We have a loan to a corporation in which one of our directors (who has no ownership in the corp) will be pledging a CD to the loan as the equity into a real estate development project. The corporation will pay the director X% interest for pledging the CD. The director will sign a 3rd party pledge. The director owns a real estate company and the corporation will list the homes through the directors real estate company.

Would this be considered of beneficial interest to the director and be a Reg O loan?

No - but it sounds like self-dealing.

Plus, you are going to make a loan to a development company when they have no equity in the project - sounds like a bad deal all around.

thanks Randy - I definitely can't argue its not marginal.

We will not consider this a Reg O loan - thanks for the feedback.

What exactly is self-dealing?

Have you looked at the tangible economic benefit rule under 215.3(f) of Reg O and determined that it does not apply?

Reg O

I found this in Kirchman's Reg. O under extensions of credit.

"Additionally, if the insider pledges collateral for an extension of credit, even though he or she is not directly obligated to pay the credit, that credit is treated as an extension of credit to the insider."

Based on this, the loan would be considered a Reg O loan to the director since he is putting up a CD.

Agree?

I've looked at the language in Kirchman and I'm not sure where it comes from. I know that specific language is not used in Reg O. It may be their interpretation of 215.3(a)(7), but I can't say for sure.

That sounds right to me. I didn't find anything in Reg O that specifically says that but that would seem to fit with the intent of the reg. Maybe they are deriving it from the following general description in Reg O in 215.3(a)

(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 also would seem to fall under the "tangible economic benefit" rule since it sounds like the director's company will be receiving commissions from the eventual sales of the homes.

It also looks like as R.L. Carey has stated previously to be a self-dealing conflict of interest situation.

I think if I was going to make this loan I would want a legal opinion on it prior to doing so.

I thought loans secured 100% by liquid assets, i.e. CDs, would exempt the loan from the requirements of Reg. O. (215.4(d)(3)). Or am I misinterpreting this (and I sure hope I'm not)?

I think it means that loans secured 100% by CDs are exempt from the aggregate limits of Reg O but not exempt from Reg O requirements in general (i.e no preferential terms, no abnormal risk of repayment or other unfavorable features, and not providing a tangible economic benefit to the insider).

I considered that issue but I wasn't under the impression that the loan would be secured 100% by the CD. I thought the CD was only to provide the equity (the 15% on commercial real estate for example).
I'm assuming the other 85% would be secured by the real estate.

It looks like for the purposes of Reg O aggregation the part secured by the CD would not have to be aggregated. I'm thinking the whole loan would need to be considered a loan to the director since the director is providing collateral and is receiving a tangible economic benefit of the loan but the amount secured by the CD not included in the total since the Bank is not at risk on that part of the loan.

The director is pledging the 15% and the rest is real estate.

So do you think the loan amount minus the CD would be a the Reg O loan?

That's the way I would look at it.