 cap on the amount of excluded 
credit card debt either be eliminated, increased, indexed, or 
periodically reviewed. Two commenters requested that credit card debt 
be exempted from the cap on general purpose loans to executive 
officers.
    Eight commenters requested that the overdraft limit be raised by an 
identical amount. Commenters reasoned that one extension of credit is 
the same as another and thus that no substantive difference exists 
between credit card loans and overdraft extensions of credit. Moreover, 
some overdraft protection plans are now tied directly to credit card 
lines of credit. Commenters also noted that the rationale that the 
credit card limit was being raised to compensate for inflation applied 
equally to overdraft protection.
    The Board has decided to increase the credit card exemption from 
$5,000 to $15,000 and to maintain the overdraft limit at $5,000. 
Raising the limit could encourage insiders to view overdraft plans as a 
source of credit, rather than solely as protection against infrequent 
and unplanned events. The Board is not prohibiting payment of 
overdrafts over $5,000 pursuant to a permissible pre-approved overdraft 
plan, but merely providing that overdrafts over $5,000 are counted 
toward the individual and aggregate lending limits of Regulation O.
    The Board believes that the proposed limit is an appropriate 
compromise between its concern to prevent insider lending abuse and the 
added convenience that even higher or indexed limits may provide. 
Commenters presented no evidence to support their argument that a cap 
on exempt credit card lending is no longer necessary. Finally, the 
Board believes that exempting credit card loans from the cap on general 
purpose loans to executive officers would be more properly addressed in 
the context of a more general review of executive officer lending 
restrictions.

V. Consumer Installment Paper

    Pursuant to the authority granted it by the Housing and Community 
Development Act of 1992 (HCDA),9 the Board proposed an exception 
to the aggregate lending limit for the discount of consumer installment 
paper from an insider with recourse, so long as the bank is relying 
primarily upon the creditworthiness of the maker of the paper and not 
on any endorsement or guarantee of the insider. Such transactions would 
continue to constitute extensions of credit subject to the aggregate 
lending limit if the maker of the consumer installment paper was an 
insider. See 58 FR 47400, September 9, 1993.
---------------------------------------------------------------------------

    \9\Public Law 102-550 Section 955, 106 Stat. 3672 (1992).
---------------------------------------------------------------------------

    The legislative history of HCDA states that the Board should make a 
``zero-based review'' of any exceptions it adopts.10 The proposed 
exception is consistent with this directive. The Board has concluded 
that, where the bank is relying primarily upon the creditworthiness of 
the underlying maker, the accompanying extension of credit to an 
insider transferring the paper with recourse poses minimal risk of loss 
to the bank.11 In addition like the previous three exceptions, the 
new exception is found in the National Bank Act,12 and is 
incorporated as an exception to the individual lending limit in 
Regulation O. See 12 U.S.C. 84(c)(8); 12 CFR 215.2(h) and 215.4(c).
---------------------------------------------------------------------------

    \1\0See 138 Cong. Rec. S17,914-15 (daily ed. October 8, 1992).
    \1\1Although extensions of credit made in conformity with the 
proposed exception would not count toward a bank's aggregate lending 
limit, such extensions of credit would continue to be treated as 
extensions of credit under 12 CFR 215.3(4) (a) and (b) of Regulation 
O, as a safeguard against abuse of this exception.
    \1\2All interpretations by the Comptroller of the Currency of 
the exceptions contained in 12 U.S.C. 84 are applicable to 
Regulation O to the extent that these exceptions are incorporated by 
reference into or otherwise adopted in Regulation O.
---------------------------------------------------------------------------

    Commenters generally supported the new exception, and no adverse 
comments were received. Three commenters argued that the proposed 
requirement that a designated officer of the bank certify in writing 
that the bank is relying primarily upon the maker of the discounted 
paper was too burdensome because it did not accommodate itself to bulk 
transactions in which the bank may perform only a statistical sampling 
of a discounted loan portfolio. One commenter asked the Board to 
clarify that the discount of consumer lease paper was included in the 
provision. Six commenters suggested adoption of additional exceptions 
contained in the National Bank Act, and one commenter suggested an 
additional exception not included in the National Bank Act.
    The requirement that a designated officer certify that the bank has 
followed appropriate underwriting procedures is found in the National 
Bank Act, and the Board has decided to maintain consistency with that 
Act.
    Concerning consumer lease paper, the Board notes that an 
interpretative letter concerning the circumstances under which a lease 
transaction may be considered to be an extension of credit for purposes 
of Regulation O has previously been issued. See Interpretative Letter 
dated April 8, 1976. The Board believes that it would be more 
appropriate to provide further guidance as to the treatment of 
particular transactions under Regulation O on a case-by-case basis.
    Additional exemptions found in the National Bank Act have not been 
adopted. Those are either limited exemptions, exemptions for credit 
secured by collateral that is not stable and liquid, or exemptions that 
would be difficult to administer in the Regulation O context. Other 
exemptions suggested by commenters would require statutory change.

VI. Loans to Executive Officers

    The Board proposed three amendments to the rules governing 
extensions of credit by a bank to its executive officers: A new 
exemption to the limit for general purpose loans that are fully 
collateralized by certain categories of highly stable and liquid 
collateral; clarification that home mortgage loan refinancing, subject 
to certain limitations, is included in the category of home mortgage 
loans; and a restatement of the prior approval requirement in section 
22(g) of the Federal Reserve Act. See 58 FR 47400, September 9, 1993.

A. General Purpose Loans

    Section 22(g) of the Federal Reserve Act establishes a special 
additional rule for extensions of credit by a bank to its executive 
officers. In general, a bank's lending to each of its executive 
officers is limited to an amount equal to the greater of $25,000 or 2.5 
percent of the bank's capital and unimpaired surplus, but not to exceed 
$100,000. 12 CFR 215.5(c). Qualifying home mortgage loans and 
educational loans are not counted toward this limit, although they do 
count toward the general individual and aggregate lending limits 
applicable to all insiders under Sec. 215.4 of Regulation O. 12 CFR 
215.5(c)(1) and (2). Also, unlike the general individual and aggregate 
lending limits, there has been no exception to the executive officer 
lending limit based on the manner in which the extension of credit is 
collateralized.
    The Board proposed to create an exemption to the general purpose 
lending limit for loans to executive officers for loans fully secured 
by: (a) Obligations of the United States or other obligations fully 
guaranteed as to principal and interest by the United States; (b) 
commitments or guarantees of a department or agency of the United 
States; or (c) a segregated deposit account with the lending bank.
    The Board previously has determined that extensions of credit 
collateralized in the manner described above pose minimal risk of loss 
to a bank. See 58 FR 26507, May 4, 1993. In view of this determination, 
the Board has concluded that it is consistent with safe and sound 
banking practices to increase the amount of credit that a bank may 
extend to its executive officers when the credit is secured as 
described above. Because such loans would continue to be subject to the 
prohibitions against preferential lending, the Board also believes that 
the proposed exception would not lend itself to evasions of the law or 
any other abuse.
    Commenters supported the proposed exception. Six commenters 
suggested that additional categories of exempt extensions of credit be 
adopted. Nine commenters requested that the current $100,000 cap on 
general purpose loans be increased, and two commenters suggested that 
the cap be eliminated altogether. One commenter suggested that loans to 
an executive officer serving in a bona fide fiduciary capacity not be 
included as loans to the executive officer for purposes of 12 CFR 
215.5(c).
    The additional exceptions that have been proposed apply more 
readily to loans made in a commercial context rather than to personal 
loans. Section 215.5 primarily governs personal loans, however, and the 
additional proposals therefore are neither necessary nor appropriate. 
The Board also considers it more appropriate to reconsider the 
appropriate lending limit for executive officers in connection with a 
more general review of executive officer restrictions. Finally, the 
Board notes that the proper treatment under Regulation O of loans to an 
executive officer serving in a bona fide fiduciary capacity has 
previously been addressed. See I Fed. Res. Reg. Serv. 3-1048. The Board 
will provide any further guidance on this issue on a case-by-case 
basis.

B. Refinancing of Home Mortgage Loans

    Section 22(g) of the Federal Reserve Act provides that a bank may 
make a loan to its executive officer, without restriction as to amount, 
if the loan is secured by a first lien on a dwelling that is owned by 
the executive officer and used by the executive officer as a residence 
after the loan is made. 12 U.S.C. 375a(2). Section 215.5(c)(2) of 
Regulation O implements this provision, and sets forth additional 
restrictions on such loans.
    The Board proposed to revise the regulation to provide clearly that 
the refinancing of a home mortgage loan is included within this 
category to the extent that the proceeds are used to pay off the prior 
home mortgage loan or for one or more of the permissible purposes 
enumerated in 12 CFR 215.5(c)(2).
    Comments were generally supportive. Two commenters asked the Board 
to clarify that the closing costs of a home mortgage refinancing are 
included as part of the qualifying portion of the loan. Two commenters 
requested that all proceeds of a home mortgage refinancing be included 
in this category.
    The Board, as requested in the comments, has revised the regulation 
further to provide expressly that closing costs are included as part of 
the exempt portion of a home mortgage refinancing, and to make other 
clarifying changes. Inclusion within the exemption of proceeds of a 
refinancing that may be used for unrestricted purposes is prohibited by 
the enabling statute.

C. Prior Approval of Home Mortgage Loans

    Section 22(g) provides that the board of directors of a bank must 
specifically approve in advance a home mortgage loan to an executive 
officer. 12 U.S.C. 375a(2). Regulation O, however, does not set forth 
this requirement. The Board proposed that 12 CFR 215.5(c) be revised to 
conform to the enabling statute.
    Comments upon this proposal were mixed. One commenter asked the 
Board to clarify that prior approval is required for all home mortgage 
loans regardless of size, notwithstanding the general provisions of 
Regulation O that require prior approval only for loans in excess of a 
calculated amount. See 12 CFR 215.4(b). Two commenters suggested that 
the Board rely on its rulemaking authority not to conform to the 
statute, and two commenters asked the Board to seek relief from this 
requirement from Congress.
    The Board has adopted this provision substantially as proposed. As 
discussed above, the Board has added an introductory statement to 
Sec. 215.5 to clarify that the requirements for extensions of credit to 
executive officers under that section, pursuant to section 22(g), are 
in addition to the general requirements for insiders set forth 
elsewhere in Regulation O. The Board lacks the authority to adopt a 
provision of Regulation O that does not conform to the statutory prior 
approval requirement. The additional comments are beyond the scope of 
this rulemaking.

VII. Conforming Definition of ``Bank''

    Subpart B of Regulation O partially implements the reporting 
requirements of title VIII of FIRA, as amended by the Garn-St. Germain 
Depository Institutions Act of 1982\13\ and FDICIA. 12 U.S.C. 
1972(2)(G). Section 215.22 requires an executive officer or principal 
shareholder of a bank to report to the bank each year if the person or 
any related interest of the person borrowed during the prior calendar 
year from a correspondent bank of the bank.
---------------------------------------------------------------------------

    \13\Public Law 97-320, 96 Stat. 1469 (1982).
---------------------------------------------------------------------------

    As originally enacted, a correspondent bank was defined in title 
VIII of FIRA to include a bank as defined in the Bank Holding Company 
Act. Title VIII was subsequently amended to include in the definition a 
mutual savings bank, a savings bank, and a savings association as 
defined in section 3 of the Federal Deposit Insurance Act. 12 U.S.C. 
1971 and 1972(H). The Board proposed to amend the definition of bank in 
subpart B of Regulation O to conform the rule to the statutory 
amendments. See 58 FR 47400, September 9, 1993.
    Comments were favorable, and the Board has adopted this provision 
as proposed.

VIII. Technical Amendments

    The Board has adopted a series of technical amendments to 
Regulation O that are designed to make the regulation more easily 
understandable and somewhat shorter. The amendments include a new 
definition of ``affiliate,'' which makes the regulation read more 
clearly and allows various cross-references and footnotes to be 
eliminated. Because the technical amendments do not make any 
substantive change to the regulation, notice and comment on them was 
not required.

IX. Final Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires an 
agency to prepare a final regulatory flexibility analysis when the 
agency promulgates a final rule. Two of the requirements of a final 
regulatory flexibility analysis, a succinct statement of the need for 
and objectives of the rule, and a summary and assessment of issues 
raised by the public comments and of any changes made in the proposed 
rule as a result thereof (5 U.S.C. 604(b)), are contained in the 
summary and supplementary information above. No significant 
alternatives to the final rule were considered by the agency.

X. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1980, 44 U.S.C. 
3507, and 5 CFR 1320.130, the Board, under authority delegated by the 
Office of Management and Budget, has reviewed its amendments to 
Regulation O. The Board has determined that the revisions do not 
significantly increase the burden of the reporting institutions. The 
changes are expected to reduce regulatory burden for some banks, 
particularly small community banks and rural banks, but the estimated 
effect on aggregate burden calculations is not deemed to be 
significant.

List of Subjects in 12 CFR Part 215

    Credit, Penalties, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Board is amending 12 
CFR part 215 as follows:

PART 215--LOANS TO EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL 
SHAREHOLDERS OF MEMBER BANKS (REGULATION O)

    1. The authority citation for part 215 is revised to read as 
follows:

    Authority: 12 U.S.C. 248(i), 375a(10), 375b(9) and (10), 1817(k) 
and 1972(2)(G)(ii); Pub. L. 102-242, 105 Stat. 2236.

Subpart A--Loans by Member Banks to Their Executive Officers, 
Directors, and Principal Shareholders

    2. 12 CFR part 215, subpart A, is amended by revising Secs. 215.1 
through 215.13, to read as follows:


Sec. 215.1  Authority, purpose, and scope.

    (a) Authority. This subpart is issued pursuant to sections 11(i), 
22(g), and 22(h) of the Federal Reserve Act (12 U.S.C. 248(i), 375a, 
and 375b), 12 U.S.C. 1817(k), and section 306 of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 
Stat. 2236 (1991)).
    (b) Purpose and scope. This subpart A governs any extension of 
credit by a member bank to an executive officer, director, or principal 
shareholder of: The member bank; a bank holding company of which the 
member bank is a subsidiary; and any other subsidiary of that bank 
holding company. It also applies to any extension of credit by a member 
bank to: A company controlled by such a person; and a political or 
campaign committee that benefits or is controlled by such a person. 
This subpart A also implements the reporting requirements of 12 U.S.C. 
375a concerning extensions of credit by a member bank to its executive 
officers and of 12 U.S.C. 1817(k) concerning extensions of credit by a 
member bank to its executive officers or principal shareholders, or the 
related interests of such persons.


Sec. 215.2  Definitions.

    For the purposes of this subpart A, the following definitions apply 
unless otherwise specified:
    (a) Affiliate means any company of which a member bank is a 
subsidiary or any other subsidiary of that company.
    (b) Company means any corporation, partnership, trust (business or 
otherwise), association, joint venture, pool syndicate, sole 
proprietorship, unincorporated organization, or any other form of 
business entity not specifically listed herein. However, the term does 
not include:
    (1) An insured depository institution (as defined in 12 U.S.C. 
1813); or
    (2) A corporation the majority of the shares of which are owned by 
the United States or by any State.
    (c)(1) Control of a company or bank means that a person directly or 
indirectly, or acting through or in concert with one or more persons:
    (i) Owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of the company or bank;
    (ii) Controls in any manner the election of a majority of the 
directors of the company or bank; or
    (iii) Has the power to exercise a controlling influence over the 
management or policies of the company or bank.
    (2) A person is presumed to have control, including the power to 
exercise a controlling influence over the management or policies, of a 
company or bank if:
    (i) The person is:
    (A) An executive officer or director of the company or bank; and
    (B) Directly or indirectly owns, controls, or has the power to vote 
more than 10 percent of any class of voting securities of the company 
or bank; or
    (ii)(A) The person directly or indirectly owns, controls, or has 
the power to vote more than 10 percent of any class of voting 
securities of the company or bank; and
    (B) No other person owns, controls, or has the power to vote a 
greater percentage of that class of voting securities.
    (3) An individual is not considered to have control, including the 
power to exercise a controlling influence over the management or 
policies, of a company or bank solely by virtue of the individual's 
position as an officer or director of the company or bank.
    (4) A person may rebut a presumption established by paragraph 
(b)(2) of this section by submitting to the appropriate Federal banking 
agency (as defined in 12 U.S.C. 1813(q)) written materials that, in the 
agency's judgment, demonstrate an absence of control.
    (d) Director of a member bank means any director of a member bank, 
whether or not receiving compensation. An advisory director is not 
considered a director if the advisory director:
    (1) Is not elected by the shareholders of the company or bank;
    (2) Is not authorized to vote on matters before the board of 
directors; and
    (3) Provides solely general policy advice to the board of 
directors.
    (e)(1) Executive officer of a company or bank means a person who 
participates or has authority to participate (other than in the 
capacity of a director) in major policymaking functions of the company 
or bank, whether or not: the officer has an official title; the title 
designates the officer an assistant; or the officer is serving without 
salary or other compensation.1 The chairman of the board, the 
president, every vice president, the cashier, the secretary, and the 
treasurer of a company or bank are considered executive officers, 
unless the officer is excluded, by resolution of the board of directors 
or by the bylaws of the bank or company, from participation (other than 
in the capacity of a director) in major policymaking functions of the 
bank or company, and the officer does not actually participate therein.
---------------------------------------------------------------------------

    \1\The term is not intended to include persons who may have 
official titles and may exercise a certain measure of discretion in 
the performance of their duties, including discretion in the making 
of loans, but who do not participate in the determination of major 
policies of the bank or company and whose decisions are limited by 
policy standards fixed by the senior management of the bank or 
company. For example, the term does not include a manager or 
assistant manager of a branch of a bank unless that individual 
participates, or is authorized to participate, in major policymaking 
functions of the bank or company.
---------------------------------------------------------------------------

    (2) Extensions of credit to an executive officer of an affiliate of 
a member bank (other than a company that controls the bank) shall not 
be subject to Secs. 215.4, 215.6 and 215.8 of this part, provided that:
    (i) The executive officer of the affiliate is excluded (by name or 
by title) from participation in major policymaking functions of the 
member bank by resolutions of the boards of directors of both the 
affiliate and the member bank, and does not actually participate in 
such major policymaking functions; and
    (ii) The executive officer is not otherwise subject to such 
requirements as a director or principal shareholder.
    (f) Foreign bank has the meaning given in 12 U.S.C. 3101(7).
    (g) Immediate family means the spouse of an individual, the 
individual's minor children, and any of the individual's children 
(including adults) residing in the individual's home.
    (h) Insider means an executive officer, director, or principal 
shareholder, and includes any related interest of such a person.
    (i) Lending limit. The lending limit for a member bank is an amount 
equal to the limit of loans to a single borrower established by section 
5200 of the Revised Statutes,2 12 U.S.C. 84. This amount is 15 
percent of the bank's unimpaired capital and unimpaired surplus in the 
case of loans that are not fully secured, and an additional 10 percent 
of the bank's unimpaired capital and unimpaired surplus in the case of 
loans that are fully secured by readily marketable collateral having a 
market value, as determined by reliable and continuously available 
price quotations, at least equal to the amount of the loan. The lending 
limit also includes any higher amounts that are permitted by section 
5200 of the Revised Statutes for the types of obligations listed 
therein as exceptions to the limit. A member bank's unimpaired capital 
and unimpaired surplus equals the sum of:
---------------------------------------------------------------------------

    \2\ Where State law establishes a lending limit for a State 
member bank that is lower than the amount permitted in section 5200 
of the Revised Statutes, the lending limit established by applicable 
State laws shall be the lending limit for the State member bank.
---------------------------------------------------------------------------

    (1) The ``total equity capital'' of the member bank reported on its 
most recent consolidated report of condition filed under 12 U.S.C. 
1817(a)(3);
    (2) Any subordinated notes and debentures that comply with 
requirements of the appropriate Federal banking agency for addition to 
the member bank's capital structure and are reported on its most recent 
consolidated report of condition filed under 12 U.S.C. 1817(a)(3); and
    (3) Any valuation reserves created by charges to the member bank's 
income reported on its most recent consolidated report of condition 
filed under 12 U.S.C. 1817(a)(3).
    (j) Member bank means any banking institution that is a member of 
the Federal Reserve System, including any subsidiary of a member bank. 
The term does not include any foreign bank that maintains a branch in 
the United States, whether or not the branch is insured (within the 
meaning of 12 U.S.C. 1813(s)) and regardless of the operation of 12 
U.S.C. 1813(h) and 12 U.S.C. 1828(j)(3)(B).
    (k) Pay an overdraft on an account means to pay an amount upon the 
order of an account holder in excess of funds on deposit in the 
account.
    (l) Person means an individual or a company.
    (m)(1) Principal shareholder means a person (other than an insured 
bank) that directly or indirectly, or acting through or in concert with 
one or more persons, owns, controls, or has the power to vote more than 
10 percent of any class of voting securities of a member bank or 
company. Shares owned or controlled by a member of an individual's 
immediate family are considered to be held by the individual.
    (2) A principal shareholder of a member bank does not include a 
company of which a member bank is a subsidiary.
    (n) Related interest of a person means:
    (1) A company that is controlled by that person; or
    (2) A political or campaign committee that is controlled by that 
person or the funds or services of which will benefit that person.
    (o) Subsidiary has the meaning given in 12 U.S.C. 1841(d), but does 
not include a subsidiary of a member bank.


Sec. 215.3  Extension of credit.

    (a) An extension of credit is a making or renewal of any loan, a 
granting of a line of credit, or an extending of credit in any manner 
whatsoever, and includes:
    (1) A purchase under repurchase agreement of securities, other 
assets, or obligations;
    (2) An advance by means of an overdraft, cash item, or otherwise;
    (3) Issuance of a standby letter of credit (or other similar 
arrangement regardless of name or description) or an ineligible 
acceptance, as those terms are defined in Sec. 208.8(d) of this 
chapter;
    (4) An acquisition by discount, purchase, exchange, or otherwise of 
any note, draft, bill of exchange, or other evidence of indebtedness 
upon which an insider may be liable as maker, drawer, endorser, 
guarantor, or surety;
    (5) An increase of an existing indebtedness, but not if the 
additional funds are advanced by the bank for its own protection for:
    (i) Accrued interest; or
    (ii) Taxes, insurance, or other expenses incidental to the existing 
indebtedness;
    (6) An advance of unearned salary or other unearned compensation 
for a period in excess of 30 days; and
    (7) Any other similar transaction as a result of which a person 
becomes obligated to pay money (or its equivalent) to a bank, whether 
the obligation arises directly or indirectly, or because of an 
endorsement on an obligation or otherwise, or by any means whatsoever.
    (b) An extension of credit does not include:
    (1) An advance against accrued salary or other accrued 
compensation, or an advance for the payment of authorized travel or 
other expenses incurred or to be incurred on behalf of the bank;
    (2) A receipt by a bank of a check deposited in or delivered to the 
bank in the usual course of business unless it results in the carrying 
of a cash item for or the granting of an overdraft (other than an 
inadvertent overdraft in a limited amount that is promptly repaid, as 
described in Sec. 215(4)(e) of this part);
    (3) An acquisition of a note, draft, bill of exchange, or other 
evidence of indebtedness through:
    (i) A merger or consolidation of banks or a similar transaction by 
which a bank acquires assets and assumes liabilities of another bank or 
similar organization; or
    (ii) Foreclosure on collateral or similar proceeding for the 
protection of the bank, provided that such indebtedness is not held for 
a period of more than three years from the date of the acquisition, 
subject to extension by the appropriate Federal banking agency for good 
cause;
    (4)(i) An endorsement or guarantee for the protection of a bank of 
any loan or other asset previously acquired by the bank in good faith; 
or
    (ii) Any indebtedness to a bank for the purpose of protecting the 
bank against loss or of giving financial assistance to it;
    (5) Indebtedness of $15,000 or less arising by reason of any 
general arrangement by which a bank:
    (i) Acquires charge or time credit accounts; or
    (ii) Makes payments to or on behalf of participants in a bank 
credit card plan, check credit plan, or similar open-end credit plan, 
provided:
    (A) The indebtedness does not involve prior individual clearance or 
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 arrangement; and
    (B) The indebtedness is incurred under terms that are not more 
favorable than those offered to the general public;
    (6) Indebtedness of $5,000 or less arising by reason of an 
interest-bearing overdraft credit plan of the type specified in 
Sec. 215.4(e) of this part; or
    (7) A discount of promissory notes, bills of exchange, conditional 
sales contracts, or similar paper, without recourse.
    (c) Non-interest-bearing deposits to the credit of a bank are not 
considered loans, advances, or extensions of credit to the bank of 
deposit; nor is the giving of immediate credit to a bank upon 
uncollected items received in the ordinary course of business 
considered to be a loan, advance or extension of credit to the 
depositing bank.
    (d) For purposes of Sec. 215.4 of this part, an extension of credit 
by a member bank is considered to have been made at the time the bank 
enters into a binding commitment to make the extension of credit.
    (e) A participation without recourse is considered to be an 
extension of credit by the participating bank, not by the originating 
bank.
    (f) Tangible economic benefit rule--(1) In general. 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.
    (2) Exception. An extension of credit is not considered made to an 
insider under paragraph (f)(1) of this section if:
    (i) The credit is extended on terms that would satisfy the standard 
set forth in Sec. 215.4(a) of this part for extensions of credit to 
insiders; and
    (ii) The proceeds of the extension of credit are used in a bona 
fide transaction to acquire property, goods, or services from the 
insider.


Sec. 215.4  General prohibitions.

    (a) Terms and creditworthiness. No member bank may extend credit to 
any insider of the bank or insider of its affiliates unless the 
extension of credit:
    (1) Is made on substantially the same terms (including interest 
rates and collateral) 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
    (2) Does not involve more than the normal risk of repayment or 
present other unfavorable features.
    (b) Prior approval. (1) No member bank may extend credit (which 
term includes granting a line of credit) to any insider of the bank or 
insider 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 interests of that person, exceeds the higher of $25,000 or 5 
percent of the member bank's unimpaired capital and unimpaired surplus, 
unless:
    (i) The extension of credit has been approved in advance by a 
majority of the entire board of directors of that bank; and
    (ii) The interested party has abstained from participating directly 
or indirectly in the voting.
    (2) In no event may a member bank extend credit to any insider of 
the bank or insider of its affiliates in an amount that, when 
aggregated with all other extensions of credit to that person, and all 
related interests of that person, exceeds $500,000, except by complying 
with the requirements of this paragraph (b).
    (3) Approval by the board of directors under paragraphs (b)(1) and 
(b)(2) of this section is not required for an extension of credit that 
is made pursuant to a line of credit that was approved under paragraph 
(b)(1) of this section within 14 months of the date of the extension of 
credit. The extension of credit must also be in compliance with the 
requirements of Sec. 215.4(a) of this part.
    (4) Participation in the discussion, or any attempt to influence 
the voting, by the board of directors regarding an extension of credit 
constitutes indirect participation in the voting by the board of 
directors on an extension of credit.
    (c) Individual lending limit--No member bank may extend credit to 
any insider of the bank or insider of its affiliates in an amount that, 
when aggregated with the amount of all other extensions of credit by 
the member bank to that person and to all related interests of that 
person, exceeds the lending limit of the member bank specified in 
Sec. 215.2(i) of this part. This prohibition does not apply to an 
extension of credit by a member bank to a company of which the member 
bank is a subsidiary or to any other subsidiary of that company.
    (d) Aggregate lending limit --(1) General limit. A member bank may 
not extend credit to any insider of the bank or insider of its 
affiliates unless the extension of credit 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 the bank's unimpaired 
capital and unimpaired surplus (as defined in Sec. 215.2(i) of this 
part).
    (2) Member banks with deposits of less than $100,000,000. (i) A 
member bank with deposits of less than $100,000,000 may by an annual 
resolution of its board of directors increase the general limit 
specified in paragraph (d)(1) of this section to a level not to exceed 
two times the bank's unimpaired capital and unimpaired surplus, if:
    (A) The board of directors determines that such higher limit is 
consistent with prudent, safe, and sound banking practices in light of 
the bank's experience in lending to its insiders and is necessary to 
attract or retain directors or to prevent restricting the availability 
of credit in small communities;
    (B) The resolution sets forth the facts and reasoning on which the 
board of directors bases the finding, including the amount of the 
bank's lending to its insiders as a percentage of the bank's unimpaired 
capital and unimpaired surplus as of the date of the resolution;
    (C) The bank meets or exceeds, on a fully-phased in basis, all 
applicable capital requirements established by the appropriate Federal 
banking agency; and
    (D) The bank received a satisfactory composite rating in its most 
recent report of examination.
    (ii) If a member bank has adopted a resolution authorizing a higher 
limit pursuant to paragraph (d)(2)(i) of this section and subsequently 
fails to meet the requirements of paragraph (d)(2)(i)(C) or 
(d)(2)(i)(D) of this section, the member bank shall not extend any 
additional credit (including a renewal of any existing extension of 
credit) to any insider of the bank or its affiliates unless such 
extension or renewal is consistent with the general limit in paragraph 
(d)(1) of this section.
    (3) Exceptions. (i) The general limit specified in paragraph (d)(1) 
of this section does not apply to the following:
    (A) Extensions of credit secured by a perfected security interest 
in bonds, notes, certificates of indebtedness, or Treasury bills of the 
United States or in other such obligations fully guaranteed as to 
principal and interest by the United States;
    (B) Extensions of credit to or secured by unconditional takeout 
commitments or guarantees of any department, agency, bureau, board, 
commission or establishment of the United States or any corporation 
wholly owned directly or indirectly by the United States;
    (C) Extensions of credit secured by a perfected security interest 
in a segregated deposit account in the lending bank; or
    (D) Extensions of credit arising from the discount of negotiable or 
nonnegotiable installment consumer paper that is acquired from an 
insider and carries a full or partial recourse endorsement or guarantee 
by the insider, provided that:
    (1) The financial condition of each maker of such consumer paper is 
reasonably documented in the bank's files or known to its officers;
    (2) An officer of the bank designated for that purpose by the board 
of directors of the bank certifies in writing that the bank is relying 
primarily upon the responsibility of each maker for payment of the 
obligation and not upon any endorsement or guarantee by the insider; 
and
    (3) The maker of the instrument is not an insider.
    (ii) The exceptions in paragraphs (d)(3)(i)(A) through (d)(3)(i)(C) 
of this section apply only to the amounts of such extensions of credit 
that are secured in the manner described therein.
    (e) Overdrafts. (1) No member bank may pay an overdraft of an 
executive officer or director of the bank3 on an account at the 
bank, unless the payment of funds is made in accordance with:
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    \3\This prohibition does not apply to the payment by a member 
bank of an overdraft of a principal shareholder of the member bank, 
unless the principal shareholder is also an executive officer or 
director. This prohibition also does not apply to the payment by a 
member bank of an overdraft of a related interest of an executive 
officer, director, or principal shareholder of the member bank.
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    (i) A written, preauthorized, interest-bearing extension of credit 
plan that specifies a method of repayment; or
    (ii) A written, preauthorized transfer of funds from another 
account of the account holder at the bank.
    (2) The prohibition in paragraph (e)(1) of this section does not 
apply to payment of inadvertent overdrafts on an account in an 
aggregate amount of $1,000 or less, provided:
    (i) The account is not overdrawn for more than 5 business days; and
    (ii) The member bank charges the executive officer or director the 
same fee charged any other customer of the bank in similar 
circumstances.


Sec. 215.5  Additional restrictions on loans to executive officers of 
member banks.

    The following restrictions on extensions of credit by a member bank 
to any of its executive officers apply in addition to any restrictions 
on extensions of credit by a member bank to insiders of itself or its 
affiliates set forth elsewhere in this part. The restrictions of this 
section apply only to executive officers of the member bank and not to 
executive officers of its affiliates.
    (a) No member bank may extend credit to any of its executive 
officers, and no executive officer of a member bank shall borrow from 
or otherwise become indebted to the bank, except in the amounts, for 
the purposes, and upon the conditions specified in paragraphs (c) and 
(d) of this section.
    (b) No member bank may extend credit in an aggregate amount greater 
than the amount permitted in paragraph (c)(3) of this section to a 
partnership in which one or more of the bank's executive officers are 
partners and, either individually or together, hold a majority 
interest. For the purposes of paragraph (c)(3) of this section, the 
total amount of credit extended by a member bank to such partnership is 
considered to be extended to each executive officer of the member bank 
who is a member of the partnership.
    (c) A member bank is authorized to extend credit to any executive 
officer of the bank:
    (1) In any amount to finance the education of the executive 
officer's children;
    (2) With the specific prior approval of the board of directors, in 
any amount to finance or refinance the purchase, construction, 
maintenance, or improvement of a residence of the executive officer, 
provided:
    (i) The extension of credit is secured by a first lien on the 
residence and the residence is owned (or expected to be owned after the 
extension of credit) by the executive officer; and
    (ii) In the case of a refinancing, that only the amount thereof 
used to repay the original extension of credit, together with the 
closing costs of the refinancing, and any additional amount thereof 
used for any of the purposes enumerated in this paragraph (c)(2), are 
included within this category of credit;
    (3) In any amount, if the extension of credit is secured in a 
manner described in Sec. 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this 
part; and
    (4) For any other purpose not specified in paragraphs (c)(1) 
through (c)(3) of this section, if the aggregate amount of extensions 
of credit to that executive officer under this paragraph does not 
exceed at any one time the higher of 2.5 per cent of the bank's capital 
and unimpaired surplus or $25,000, but in no event more than $100,000.
    (d) Any extension of credit by a member bank to any of its 
executive officers shall be:
    (1) Promptly reported to the member bank's board of directors;
    (2) In compliance with the requirements of Sec. 215.4(a) of this 
part;
    (3) Preceded by the submission of a detailed current financial 
statement of the executive officer; and
    (4) Made subject to the condition in writing that the extension of 
credit will, at the option of the member bank, become due and payable 
at any time that the officer is indebted to any other bank or banks in 
an aggregate amount greater than the amount specified for a category of 
credit in paragraph (c) of this section.


Sec. 215.6  Prohibition on knowingly receiving unauthorized extension 
of credit.

    No executive officer, director, or principal shareholder of a 
member bank or any of its affiliates shall knowingly receive (or 
knowingly permit any of that person's related interests to receive) 
from a member bank, directly or indirectly, any extension of credit not 
authorized under this part.


Sec. 215.7  Extensions of credit outstanding on March 10, 1979.

    (a) Any extension of credit that was outstanding on March 10, 1979, 
and that would, if made on or after March 10, 1979, violate 
Sec. 215.4(c) of this part, shall be reduced in amount by March 10, 
1980, to be in compliance with the lending limit in Sec. 215.4(c) of 
this part. Any renewal or extension of such an extension of credit on 
or after March 10, 1979, shall be made only on terms that will bring 
the extension of credit into compliance with the lending limit of 
Sec. 215.4(c) of this part by March 10, 1980. However, any extension of 
credit made before March 10, 1979, that bears a specific maturity date 
of March 10, 1980, or later, shall be repaid in accordance with its 
repayment schedule in existence on or before March 10, 1979.
    (b) If a member bank is unable to bring all extensions of credit 
outstanding on March 10, 1979, into compliance as required by paragraph 
(a) of this section, the member bank shall promptly report that fact to 
the Comptroller of the Currency, in the case of a national bank, or to 
the appropriate Federal Reserve Bank, in the case of a State member 
bank, and explain the reasons why all the extensions of credit cannot 
be brought into compliance. The Comptroller or the Reserve Bank, as the 
case may be, is authorized, on the basis of good cause shown, to extend 
the March 10, 1980, date for compliance for any extension of credit for 
not more than two additional one-year periods.


Sec. 215.8  Records of member banks.

    (a) In general. Each member bank shall maintain records necessary 
for compliance with the requirements of this part.
    (b) Recordkeeping for insiders of the member bank. Any 
recordkeeping method adopted by a member bank shall:
    (1) Identify, through an annual survey, all insiders of the bank 
itself; and
    (2) Maintain records of all extensions of credit to insiders of the 
bank itself, including the amount and terms of each such extension of 
credit.
    (c) Recordkeeping for insiders of the member bank's affiliates. Any 
recordkeeping method adopted by a member bank shall maintain records of 
extensions of credit to insiders of the member bank's affiliates by:
    (1) Survey method. (i) Identifying, through an annual survey, each 
insider of the member bank's affiliates; and
    (ii) Maintaining records of the amount and terms of each extension 
of credit by the member bank to such insiders; or
    (2) Borrower inquiry method. (i) Requiring as part of each 
extension of credit that the borrower indicate whether the borrower is 
an insider of an affiliate of the member bank; and
    (ii) Maintaining records that identify the amount and terms of each 
extension of credit by the member bank to borrowers so identifying 
themselves.
    (3) Alternative recordkeeping methods for insiders of affiliates. A 
member bank may employ a recordkeeping method other than those 
identified in paragraphs (c)(1) and (c)(2) of this section if the 
appropriate Federal banking agency determines that the bank's method is 
at least as effective as the identified methods.
    (d) Special rule for non-commercial lenders. A member bank that is 
prohibited by law or by an express resolution of the board of directors 
of the bank from making an extension of credit to any company or other 
entity that is covered by this part as a company is not required to 
maintain any records of the related interests of the insiders of the 
bank or its affiliates or to inquire of borrowers whether they are 
related interests of the insiders of the bank or its affiliates.


Sec. 215.9  Reports by executive officers.

    Each executive officer of a member bank who becomes indebted to any 
other bank or banks in an aggregate amount greater than the amount 
specified for a category of credit in Sec. 215.5(c) of this part, 
shall, within 10 days of the date the indebtedness reaches such a 
level, make a written report to the board of directors of the officer's 
bank. The report shall state the lender's name, the date and amount of 
each extension of credit, any security for it, and the purposes for 
which the proceeds have been or are to be used.


Sec. 215.10  Reports on credit to executive officers.

    Each member bank shall include with (but not as part of) each 
report of condition (and copy thereof) filed pursuant to 12 U.S.C. 
1817(a)(3) a report of all extensions of credit made by the member bank 
to its executive officers since the date of the bank's previous report 
of condition.


Sec. 215.11  Disclosure of credit from member banks to executive 
officers and principal shareholders.

    (a) Definitions. For the purposes of this section, the following 
definitions apply:
    (1) Principal shareholder of a member bank means any person4 
other than an insured bank, or a foreign bank as defined in 12 U.S.C. 
3101(7), that, directly or indirectly, owns, controls, or has power to 
vote more than 10 percent of any class of voting securities of the 
member bank. The term includes a person that controls a principal 
shareholder (e.g., a person that controls a bank holding company). 
Shares of a bank (including a foreign bank), bank holding company, or 
other company owned or controlled by a member of an individual's 
immediate family are presumed to be owned or controlled by the 
individual for the purposes of determining principal shareholder 
status.
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    \4\ The term ``stockholder of record'' appearing in 12 U.S.C. 
1972(2)(G) is synonymous with the term ``person.''
---------------------------------------------------------------------------

    (2) Related interest means:
    (i) Any company controlled by a person; or
    (ii) Any political or campaign committee the funds or services of 
which will benefit a person or that is controlled by a person. For the 
purpose of this section and subpart B of this part, a related interest 
does not include a bank or a foreign bank (as defined in 12 U.S.C. 
3101(7)).
    (b) Public disclosure. (1) Upon receipt of a written request from 
the public, a member bank shall make available the names of each of its 
executive officers and each of its principal shareholders to whom, or 
to whose related interests, the member bank had outstanding as of the 
end of the latest previous quarter of the year, an extension of credit 
that, when aggregated with all other outstanding extensions of credit 
at such time from the member bank to such person and to all related 
interests of such person, equaled or exceeded 5 percent of the member 
bank's capital and unimpaired surplus of $500,000, whichever amount is 
less. No disclosure under this paragraph is required if the aggregate 
amount of all extensions of credit outstanding at such time from the 
member bank to the executive officer or principal shareholder of the 
member bank and to all related interests of such a person does not 
exceed $25,000.
    (2) A member bank is not required to disclose the specific amounts 
of individual extensions of credit.
    (c) Maintaining records. Each member bank shall maintain records of 
all requests for the information described in paragraph (b) of this 
section and the disposition of such requests. These records may be 
disposed of after two years from the date of the request.


Sec. 215.12  Reporting requirement for credit secured by certain bank 
stock.

    Each executive officer or director of a member bank the shares of 
which are not publicly traded shall report annually to the board of 
directors of the member bank the outstanding amount of any credit that 
was extended to the executive officer or director and that is secured 
by shares of the member bank.


Sec. 215.13  Civil penalties.

    Any member bank, or any officer, director, employee, agent, or 
other person participating in the conduct of the affairs of the bank, 
that violates any provision of this part (other than Sec. 215.11 of 
this part) is subject to civil penalties as specified in section 29 of 
the Federal Reserve Act (12 U.S.C. 504).

Subpart B--[Amended]


Sec. 215.21  [Amended]

    3. Section 215.21 is amended by removing ``1841(c)'' where it 
appears in paragraph (a) and adding in its place ``1971 and 1972'' and 
by removing footnote 10 and redesignating footnotes 11 and 12 as 
footnotes 5 and 6.


Sec. 215.22  [Amended]

    4. Section 215.22 is amended by removing ``12 CFR 226.2(p)'' where 
it appears in paragraph (c)(1)(ii) and adding in its place ``12 CFR 
226.2(a)(12)''.

    By order of the Board of Governors of the Federal Reserve 
System, February 15, 1994.

    Dated: February 15, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-3860 Filed 2-18-94; 3:20 pm]
BILLING CODE 6210-01-P