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#3181 - 07/23/01 08:54 PM Reg O - Insider Loan Terms
cervesa Offline
Joined: Jun 2001
Posts: 56
Santa Fe, NM
A loan is under consideration for a purchase of commercial property from an insider of the bank. The loan has a 30 yr. term. This is in conflict with our Loan Policy which states a maximum 25 yr. term for this type of credit. The Loan VP thought Reg O had changed to allow this type of credit modification. I see that Reg O, as amended in 1994, says that the "tangible economic benefit" rule does not apply to arms length transactions. Since this loan is in conflict w/ policy, I don't think the case can be made that these terms are nonpreferential and that the loan is therefore at arms length. Comments? Thanks.

[This message has been edited by karenS (edited 07-23-2001).]

[This message has been edited by karenS (edited 07-24-2001).]

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General Discussion
#3182 - 07/24/01 03:42 AM Re: Reg O - Insider Loan Terms
Andy_Z Online
10K Club
Joined: Oct 2000
Posts: 27,509
On the Net
A basic premise of Reg. O is that you don't do for insiders what you don't do for walk-in customers. And you should be able to demonstrate that you make these loans. You won't be able to do this without trashing your policy.

You developed your policy for a reason. Breaking it violates those reasons whether the insider is considerd to have benefited from it or not. Strong justification would be needed to justify the variance, in my opinion.

Andy Zavoina
Opinions stated are not necessarily that of my employer.

My opinions are not necessarily my employers.
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell

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#3183 - 07/24/01 01:48 PM Re: Reg O - Insider Loan Terms
John Burnett Offline
10K Club
John Burnett
Joined: Oct 2000
Posts: 39,704
Cape Cod
Ask yourself whether you have gone 30 years on a similar loan to a similarly-situated borrower (with no connection to an insider) as a policy exception. Document which loans fit that description. If you can do this (with more than just one or two examples), you may be OK. If you cannot, you're really venturing onto thin Reg O ice if you make the requested loan.

And don't even THINK about arranging to have policy amended to accommodate this credit, unless you have a few similar credits (non-insider) in the pipeline. Regulators see through this sort of chicanery quickly.

John S. Burnett
Fighting for Compliance since 1976
Bankers' Threads User #8

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