I am doing the annual audit on Reg O and found that the Reg O officer let two directors have loans (approved by the board) at Prime back in February of last year (ironically, the month after my audit!). I knew nothing of this until now.

What should I do?

You should conduct research to see if at the time these two loans were approved, were there other Prime rate loans on the books to noninsiders? If there were comparable loans to NONinsider borrowers with comparable financial characterstics(i.e., net worth, liquidity, etc) then it may be allowable.

The Reg O officer who let the directors have these loans should already have documented this information; otherwise, he wasn't doing his job. Be sure that the financial characterstics of the non Reg O borrowers is similar to the directors.

There have been cases where a bank tried to say the directors financial condition was similar to noninsider loans, yet the Reg O insider financial strength was nowhere near as strong as the noninsider customers they were trying to compare to.

After discussion with the Reg O officer, I pulled a collateral report which shows these loans are secured by bank stock.

Does that mean that it is ok?

If you are a national bank, loans secured by a bank's own stock are expressly prohibited by 12 USC 83.

Did the directors get a rate/term/loan that would be available to a non-insider with the same credit/liquidity qualifications?

If not and the directors got a "sweet deal" because of their position, that is when you run into problems.

Not a national bank, but is a privately held bank. Reg O officer says that other non-director credit has been given at prime. I am pulling reports to see if I can verify that.

Thanks for the help.

The prohibition is not limited to National Banks and you are going to have to check State laws. For example in Texas - the Texas Finance Code states:

§ 34.102. TRANSACTION IN BANK SHARES. (a) A state bank may not acquire a lien by pledge or otherwise on its own shares, or otherwise purchase or acquire title to its own shares, except:

(1) as necessary to avoid or minimize a loss on a loan or investment previously made in good faith; or

(2) as provided by Subsection (b).

(b) With the prior written approval of the banking commissioner or as permitted by rules adopted under this subtitle, a state bank may acquire title to its own shares and hold those shares as treasury stock. Treasury stock acquired under this subsection is not considered an equity investment.

I'm confused about the posts concerning loans to directors that are secured by bank stock. What is the purpose or meaning of 215.10 "reporting requirement for credit secured by certain bank stock" if loans secured by bank stock are prohibited? Are directors and executive officers allowed to pledge their shares of the bank's holding company stock (as opposed to bank stock)as collateral for a loan they receive? And does 215.10 apply in that instance?

Loans by the bank secured by holding company stock is allowed unless prohibited by State law. They would be subject to Reg. W, however.

The reporting under Reg. O. relates to loans made by other banks to executive officers or directors secured by your bank stock.