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Regulation O Considerations When Bank Stock Held by a Director Is Collateral

Question: 
One of our bank directors has an adult relative who is starting a new business venture. This relative wants to get financing from the bank, and part of the collateral securing the loan would be bank stock pledged by the director. The director has no beneficial ownership in this new business venture and simply wants to help the relative get the business up and running. What, if any, Regulation O implications are involved with this scenario?
Answer: 

It does not appear that this loan will be subject to Regulation O, since the loan is not extended to the director and the director does not receive a tangible benefit from the proceeds. However, there are some other things to be concerned about. If those director-owned shares are the qualifying shares to be a director, pledging them as collateral could disqualify the director. In addition, if it is bank stock, there is a prohibition against taking your own bank stock as collateral. See the Federal Deposit Insurance Act 12 USC 1828(v)(1) GENERAL PROHIBITION. No insured depository institution may make any loan or discount on the security of the shares of its own capital stock. If it is holding company stock, you will need to be mindful of the 23A restrictions. The total dollar amount of loans secured by the holding company stock is limited to 10% of the bank's capital.

Vendor: 
Wipfli's Financial Institutions Practice has served the banking industry for more than 85 years. Our seasoned professionals have banking experience, dedicate their time to clients throughout the United States, and provide regulatory compliance, information technology, risk management, strategic planning, board development, audit, and tax services. Visit http://www.wipfli.com/fi, call 800.486.3454 or contact wipflifipractice@wipfli.com.

First published on 08/31/2015

Last updated on Aug 31 2015

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