Regulation O

Posted By: Anonymous

Regulation O - 12/05/02 09:07 PM

If a director of the bank is the owner of a business and that business has a checking account with the bank, how should overdrafts on the business account be handled? Such as tolerance, fees, etc... Is this covered under reg O?

The director is a signer on the account.
Posted By: Andy_Z

Re: Regulation O - 12/05/02 09:31 PM

Look at footnote 3 to 215.4 for some help.

General prohibitions. 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.
Posted By: Don_Narup

Re: Regulation O - 12/05/02 09:34 PM

Examiners will review NSF and overdraft activity for senior management and directors. It could very well be a Reg 0 issue. Best advice Don't carry overdraft balances, Don't waive fees,or treat director acounts any differently than that of a regular customer.

Politically, make a phone call to the director to get a deposit in so you do not have an overdraft. They still will have the NSF activity to account for.
Posted By: Anonymous

Re: Regulation O - 12/05/02 09:47 PM

Regulation O overdraft payment prohibitions do not apply to related interests of an executive officer, director, or principal shareholder. (See footnote 3 to 12 CFR 215.4(e))
Posted By: Don_Narup

Re: Regulation O - 12/05/02 10:26 PM

Examiners will determine if any Reg O violations have occurred. The overdraft of itself may not be a Reg O violation, but depending on how the bank accomodates the director could involk a Reg O.

The question on how to treat it, in my opinion, is do not treat the director any differently that you would a regular customer. Be very careful about waiving fees.
Posted By: John Burnett

Re: Regulation O - 12/06/02 01:29 PM

Before you get too comfortable allowing that overdraft, remember that, although it won't be illegal as an overdraft, it is still an extension of credit to the related interest.

As such, it may need prior full board approval depending on any other credit extended to the director or related interest. This is a pretty strong argument for having a line of credit approved in advance for these businesses.

And, if your bank is already running up against the aggregate limit for credits to insiders and related interests (admittedly an unlikely event), the overdraft may not be permitted under any circumstances.
Posted By: Don_Narup

Re: Regulation O - 12/06/02 02:52 PM

Totally agree with you John. While I wasn't specific thats one of the areas I was implying that could cause a problem.

In a small bank its not as unlikely as one can imagine that payment of an overdratf will cause a violation of legal lending limits.

Don't just blindly pay an overdraft of a director. Let the bank president or other senior bank officer know immediately of any such situation. Even if an overdraft is approved you need to be careful on how the accomodation is handled.
Posted By: Sponge Steve

Re: Regulation O - 12/06/02 06:48 PM

If the business is run as a sole proprietorship you cannot pay the OD.
Posted By: Rangers Fan

Re: Regulation O - 12/06/02 08:24 PM

Your best remedy would be to have auto transfer set up for all of your insiders so that you would not have the problem of overdrafts in the first place. This may not help as much in the instance of a related business account, but it may help on the personal accounts.
Posted By: Pale Rider

Re: Regulation O - 12/06/02 09:57 PM

We just went through this with examiners that were going to write our bank up for paying an OD of a related interest of a director. We finally got them to understand that Reg O doesn't apply to affiliated companies. That turned their attention away from Reg O to Section 23A and 23B of the Fed. They then subsequently agreed that we could pay the overdraft of an affiliated company and waive fees if that was an established practice for our best customers and we could prove it.