I am looking for some clarification regarding the 14-month review requirements and HELOCs for Executives. Currently we annually review all commercial lines of credit but not for personal HELOCs, I can't seem to get a straight answer on whether this is a requirement of the Reg, and if so under what parameters. Assume that the HELOC is greater than $15,000. We are a state non-member bank.

Thanks

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Dan thanks--that made perfect sense until the last part. Our HELOCs are defined with a maturity term of 7 yrs. All our insider loans are approved by the Board, not matter what the amount. So the reg says that they are still required to have 14 mth reviews?
Does it matter if its first or ssecond lien, or what the purpose is for?

Thank you for responding so quickly.

OK, I will try to explain the citation, which is from 215.4(b), as I understand it.

Approval by the board of directors under paragraphs (b)(1) and (b)(2) of this section is not required for an extension of credit that is made pursuant to a line of credit that was approved under paragraph (b)(1) of this section within 14 months of the date of the extension of credit. The extension of credit must also be in compliance with the requirements of §215.4(a) of this part.

What this is saying, IMO, is that each time an insider takes an advance (an extension of credit) pursuant to the terms of the LOC, the advance (extension of credit) does not require prior approval as long as the advance (extension of credit) is taken within 14 months from the appropriate approval of the LOC.

If the LOC is not re-approved then each advance (extension of credit) made against the LOC after 14 months from the appropriate approval of the LOC would require prior approval before it could be made.

I also understand what you are saying now, but I also was under the impression that the thresholds now come into play. The HELOCs that I am deealing with are all equal to or less than $100,000.

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3--1032
PRIOR APPROVAL AND PREFERENTIAL LENDING
Once a line of credit has been approved by a majority of the bank's entire board of directors, drawdowns on that line of credit do not require further approval as long as (1) the line of credit was approved within 14 months of the date of the drawdown and (2) the terms of the drawdown comply with the statutory prohibition against preferential lending and do not involve more than the normal risk of repayment or present other unfavorable features.
Member bank loans to its own subsidiaries are not subject to the limitations of section 22(h), including the prior-approval and preferential-lending requirements. Executive officers, directors, and principal shareholders of such subsidiaries will not be deemed to have that same relationship with the parent member bank, because Regulation O, section 215.2(l), specifies that the term "subsidiary" does not include a subsidiary of a member bank.
The term "extension of credit" in section 22(h) has the same meaning as in section 23A, and will be interpreted, for the purposes of section 22(h), consistent with its interpretations of section 23A.

I thought I added the following to the above post - maybe I just thought about it and didn't type it.

Keep in mind this section is talking about the prior approval of the BODs. The LOC still has to go through the approval process, and as long as you are in compliance with sections (b)(1) & (2) prior approval of the BODs is not required. But one of the requirements to avoid BOD prior approval is the LOC has been approved within 14 months of the advance, extension of credit, draw-down, or whatever you call extending additional monies on the LOC.

Anyway this is how I see this section.

Dan, I'm a little confused. Are you saying that:

Unless the amount of credit extended to an insider exceeds the pre-approval requirement limits, a LOC does not need to be approved by the board every 14 months.

That is the way I have always interpreted this section.

No, that's not what I'm saying, or at least that's not what I intended to say.

I've always confessed that Reg. O is one of my weaker Regulations, primarily because we allow very few insider loans.

Anyway, what I am trying to say is if the extension of credit is made in compliance with 205.4(b)(1) & (2). Then the BOD's prior approval is not required unless it exceeds the thresholds. Section (b)(3) is saying that an extension of credit made pursuant to a LOC approved under (in compliance with) sections (b)(1) & (2) does not require the BOD's prior approval if the LOC was approved under (in compliance with) sections (b)(1) & (2) within 14 months of the extension of credit.

My contention is the LOC should be approved every 14 months, however if the LOC does not exceed the thresholds then the BOD's prior approval would not be necessary. The approval would go through your loan committee or whatever source you approve insider loans through.

And again, this is my interpretation of the specific section being discussed.

While you are free to do as you suggest, if the credit extensions to an insider does not reach the thresholds outlined in (b)(1), IMHO, there is no regulatory support to require that a line of credit be re-approved at any time. If you don't reach the limits in (b)(1), the whole subsection b would not be applicable.

OK, Randy help me out here. Or anyone else that wants to chime in.

(b)(1) says, a bank may not make any extension of credit, without the prior approval of the BOD, if the extension of credit exceeds the higher of $25,000 or 5% of unimpaired capitol.

Therefore as long as the extension of credit is less than the higher of $25,000 or 5% of unimpaired capitol the bank is free to make the loan without requiring the prior approval of the BODs. However, wouldn’t the loan still be subject to other Reg. O limitations?

(b)(3) says, Approval by the board of directors under paragraphs (b)(1) and (b)(2) of this section is not required for an extension of credit that is made pursuant to a line of credit that was approved under paragraph (b)(1) of this section within 14 months of the date of the extension of credit.

So, if the bank was able to make the extension of credit, without prior approval from the BODs, wouldn’t the LOC have been approved under the allowances of (b)(1)? And if the LOC was approved under the allowances of (b)(1) then wouldn’t the 14 month requirement kick in?

Here's my take, Dan (for what it's worth I agree with Randy, and I think you are reading too much in here). First, (b)(1) says that certain extensions of credit must be approved in advance by the Board. Those certain extensions of credit are those that cause total exposure to exceed specific limits ($25,000 or 5% of unimpaired capital and surplus, and $500,000 for institutions with more than $10 million in capital and surplus). By definition in Reg O, each advance on a line of credit is an extension of credit. If (b)(3) did not exist, then for each advance on a line of credit where the total exposure was more than the limits, prior board approval would be required. What (b)(3) does is simplify that to say that if the line has been approved within the past 14 months, each individual advance that would otherwise require advance approval does not have to have that approval. It does not require that every insider line of credit must be preapproved at least every 14 months. If the line has not been approved within the past 14 months, then it defaults back to where each individual advance will need to be looked at to see if it causes total exposure to exceed the limit and thereby require pre-approval for the advance. But if the institution knows the total line does not exceed the limit, then they can be comfortable that each individual advance also would not exceed the limit and no action need be taken.

OK, Jim I can see where your coming from but how would the following situation be handled?

HELOC obtained 1/1/06 for $20,000.

2/2/07 a business loan in an amount of $150,000 is obtained and does not qualify for any exemptions and exceeds the limitations.

On 4/15/07 the insider takes an advance (an extension of credit) on the previously approved HELOC, however the HELOC has not been approved within the last 14 months and the advance (extension of credit) now exceeds the limitations.

PS. I should have indicated that the advance was taken through the normal HEOLC advance procedures such as writing a check or using a card to make a purchase.[/i

On 2/2/07, in approving the $150,000 loan, it is incumbent on the institution to recognize that now future advances on the HELOC are going to require BOD pre-approval if the line as a whole has not been approved by the BOD within 14 months. The correct procedure would call for the HELOC at that point to also be approved by the BOD and scheduled for repeat approvals at least every 14 months until such time as total exposure including the full line dropped back below the pre-approval threshhold.

Now with all these great views being presented--I think I'm still confused. Are we saying that if the LOC was below the threshhold set in 215.4(b), then periodic 14 month reviews are not necessary, unless the borrower has increased their indebtedness at the bank to above the threshhold, and if so, then the HELOC would now need to be reviewed prior to any advances being made.

That would be true. However, another option would be that you could just begin scheduling the HELOC for presentation to the BOD every 14 months at that time and still be in compliance.