Realize there are circumstances when an NSF fee must be charged to an insider when their account is overdrawn (i.e. inadvertant, under $1,000, cleared within 5 days);however, if the negative balance is covered with good funds within the 24 hour return period, does Reg.O require assessment of an NSF fee? Please provide regulatory cite. Thanks!

From Reg O, see bold below




Regulation O

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
(ii) Does not involve more than the normal risk of repayment or present other unfavorable features.
(2) Exception. Nothing in this paragraph (a) or paragraph (e)(2)(ii) of this section shall prohibit any extension of credit made pursuant to a benefit or compensation program--
(i) That is widely available to employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, is widely available to employees of the affiliates at which that person is an insider; and
(ii) That does not give preference to any insider of the member bank over other employees of the member bank and, in the case of extensions of credit to an insider of its affiliates, does not give preference to any insider of its affiliates over other employees of the affiliates at which that person is an insider.

(b) Prior approval. (1) No member bank may extend credit (which term includes granting a line of credit) to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank's unimpaired capital and unimpaired surplus, unless:
(i) The extension of credit has been approved in advance by a majority of the entire board of directors of that bank; and
(ii) The interested party has abstained from participating directly or indirectly in the voting.
(2) In no event may a member bank extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of this paragraph (b).
(3) 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 Sec. 215.4(a) of this part.
(4) Participation in the discussion, or any attempt to influence the voting, by the board of directors regarding an extension of credit constitutes indirect participation in the voting by the board of directors on an extension of credit.

(c) Individual lending limit-- No member bank may extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in Sec. 215.2(i) of this part. This prohibition does not apply to an extension of credit by a member bank to a company of which the member bank is a subsidiary or to any other subsidiary of that company.

(d) Aggregate lending limit --(1) General limit. A member bank may not extend credit to any insider of the bank or insider of its affiliates unless the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to all such insiders, does not exceed the bank's unimpaired capital and unimpaired surplus (as defined in Sec. 215.2(i) of this part).

(2) Member banks with deposits of less than $100,000,000. (i) A member bank with deposits of less than $100,000,000 may by an annual resolution of its board of directors increase the general limit specified in paragraph (d)(1) of this section to a level not to exceed two times the bank's unimpaired capital and unimpaired surplus, if:
(A) The board of directors determines that such higher limit is consistent with prudent, safe, and sound banking practices in light of the bank's experience in lending to its insiders and is necessary to attract or retain directors or to prevent restricting the availability of credit in small communities;
(B) The resolution sets forth the facts and reasoning on which the board of directors bases the finding, including the amount of the bank's lending to its insiders as a percentage of the bank's unimpaired capital and unimpaired surplus as of the date of the resolution;
(C) The bank meets or exceeds, on a fully-phased in basis, all applicable capital requirements established by the appropriate Federal banking agency; and
(D) The bank received a satisfactory composite rating in its most recent report of examination.
(ii) If a member bank has adopted a resolution authorizing a higher limit pursuant to paragraph (d)(2)(i) of this section and subsequently fails to meet the requirements of paragraph (d)(2)(i)(C) or (d)(2)(i)(D) of this section, the member bank shall not extend any additional credit (including a renewal of any existing extension of credit) to any insider of the bank or its affiliates unless such extension or renewal is consistent with the general limit in paragraph (d)(1) of this section.

(3) Exceptions. (i) The general limit specified in paragraph (d)(1) of this section does not apply to the following:
(A) Extensions of credit secured by a perfected security interest in bonds, notes, certificates of indebtedness, or Treasury bills of the United States or in other such obligations fully guaranteed as to principal and interest by the United States;
(B) Extensions of credit to or secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission or establishment of the United States or any corporation wholly owned directly or indirectly by the United States;
(C) Extensions of credit secured by a perfected security interest in a segregated deposit account in the lending bank; or
(D) Extensions of credit arising from the discount of negotiable or nonnegotiable installment consumer paper that is acquired from an insider and carries a full or partial recourse endorsement or guarantee by the insider, provided that:
(1) The financial condition of each maker of such consumer paper is reasonably documented in the bank's files or known to its officers;
(2) An officer of the bank designated for that purpose by the board of directors of the bank certifies in writing that the bank is relying primarily upon the responsibility of each maker for payment of the obligation and not upon any endorsement or guarantee by the insider; and
(3) The maker of the instrument is not an insider.
(ii) The exceptions in paragraphs (d)(3)(i)(A) through (d)(3)(i)(C) of this section apply only to the amounts of such extensions of credit that are secured in the manner described therein.

(e) Overdrafts. (1) No member bank may pay an overdraft of an executive officer or director of the bank or executive officer or director of its affiliates \3\ on an account at the bank, unless the payment of funds is made in accordance with:
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\3\ This prohibition does not apply to the payment by a member bank of an overdraft of a principal shareholder of the member bank, unless the principal shareholder is also an executive officer or director. This prohibition also does not apply to the payment by a member bank of an overdraft of a related interest of an executive officer, director, or principal shareholder of the member bank or executive officer, director, or principal shareholder of its affiliates.
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(i) A written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment; or
(ii) A written, preauthorized transfer of funds from another account of the account holder at the bank.
(2) The prohibition in paragraph (e)(1) of this section does not apply to payment of inadvertent overdrafts on an account in an aggregate amount of $1,000 or less, provided:
(i) The account is not overdrawn for more than 5 business days; and
(ii) The member bank charges the executive officer or director the same fee charged any other customer of the bank in similar circumstances.

If you give other customers the ability to cover overdrafts the next day, then I bleieve you could do so for your insiders. I think you would have to allow that that to make it "in similar circumstances" although that was not specifically addressed in the following FRB Staff Opinion.


December 6, 1996


[Name deleted]

Dear [name deleted] :

This is in response to your letter dated September 6, 1996, and your subsequent telephone conversation with Gordon Miller of my staff, concerning the application of the overdraft provision of the Board's Regulation O (12 C.F.R. 215.4(e)) to your bank's check processing procedures.

As indicated in your letter and telephone conversation, the bank initially settles for all checks that are presented to it by other banks during a given banking day, while reserving the right to return the checks before midnight of the following banking day (the "Midnight Deadline").1 The bank makes a final decision to pay or return a presented check by 2:00 p.m. on the banking day following receipt of the check. If a director's checking account would be overdrawn by payment of a presented check, the director is informed of the situation and given an opportunity to deposit sufficient funds in the checking account to cover the overdraft before the bank's 2:00 p.m. deadline. If the director does not deposit sufficient funds before the 2:00 p.m. deadline, the bank may return the check because of insufficient funds or it may finally pay the check and charge the director's account, at which time an overdraft in the director's checking account would be booked.

Under Regulation O, an extension of credit is defined as the making or renewal of any loan, the granting of a line of credit, or an extension of credit in any manner, and includes any transaction of this nature as a result of which a person becomes obligated to pay money to a bank. 12 C.F.R. 215.3(a). Since the bank may return a check that is drawn against a director's account at any time before the Midnight Deadline, and the bank does not in fact decide to return a check before the bank's 2:00 p.m. deadline, it does not appear that the bank irreversibly advances its own funds to cover a director's overdraft before the bank's 2:00 p.m. deadline. Accordingly, it does not appear that a director would incur an obligation to pay any money to the bank on account of an overdraft in his checking account before the bank's 2:00 p.m. deadline. The bank's procedure of initially settling for all checks on the day the checks are presented, while reserving the right to return the checks by the Midnight Deadline, does not appear, therefore, to give rise to an overdraft in the director's account for purposes of Regulation O before the bank's 2:00 p.m. deadline.

This interpretation is based on and solely addresses the facts described in your letter and telephone conversation. For example, this interpretation does not apply to checks presented over the counter for payment in cash, or to any other circumstances that would cause the bank's advance of funds to become irreversible before the bank's 2:00 p.m. deadline. Any changes in the facts as described in your letter and telephone conversation may require reconsideration of this opinion, and may require this opinion to be revised or withdrawn. In addition, the bank's practices in paying checks that cause overdrafts continue to be governed by general standards of safety and soundness and prohibitions against fraud and abuse.

I hope this information is helpful to you. If you have any further questions concerning this matter, please contact Gordon Miller of my staff at (202) 452-2534.


Sincerely,


(signed) J. Virgil Mattingly


J. Virgil Mattingly


General Counsel

Thanks for your responses. As an employee benefit, the first overdraft incurred annually is paid, no charge, so I think we can extend the same to those subject to Reg. O per the exception at 215.4 (a)(2)(i)& (ii). The branch network decisions customer NSFs and outcomes vary; so I am not comfortable placing reliance from the customer perspective. As a caution, we obtained a written agreement from most directors/EOs to cover overdrafts; I could argue both sides of whether to charge the fee but want to ensure our policy and practices agree with Reg. O in letter and spirit.

I would charge regardless. Then there is no question of compliance.

Can I add a twist to this. We follow the rules as far as the less than $1,000, inadvertant, and charge the same OD fee we charge to others. We do report to the BOD but don't ask for BOD approval. However, we recently had a SVP go over the $1000. We still charged and reported to the BOD, but we have a BOD member state that we need to get BOD approval and need to submit a plan to BOD on how it won't happen again. I'm not really sure what to do on OD's over $1000??

Return the checks are one of your only options to prevent the OD unless you have preauthorized transfers or an OD line of credit attached to the account.

We always had a line of credit available to cover ODs. Errors can happen, secretaries get the wrong checkbook, whatever. Some of these individuals travel and can be difficult to contact on short notice.