I think I know the answer to this, I just need a little confirmation!

Our board "pre-approves" line of credit limits for insiders every year as allowed by the regulation. These aren't actually extended to the insider until they've applied and qualified for that amount.

Several years ago (before I got here) we had a consultant tell the bank that we needed to include these "pre-approval" amounts on our call report in schedule RC-M line item 1a. I completely disagree. For example, let's say all 10 of our directors have been "pre-approved" for a $50,000 line of credit, but none of them actually have a loan with us. We would report extensions of credit to insiders of $500,000 even though there are no actual loans. Keep in mind that these directors still have to go through underwriting and actually qualify for the amount applied for. These are not guaranteed amounts.

I don't think that we report LOCs until a loan has actually been made, but I just wanted to get some second opinions. Thanks!

We also have lines of credit set up for our directors. They have been booked and show as available credit, so we do report this amount in RCM 1.a.

But ours are NOT booked because there is no loan to book. The board members do not actually have a line of credit yet. These "pre-approvals" are simply an amount that the board has pre-approved (as referenced by 215.4(b)(3)). If the board member wants a line of credit, they still have to apply and go through underwriting - they are not guaranteed this amount, they must qualify for it. This just eliminates the potential need for the LOC to get pre-approval under Reg O. Again, refer to 215.4(b)(3), and that is essentially what I am referring to.

If the examiners came in and said "I see you have $500,000 in loans to insiders - could we see those files?", we'd have nothing to show them as the loans haven't been made. I don't think we should be reporting non-existent loans on the call report.

I agree with you. I wouldn't report those as loans either.

Then how are these LsOC preapproved? If they have to go through full underwriting when the insider finally gets around to requesting the LOC then IMO your BOD has not preapproved anything. I would question very heavily if they are approving under the provisions of 215.4(a). Sounds like your insiders are getting favorable treatment unless you approve all your lines of credit this way. If your BODs do not have all the applicable financial information to be making the approval then on what basis are they "pre-approving" the LsOC? You would not convince me as an examiner that you have complied with the requirements of Reg. O.

I guess I didn't make that sound quite right (I was more focused on the other situation than the underwriting part).

They are pre-approved once per year based on their financial condition at that time. However, once they apply for a loan, we verify that there have been no significant changes to their financial condition that would affect the amount offered. If there are significant adverse changes, it would have to be re-approved by the board. So, just because a director qualified in January doesn't mean they can go out, rack up a bunch of debt, and still get a $50,000 LOC in November. The pre-approval is only good if their are no major issues not previously identified.

Does that make more sense?

OK that makes more sense. Not sure I agree with the process but that's only my opinion. Why take up the board's time to review financial information and go through the approval process for a loan that may never happen? Makes better sense to me to just approve them as they are applied for.

BTW, I don't think I would report these either under this scenario. However you do have the commitment out there.

Thank you both very much for your opinions. I also think it is a waste of the board's time, but that's not my decision! I've decided to pick my battles, and this isn't one of them!

If I could, I'd like to add one additional question:

Am I correct that we would NOT report an overdraft line of credit in the amount $5,000 on the call report, as this is not considered an "extension of credit" under Reg O? (The $5,000 is the contract amount and not the current balance) The call report instructions defer to Reg O for the definition of "extension of credit", which is why I feel these would not be reported.

You are correct, you defer to the definition within Reg O.

Also, I have to agree with Dan on the waste of time issue. Unless you are a very small bank (<$1,000,000 in unimpaired capital and surplus) or unless the directors all have other loan relationships, prior board approval is not required unless the director's total loan relationship exceeds 5% of unimpaired capital and surplus or $500,000, which ever is less. Other than that, a $50,000 loan does not require prior board approval and this becomes a meaningless exercise.