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Reg O - Aggregate Lending Limit
Answer by Randy Carey, BOL Guru
Guru Bios

Question:  Can the bank set preapproved lending guidance on insiders? We would like to set an aggregate lending limit to each bank insider that would not need board approval if it met certain underwriting guidelines such as maximum DTI, minimum DSC, etc. I believe we would have these guidance levels approved yearly by the board. I am trying to make sure that we are not in violation of anything by doing this.

Answer:  It can be done, but only with proper documentation. The following staff opinion may give you some guidance (footnotes omitted):

FDIC-95-8, June 22, 1995

This is in response to your letter of May 1, 1995 concerning 12 C.F.R. Part 215 Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (Regulation O) ("Regulation O") which is made applicable to insured nonmember banks by section 337.3 of FDIC regulations (12 C.F.R. 337.3).

You state in your letter that your depository institution, (the "Bank"), was examined by the "State" Department of Banking and Finance (the "Department"). The Department cited minutes from a meeting of the board of directors of the Bank in November, 1994 wherein lines of credit for insiders of the Bank were approved, as containing insufficient information to meet the requirements of section 215.4(b)(l) of Regulation O. You enclose a copy of the board minutes and request our opinion as to whether the minutes provide sufficient information to satisfy Regulation O requirements. If we conclude that the minutes do not satisfy Regulation O, you request that we advise you as to what information should be provided.

Section 215.4(b)(1) of Regulation O requires the prior approval of the board of directors of a bank before an extension of credit (to include the granting of a line of credit) may be made to an insider of the bank which is in excess of $25,000 or 5 percent of the bank's unimpaired capital and unimpaired surplus, whichever is higher. The approval must be given by a majority of the entire board of directors of the bank. The insider who is to receive the loan must abstain from that vote. Prior approval is not required, however, for an extension of credit pursuant to a line of credit that was approved by the board of directors of the bank within 14 months of the date of the extension of credit as long as that approval was in accordance with section 215.4(b)(l).

When asked to address this issue in the past, the FDIC has stated that the record of the board of directors' approval of an extension of credit to an insider must reflect more than a mere notice of an insider borrowing up to a stated amount, coupled with a recital that the terms of the loan are not to be preferential. At a minimum, the record should reflect the following information regarding the loan to be approved;
  1. the name of the borrower;
  2. the upper ceiling of the loan;
  3. whether the loan is secured or unsecured;
  4. the interest rate or range, if possible (e.g., "prime plus");
  5. the type of loan; and
  6. the terms of the loan, to the extent possible.
The board of directors should be aware of these basic aspects of the loan at the time of approval. Regulation O places the responsibility for insider loan review with the board of directors. Consequently, the board of directors may only approve loans whose basic terms are known to them. Where the board of directors approves a line of credit, however, a loan officer or committee may approve draws by an insider on that line of credit without further action by the board of directors for up to 14 months from the date of approval as long as the line of credit was originally approved by the board of directors in accordance with section 215.4 (b).

Review of the minutes from the November, 1994 meeting of the board of directors of the bank indicates that several of the criteria listed above are unsatisfied, namely: the upper ceiling of the loan (a definite sum must be listed, stating "up to legal lending limits" will not suffice); whether the loans are secured or unsecured; the loan's interest rate or range; the loan type; and the terms of the loan, to the extent that they are known at the time of approval. We therefore agree with the Department's finding that the minutes of the November, 1994 meeting are insufficient to satisfy the requirements of section 215.4 (b) of Regulation O.

We contacted staff of the Board of Governors of the Federal Reserve System (the "FRS") to inquire whether there is any conflict between the position set forth above and FRS staff opinions which you cite in your letter of May 1, 1995. FRS staff have informed us that, in their opinion, a "good faith assessment of the creditworthiness of a bank official" which both FRS opinions state must be made by a board of directors when approving an insider's line of credit, can be read to require that the basic terms of the loan must be known by the board of directors at the time of the prior approval. FRS staff cautioned that the staff opinion on blanket resolutions should not be interpreted to mean that the requirement may be satisfied by simply listing the official's name and the phrase "up to the lending limit". There therefore appears to be no inconsistency between FDIC and FRS advisory opinions on this question.

We recommend that, in the future, the minutes of your board of directors list the information listed above. If this step is taken, the recordkeeping requirements of section 215.4(b) should be satisfied.

First published on 5/19/08

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