I am writing a Reg. O policy for my financial institution and am going off a checklist of things that the policy should address. One of the things is as follows:

Requirements for arms-length transactions with insiders, or insider-related organizations.

I am having a difficult time understanding what exactly is meant by arms-length transactions. Could someone please expound on this?

Any help is greatly appreciated!

Kara M Scott

Kara, I think this refers to the requirements of 215.4 prohibiting extensions of credit to insiders or their related interests unless they are on substantially the same terms and conditions, and carry the same repayment risk, as credits to noninsiders.

Insider credit transactions should be negotiated on the same basis as credits to non-insiders.

Thank you, I do agree that this has something to do with 215.4. However, I feel that putting the following statement in a policy would be to general:

"The Bank shall treat a transaction with an insider or their related interest at arm's length. This applies equally to vendors who are also customers of the Bank."

In one of my resources it talks about the tangible economic benefit:

"If the credit proceeds will be used for the tangible economic benefit of an insider, the credit is considered an insider loan for the purpose of Tegulation O and subject ot hte insider lending limits. However, an extension of credit extended on an arm's length basis 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 ainsder or an insider's related interest is NOT to be considered an insider loan."


The "arms-length basis" phrase has me spinning in circles, I don't quite understand the terms of that phrase.

It means that you don't make 125% LTV loans or loans to insiders when they have DTI of 75% because you won't do that for Joe Shmoe walking in off the street.

Thanks all, I think that it makes sense!

Kara, it means they receive no preferential treatment because of their status as insiders.

If you don't like "arms length," why not say "extensions of credit to insiders and their related interests will be made on similar terms and conditions as those extended to noninsider borrowers."

Thanks Paul. I did determine that I am going to use something similar to what you said.

By the way, if anyone currently has a Reg. O policy in place, would anyone be willing to share it?

Thanks!

Kara

So if I make a loan to an S corporation, and one of my directors is the sole shareholder of the S corporation, did he receive 'tangible economic benefit' from the loan? If so, do I need to include loans to his business as well as loans to him as an individual?

Actually, since he owns greater than 25% of the company, he "controls" the company. Reg O applies to not only the individual, but any "related interest" of that individual. So, it doesn't matter if he received a "tangible economic benifit" from the loan (which I'm sure he did) it is still covered. The "TEB" rule only comes in to play if the loan is not made to the insider or his related interest. BTW, loans to immediate family members are also included in Reg O. Don't let your insiders think that they can put the loan in their spouse's name and it would not covered.

Interestingly (or not), the section governing overdrafts does not include related interests. You think it would, but it doesn't. Immediate family is included, though.