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#1838322 - 07/31/13 10:56 PM Insider loan?
Marnie Offline
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Joined: Nov 2007
Posts: 437
Nevada
If an insider pledges his collateral for a non-insider, is that loan considered a REG O loan? Under REG O Extensions of credit, 215.3 A-7 says:

(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.

It's the "indirectly" and "endorsement" that makes me think the above would be classified as a REG O loan.

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#1838333 - 08/01/13 01:02 AM Re: Insider loan? Marnie
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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Posts: 21,277
I have always treated this situation as covered by Reg O. The collateral has value and is a monetary equivalent, in my opinion, by which the insider is agreeing to repay all or part of the loan by sale of the collateral, or direct payment if they wish to preserve the asset pledged. It gets you to the same place as a guaranty.
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Kathleen O. Blanchard, CRCM "Kaybee"
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#1838723 - 08/01/13 10:05 PM Re: Insider loan? Kathleen O. Blanchard
Marnie Offline
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Joined: Nov 2007
Posts: 437
Nevada
I have been told that unless the insider receives direct benefit from this loan, it would not count, even tho he is pledging the collateral. The REG leaves a lot to interpretation, I guess. Thanks for your response, Kathleen.

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#1838778 - 08/02/13 01:12 PM Re: Insider loan? Marnie
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
REG leaves a lot to interpretation, I guess.

The regulation you cite plainly states "obligated to pay money (or its equivalent)", the insider is obligated to relinquish his property to satisfy the loan if the loan defaults. I'm not sure how one could argue that is not an obligation to pay money or its equivalent.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1838966 - 08/02/13 04:53 PM Re: Insider loan? Dan Persfull
Marnie Offline
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Joined: Nov 2007
Posts: 437
Nevada
The decision was made by our Legal dept who said the insider is not the applicant nor does he receive any benefit from the loan, so it doesn't count. I don't agree, but there it is.

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#1839009 - 08/02/13 05:42 PM Re: Insider loan? Marnie
Dan Persfull Offline
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Dan Persfull
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Posts: 46,645
Bloomington, IN
When the insider is obligated to pay money or its equivalent benefit is not a consideration. The legal department is opening the bank up to potential penalties IMO. The following are the last CMPs that can be assessed that I am aware of.

Civil Money Penalties - FIRREA

Tier 1 - $5,500 per day
Tier 2 - $27,500 per day
Tier 3 - $1.1 million per day
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The opinions expressed are mine and they are not to be taken as legal advice.

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#1839048 - 08/02/13 06:20 PM Re: Insider loan? Marnie
Marnie Offline
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Joined: Nov 2007
Posts: 437
Nevada
I know. Thanks, Dan

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#1839103 - 08/02/13 07:13 PM Re: Insider loan? Dan Persfull
Ski Offline
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Joined: May 2003
Posts: 639
South Louisiana
I asked the following question to the FDIC 10/2004:

Director/Executive Officer pledges personal Certificate of Deposit to the loan of an unrelated party. The Director/Executive Officer does not sign the loan as a guarantor or endorser, but only signed to pledge the CD.

Does the pledging of a CD which is owned by the Director/Executive Officer constitute an “indirect obligation” to the Director/Executive Officer that would make the loan request subject to Reg. O?

Answer received:
No, pledging the CD in and of itself alone, does not constitute an indirect obligation. Instead, the issue would be whether the director either signed on the note as co-maker, endorser, or guarantor of the note. Then the indirect obligation issues comes into play.

This loan remains on our books, has been reviewed many times and never questioned. (Just sayin)

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#1839275 - 08/05/13 01:24 PM Re: Insider loan? Ski
Burgess Offline
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Joined: Jan 2004
Posts: 1,620
....but instead of pledging a cd, if the director had instead guaranteed the note, then it would fall under Reg O.

that has always been our thinking - guarantees are included
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#1839303 - 08/05/13 02:22 PM Re: Insider loan? Marnie
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
Having spent way too many years on Reg O as a banker, I always take the conservative route and include it if on the fence. Much safer when someone along the way changes the interpretation on your loan...and your opinions received are not binding.
_________________________
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy
www.kaybeescomplianceinsights.com

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