...when a commercial loan has a rate of (let's say) 5.75% for 60 months....This loan is for a director of the bank....Several loans made around the same time to regular Joes have loan rates of 7.25 to 7.75% .

Definitely a concern if all the loans are made under similar circumstances. You are giving an insider more favorable terms than are available to the general public. A direct violation of Reg. O.

Now, if that rate is available to all employees, that should be OK under Reg O. Is that right, Dan?

If the rate is part of an employee benefit program that was in place at the time the loan was made, yes. But simply saying that the rate is available to all employees would be like putting a screen door in a submarine.

Interesting analogy.

Is the Director actually an employee of the bank? Would the Director meet the definition of an "employee" in order to receive the benefit of the employee rate?

The benefit is extended to insiders. See 215.4.

Okay...I'm back with another question.....

Employee's daughter get a rate of 6% on a home purchase loan. The bank's loan rate guidelines for real estate is 6.95% for 60 months.

Problem?

If so, how is it corrected?

Do you not have an additional variance guideline to take into consideration relationship, risk, beacon, etc? Ours vary up or down 1.5% generally based on those types of factors.

No we don't. Perhaps that is something that should be set up.

If employee's daughter is not an insider of the bank (look up the Reg O definition), then you don't have a Reg O problem, but you might have other problems. I hope the employee was not the loan officer.

The employee's daughter is not an insider.....and the employee is not a loan officer...but she is in the loan department........

When I look at this situation, I think that they showed favoritism by granting this girl such a low rate.....

Probably should take a look at your "patterns & practices" (i.e. audit other loans to relatives of employees) and see how big your problem might be.

Did the loan officer obtain a documented waiver from policy?

After you've done your audit, you will probably see what you need to do.

As far as the preferential rate to the director, you need to look at rates charged to other customers who are similarly situated. Directors usually have assets and credit ratings to make them qualify for rates that the bank's best customers qualify for. I have seen loans where the director received P minus .5, but when I looked at other loans to similar borrowers, the rates were the same as offered to other "best customer". Just be sure they have not received rates more favorable than other similarly qualified customer.

I don't see where this enters into any type of fair lending problems. It does not appear based on a prohibited practice AND the rate was better than standards. Favoritism is not a crime in and of itself, IMHO.

Here is a section from Reg O that addresses loan terms to insiders that says the terms should be substantially the same as for non-insiders. That is why you need to see what you have terms have been offered to similar non-insiders.

Sec. 215.4 General prohibitions.
(a) Terms and creditworthiness--(1) In general. No member bank may extend credit to any insider of the bank or insider of its affiliates unless the extension of credit:
(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and

Here I am again...

I've found a couple of concerns....In our main office, a customer was charged a higher rate than should have been according to our guidelines.....That customer was refunded.

I've found that is the case with a second customer in another location..... The loan officer states that the collateral taken was an older mobile home and the higher rate corresponded to the collateral. With examiners, he may be able to get by with that explanation.....however, in this next case, I'm doubtful....

The customer was charge a 5 year rate for a 16 month loan. This customer had a good payment history. Mind you I am reviewing 2005 records. When speaking to the loan officer, he states that all of the records were shredded and that therefore they did not remember why the rate was given. I was shocked. I was again shocked when I was told by upper management to pull another file and not use this one.......

My first question is with a Fair Lending Review...do I have to turn it over to the examiners.......?

Secondly, I don't feel right about hiding that file.....but apparently I'm the only one......

What are your thoughts....

I would be concerned. This is just my opinion but I would keep the file you selected. Note it in your audit that, per inquiry with person X, the loan had other issues with it that caused a higher interest rate. The finding to the Audit Comm would be that they are outside of compliance with record retention. Those loan docs need to be available either by hard copy or image for 5 years. I would also find out what your guidelines are for preferential interest rates and who has the authority to grant them. Internal Loan Comm? Or, can any loan officer make this decision? If they are giving preferential rates, they need to have documented guidelines on how people qualify.