[Federal Register Volume 86, Number 97 (Friday, May 21, 2021)]
[Rules and Regulations]
[Pages 27507-27509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10711]



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 Rules and Regulations
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 This section of the FEDERAL REGISTER contains regulatory documents 
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  Federal Register / Vol. 86, No. 97 / Friday, May 21, 2021 / Rules and 
Regulations  

[[Page 27507]]



FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R-1740]
RIN 7100-AG 10


Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Interim final rule with request for comment.

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SUMMARY: On April 17, 2020, the Board issued an interim final rule to 
except certain loans made through June 30, 2020, that are guaranteed 
under the Small Business Administration's Paycheck Protection Program 
from the requirements of the Federal Reserve Act and the associated 
provisions of the Board's Regulation O. The Board issued two additional 
interim final rules to extend the exception when Congress approved 
extensions to the Paycheck Protection Program. To reflect a further 
extension approved by Congress and to automatically capture any further 
extensions, the Board is issuing this interim final rule to extend this 
exception to such loans made through March 31, 2022.

DATES: This interim final rule is effective May 21, 2021. Comments on 
the interim final rule must be received no later than July 6, 2021.

ADDRESSES: You may submit comments, identified by Docket No. R-1740 and 
RIN 7100 AG 10, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
and RIN numbers in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments will be made available on the Board's website 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments also may be viewed electronically 
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC 
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Benjamin McDonough, Associate General 
Counsel, (202) 452-2036, Alison Thro, Deputy Associate General Counsel, 
(202) 452-3236, Daniel Hickman, Senior Counsel, (202) 973-7432, Josh 
Strazanac, Senior Attorney, (202) 452-2457, Jasmin Keskinen, Attorney, 
(202) 475-6650, Legal Division; or Anna Lee Hewko, Associate Director, 
(202) 530-6360, Juan Climent, Assistant Director, (202) 872-7526, (202) 
452-5239, Kathryn Ballintine, Manager, (202) 452-2555, Rebecca Zak, 
Lead Financial Institution Policy Analyst, (202) 912-7995, Eusebius 
Luk, Senior Financial Policy Analyst I, (202) 452-2874, Division of 
Supervision and Regulation; Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue NW, Washington, DC 20551. 
Users of Telecommunication Device for Deaf (TDD) only, call (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. The Interim Final Rule
III. Administrative Law Matters
    A. Administrative Procedure Act
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
    D. Riegle Community Development and Regulatory Improvement Act 
of 1994
    E. Use of Plain Language

I. Background

    On March 27, 2020, the President signed into law the Coronavirus 
Aid, Relief, and Economic Security (CARES) Act which, among other 
things, created the Paycheck Protection Program (PPP) to facilitate 
lending to small businesses affected by the outbreak of COVID-19 and 
the imposition of associated containment measures (COVID event). 
Although the CARES Act specified that the PPP would end on June 30, 
2020, Congress later extended the program to August 8, 2020, and again 
to March 31, 2021.\1\ On March 30, 2021, the President signed into law 
the PPP Extension Act of 2021 (PPP Extension Act), which further 
extended the PPP to June 30, 2021.\2\
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    \1\ Prioritized Paycheck Protection Program Act, S. 4116, 116th 
Cong. section 1 (2020); Economic Aid to Hard-Hit Small Businesses, 
Nonprofits, and Venues Act, H.R. 133, 116th Cong. section 311 
(2020).
    \2\ PPP Extension Act of 2021, H.R. 1799, 117th Cong. section 2 
(2021).
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    Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation 
O set forth quantitative and qualitative requirements for loans made by 
a bank \3\ to its directors, executive officers, and principal 
shareholders, as well as to any companies owned by such persons 
(collectively, insiders).\4\ Regulation O also sets forth procedural 
and recordkeeping requirements for loans by banks to their insiders. 
These requirements normally would apply to PPP loans made by banks to 
the small businesses owned by their insiders. In some cases, the 
restrictions in Regulation O could delay or entirely prohibit a bank 
from making a PPP loan to such a business. This could be particularly 
challenging in small communities where bank insiders often own small 
businesses and there are few alternative lenders.
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    \3\ Sections 22(g) and 22(h), and Regulation O, apply to all 
banks that are members of the Federal Reserve System. Other federal 
law subjects federally insured state non-member banks and insured 
savings associations to sections 22(g) and 22(h) in the same manner 
and to the same extent as if they were member banks. 12 U.S.C. 
1828(j) (non-member banks); 12 U.S.C. 1468(b) (savings 
associations); 12 CFR 337.3 (state non-member banks and state 
savings associations); 12 CFR 31.2 (national banks and federal 
savings associations). Accordingly, any reference to ``bank'' in 
this notice applies to all member banks and institutions subject to 
sections 22(g) and 22(h) in the same manner and to the same extent 
as member banks.
    \4\ See generally 12 U.S.C. 375a and 375b; 12 CFR part 215.
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    On April 17, 2020, the Board issued an exception to section 22(h) 
and amended the corresponding provisions of Regulation O for PPP loans 
made to insiders that would not be prohibited

[[Page 27508]]

from receiving a PPP loan under the Small Business Administration (SBA) 
lending restrictions (original IFR).\5\ The exception was intended to 
facilitate lending by banks to a broad range of small businesses within 
their communities, consistent with applicable law and safe and sound 
banking practices. The exception applied only to PPP loans made by June 
30, 2020, the original date on which the PPP was set to expire. The 
Board has extended the exception each time that Congress has extended 
the PPP.\6\ The Board responded to the dozen comments it received in 
response to the interim final rules issued in April and July in the 
interim final rule issued on February 17, 2021.\7\ Since issuing its 
last interim final rule, the Board received two comments, neither of 
which discussed the interim final rules, sections 22(g) and 22(h), or 
Regulation O.
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    \5\ ``Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks,'' 85 FR 22345 (Apr. 22, 2020)).
    \6\ ``Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks,'' 85 FR 43119 (July 16, 2020); ``Loans 
to Executive Officers, Directors, and Principal Shareholders of 
Member Bank,'' 86 FR 9837 (Feb. 17, 2021).
    \7\ Id. at 9839.
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    The Board is issuing this interim final rule to extend the 
exception to PPP loans made through June 30, 2021.\8\ The exception 
will continue to apply if Congress and the President extend the PPP 
further, but will sunset on March 31, 2022.
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    \8\ References in this IFR to ``PPP loans'' include ``PPP second 
draw loans,'' which are PPP loans that that can be made to borrowers 
who already have received a first PPP loan. PPP second draw loans 
have the same features as PPP loans, except that fewer borrower are 
eligible for PPP second draw loans. For example, only borrowers with 
300 or fewer employees may obtain a PPP second draw loan. See 
Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues 
Act, H.R. 133, 116th Cong. section 311 (2020).
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II. The Interim Final Rule

    Section 22(h) authorizes the Board to adopt, by regulation, 
exceptions to the definition of ``extension of credit'' in section 
22(h) for transactions that ``pose minimal risk.'' \9\ Therefore, the 
Board may except PPP loans from the restrictions in section 22(h) and 
the corresponding provisions of Regulation O upon a determination that 
such loans pose minimal risk.
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    \9\ 12 U.S.C. 375b(9)(D)(ii).
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    The Board determined in the original IFR that PPP loans pose 
minimal risk.\10\ Among other things, this determination relieved 
member banks from ensuring that PPP loans made to certain insiders 
complied with the qualitative, quantitative, and procedural 
requirements set forth in section 22(h) and Regulation O. The PPP 
Extension Act did not change any of the features of PPP loans on which 
the Board relied in the original IFR to determine that PPP loans pose 
minimal risk. Accordingly, for the same reasons cited in the original 
IFR, the Board has determined that PPP loans appear to pose minimal 
risk to bank safety and soundness.\11\
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    \10\ 85 FR 22345, 22346.
    \11\ 85 FR 22345, 22346 (Apr. 22, 2020); 85 FR 43119, 43119-20 
(July 16, 2020); 86 FR 9837, 9838 (Feb. 17, 2021).
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    The exception will continue to apply if Congress and the President 
further extend the PPP, provided that the material terms of the PPP on 
which the Board has justified the exception remain the same. 
Specifically, the exception will continue to apply to PPP loans made 
under an extended program as long as the SBA continues to fully 
guarantee the loans and the material terms of the loan, including the 
interest rate and term, are set by the SBA. The exception will not 
apply for any loans made after March 31, 2022. The duration of the 
sunset provision is consistent with other exceptions the Board has made 
in response to the COVID event.\12\
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    \12\ E.g., Temporary Exclusions of U.S. Treasury Securities and 
Deposits at Federal Reserve Banks From the Supplementary Leverage 
Ratio, 85 FR 20578 (Apr. 14, 2020).
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    SBA lending restrictions continue to apply to PPP loans that are 
subject to section 22(h) and the corresponding provisions of Regulation 
O.\13\ Excepting loans that would be prohibited by the SBA lending 
restrictions from the requirements of section 22(h) and the 
corresponding provisions in Regulation O would not achieve any 
meaningful regulatory purpose. Excepting these loans from one regime 
and not the other also may create confusion because some lenders may 
mistakenly interpret an exception under one regime to extend to both 
regimes. Accordingly, the exception continues to apply only for 
insiders that would not be prohibited from receiving a PPP loan by the 
SBA lending restrictions.
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    \13\ Business Loan Program Temporary Changes; Paycheck 
Protection Program as Amended by the Economic Aid Act, 86 FR 3712 
(Jan. 6, 2021).
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    This interim final rule does not except a PPP loan from other 
restrictions that may apply to the loan, including section 22(g) of the 
Federal Reserve Act or section 215.5 of Regulation O.\14\ This 
determination also does not affect application of SBA lending 
restrictions to a PPP loan. The SBA has stated that ``[f]avoritism by 
[a PPP] [l]ender in processing time or prioritization of [a] director's 
or equity holder's PPP application is prohibited.'' \15\ The Board will 
administer the interim final rule accordingly.
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    \14\ 12 U.S.C. 375a; 12 CFR 215.5.
    \15\ 86 FR 3712, 3696.
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    Question 1: Please describe any additional terms or conditions that 
should apply to the exception.
    Question 2: What are the advantages and disadvantages for the 
exception to automatically extend if the PPP is again extended?

III. Administrative Law Matters

A. Administrative Procedure Act

    The Board is issuing the interim final rule without prior notice 
and the opportunity for public comment and the delayed effective date 
ordinarily prescribed by the Administrative Procedure Act (APA).\16\ 
Pursuant to section 553(b)(B) of the APA, general notice and the 
opportunity for public comment are not required with respect to a 
rulemaking when an ``agency for good cause finds (and incorporates the 
finding and a brief statement of reasons therefor in the rules issued) 
that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' \17\
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    \16\ 5 U.S.C. 553.
    \17\ 5 U.S.C. 553(b)(B).
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    The Board believes that the public interest is best served by 
implementing the interim final rule immediately in light of the short 
timeframe for execution of the renewed PPP mandated by the PPP 
Extension Act. Accordingly, the Board finds that there is good cause 
consistent with the public interest to issue the rule without advance 
notice and comment.\18\
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    \18\ 5 U.S.C. 553(b)(B); 553(d)(3).
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    The APA also requires a 30-day delayed effective date, except for 
(1) substantive rules which grant or recognize an exemption or relieve 
a restriction; (2) interpretative rules and statements of policy; or 
(3) as otherwise provided by the agency for good cause.\19\ Because the 
rules relieve a restriction by providing an exception to the definition 
of ``extension of credit'' in section 22(h) and Regulation O, the 
interim final rule is exempt from the APA's delayed effective date 
requirement.\20\
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    \19\ 5 U.S.C. 553(d).
    \20\ 5 U.S.C. 553(d)(1).
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    While the Board believes that there is good cause to issue the rule 
without advance notice and comment and with an immediate effective 
date, the Board is interested in the views of the public and requests 
comment on all aspects of the interim final rule.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. 3501-3521) (PRA) states that 
no

[[Page 27509]]

agency may conduct or sponsor, nor is the respondent required to 
respond to, an information collection unless it displays a currently 
valid OMB control number. On June 15, 1984, OMB delegated to the Board 
authority under the PRA to approve and assign OMB control numbers to 
collections of information conducted or sponsored by the Board, as well 
as the authority to temporarily approve a new collection of information 
without providing opportunity for public comment if the Board 
determines that a change in an existing collection must be instituted 
quickly and that public participation in the approval process would 
defeat the purpose of the collection or substantially interfere with 
the Board's ability to perform its statutory obligations.
    This interim final rule does not contain any collections of 
information subject to the PRA.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \21\ requires an agency to 
consider whether the rules it proposes will have a significant economic 
impact on a substantial number of small entities.\22\ The RFA applies 
only to rules for which an agency publishes a general notice of 
proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed 
previously, consistent with section 553(b)(B) of the APA, the Board has 
determined for good cause that general notice and opportunity for 
public comment are unnecessary, and therefore the Board is not issuing 
a notice of proposed rulemaking. Accordingly, the Board has concluded 
that the RFA's requirements relating to initial and final regulatory 
flexibility analysis do not apply.
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    \21\ 5 U.S.C. 601 et seq.
    \22\ Under regulations issued by the SBA, a small entity 
includes a depository institution, bank holding company, or savings 
and loan holding company with total assets of $600 million or less 
and trust companies with total assets of $41.5 million or less. See 
13 CFR 121.201.
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    Nevertheless, the Board seeks comment on whether, and the extent to 
which, the interim final rule affects a significant number of small 
entities.

D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\23\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), the federal banking agencies 
must consider, consistent with the principle of safety and soundness 
and the public interest, any administrative burdens that such 
regulations would place on depository institutions, including small 
depository institutions, and customers of depository institutions, as 
well as the benefits of such regulations. In addition, section 302(b) 
of RCDRIA requires new regulations and amendments to regulations that 
impose additional reporting, disclosures, or other new requirements on 
IDIs generally to take effect on the first day of a calendar quarter 
that begins on or after the date on which the regulations are published 
in final form, with certain exceptions, including for good cause.\24\ 
The Board believes that the public interest is best served by 
implementing the interim final rule immediately. As discussed in the 
original IFR, the COVID event has disrupted economic activity in the 
United States and other countries. The magnitude and persistence of the 
COVID event on the economy continue to present some uncertainty. In 
light of the substantial disruptions in the economy, and the likelihood 
that this interim final rule will help ameliorate those disruptions by 
promoting lending to small businesses, the Board finds good cause 
exists under section 302 of RCDRIA to publish this interim final rule 
with an immediate effective date.
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    \23\ 12 U.S.C. 4802(a).
    \24\ 12 U.S.C. 4802.
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    As such, the interim final rule will be effective immediately on 
publication. Nevertheless, the Board seeks comment on RCDRIA.

E. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \25\ requires the federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The Board has sought to present the 
interim final rule in a simple and straightforward manner. The Board 
invites comments on whether there are additional steps it could take to 
make the rule easier to understand. For example:
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    \25\ 12 U.S.C. 4809.
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     Have we organized the material to suit your needs? If not, 
how could this material be better organized?
     Are the requirements in the regulation clearly stated? If 
not, how could the regulation be more clearly stated?
     Does the regulation contain language or jargon that is not 
clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the regulation easier to 
understand? If so, what changes to the format would make the regulation 
easier to understand?
     What else could we do to make the regulation easier to 
understand?

List of Subjects in 12 CFR Part 215

    Credit, Penalties, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons stated in the preamble, the Board of Governors of 
the Federal Reserve System amends 12 CFR chapter II as follows:

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

0
1. The authority citation for part 215 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 375a(10), 375b(9) and (10), 1468, 
1817(k), 5412; and Pub. L. 102-242, 105 Stat. 2236 (1991) (12 U.S.C. 
1811 note).


0
2. In Sec.  215.3, revise paragraphs (b)(8)(i) through (iii) and add 
paragraph (b)(8)(iv) to read as follows:


Sec.  215.3  Extension of credit.

* * * * *
    (b) * * *
    (8) * * *
    (i) Made pursuant to the ``Paycheck Protection Program'' in which 
the participation by the Small Business Administration on a deferred 
basis is 100 percent;
    (ii) For which material terms, including the maturity and the 
interest rate, are set by the Small Business Administration;
    (iii) That is made during the ``covered period,'' as that term is 
defined in 15 U.S.C. 636(a)(36)(A)(iii), but in no case later than 
March 31, 2022; and
    (iv) That would not be prohibited by 13 CFR 120.110(o) or rules or 
interpretations thereof issued by the Small Business Administration.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-10711 Filed 5-20-21; 8:45 am]
BILLING CODE P