Insider Lending (Reg O)

Question 1

Which of the following is NOT an exempt loan under Reg O?

A. An overdraft LOC of $5,000 or less
B. A HELOC, personal line of credit, or credit card of $15,000 or less
C. The first $5,000 of a $10,000 overdraft LOC
D. An inadvertent overdraft of $1000 or less for 5 business days or less

Answer 1

C. The first $5,000 of a $10,000 overdraft LOC

Question 2

When designing compliance training with Regulation O, to whom should the training be directed?

A. The bank’s Directors, Senior Officers, Principal Shareholders, and Related Parties
B. The bank’s Advisory Directors, Officers, Majority Shareholders, and Related Interests
C. The Bank’s Chairman of the Board, President, Principal Shareholders, and Related Interests
D. The bank’s Directors, Executive Officers, Principal Shareholders, and Related Interests

Answer 2

D. The bank’s Directors, Executive Officers, Principal Shareholders, and Related Interests

Regulation O defines “insiders” as Directors, Executive Officers, Principal Shareholders, and Related Interests. These are the individuals and parties to whom Reg. O training should be directed.

Question 3

What does a director need to have to be an insider under the “Director” prong of Reg O?

A. VP in their title
B. 10% shares
C. A vote on the board

Answer 3

C. A vote on the board

Question 4

Which of the following is NOT an insider under the “Executive Officer” prong of Reg O?

A. Chairman of the Board
B. A VP not listed on the Board’s resolution naming Executive Officers
C. Vice President (if no Board resolution)
D. Cashier, Secretary, or Treasurer

Answer 4

B. A VP not listed on the Board’s resolution naming Executive Officers

Question 5

Which of the below are insiders under the “Principal Shareholders” prong of Reg O? Select all that apply.

A. An individual with 10% voting shares
B. A company with 10% voting shares
C. An individual with 8% voting shares, who has a spouse with 5% voting shares
D. An individual with 5% voting shares, who has two children at home with 5% voting shares each

Answer 5

A, B, C, and D

Question 6

Which of the following are insiders under the “Related Interest” prong of Reg O? Select all that apply.

A. Entities that are owned or controlled by directors, executive officers, or principal shareholders
B. Companies in which an insider has 25% voting securities
C. Political or campaign committees controlled by or benefiting the insider
D. Trusts controlled by, owned by, or benefiting an insider

Answer 6

A, B, C, and D

Question 7

If an insider’s aggregate loans of more than $500,000 contain an open-ended LOC, how often must the open-ended LOC be approved by the Board?

A. Every 14 months
B. Every year
C. Every 18 months
D. Every 2 years

Answer 7

A. Every 14 months

Question 8

Can an insider obtain loans in the aggregate of $500,000 or 5% of the bank’s capital in the surplus?

A. No
B. Yes, if the insider signs an affidavit
C. Yes, if none of the loans are open-ended lines of credit
D. Yes, if the loans are pre-approved by the Board

Answer 8

D. Yes, if the loans are pre-approved by the Board

Question 9

True/False: Executive officers cannot receive overdraft lines of credit.

Answer 9

True, although inadvertent overdrafts are allowed.

Inadvertent overdrafts may be paid if the aggregate debt does not exceed $1,000, the account is not overdrawn for more than 5 business days, and the insider is charged the same fee as any other customer of the bank.

Question 10

What is the cap for executive officer lending?

A. 2.5% of the bank’s capital in the surplus or $100,000, whichever is higher
B. $500,000
C. 2.5% of the bank’s capital in the surplus or $100,000, whichever is lower
D. 5% of the bank’s capital in the surplus or $500,000, whichever is lower

Answer 10

C. 2.5% of the bank’s capital in the surplus or $100,000, whichever is lower

Question 11

What types of loans are exempt from the executive officer cap?

A. One lien (first or second) on a residence and up to $100,000 in education loans for the officer’s children
B. One first lien on the officer’s primary dwelling and education loans for the officer’s children
C. One first lien on a primary dwelling and HELOCs
D. One first lien on a residence and education loans for the officer’s children

Answer 11

D. One first lien on a residence and education loans for the officer’s children

Question 12

True/False: Loans to executive officers must have a call provision.

Answer 12

True

Question 13

Can the bank contact insiders to “cover” overdraft amounts prior to the cutoff time to make a pay/return decision?

Answer 13

No, unless the bank is also contacting all non-insiders to cover their overdrafts. Doing so for only insiders would be preferential treatment.

Question 14

Your bank is considering a candidate for a vacant director position. The GREATEST potential regulatory risk, if the individual is appointed, is his or her:

A. Past overdraft history
B. Current indebtedness to your institution
C. Current indebtedness to correspondent banks
D. Level of stock ownership in your institution

Answer 14

B. Current indebtedness to your institution

Question 15

What ownership percentage must an insider have to trigger the Tangible Economic Benefit Rule under Reg O?

(What would cause an extension of credit to an estate/trust to be considered an extension of credit to an insider?)

Answer 15

For purposes of Regulation O, an extension of credit to a trust or estate in which an insider has a present or contingent beneficial interest of at least 25% will be treated as made to the insider-beneficiary.

An extension of credit will be deemed to be made to an insider if the proceeds are transferred to an insider or used for the insider’s benefit.

Question 16

Banks may not lend to any executive officer, director, principal shareholder or any of their related interests in amounts that exceed the higher of $_____ or ___% of the bank’s capital and unimpaired surplus (up to a maximum $____) in the aggregate unless what?

Answer 16

$25,000
5%
$500,000
Unless the credit is approved in advance by the BOD and the interested party has abstained from voting.

Question 17

What is the bank’s legal lending limit under Reg O?

Answer 17

15% of unimpaired capital and surplus

Question 18

What is the maximum aggregate amount of credit that a bank may extend to a single insider (including his or her related interests)?

Answer 18

It’s limited to the bank’s legal lending limit = 15% of unimpaired capital and surplus.

A bank’s limit may increase an additional 10% of capital and unimpaired surplus for loans that are fully secured by certain readily marketable collateral.

Question 19

What is the aggregate lending limit?

Answer 19

The maximum amount of credit that a bank may extend to all of its insiders. It’s equal to 100% of its unimpaired capital and surplus.

Question 20

Provided that it meets all of the requirements and has an annual resolution to do so, what is the aggregate lending limit for banks with assets of less than $100 million?

Answer 20

200% of unimpaired capital and surplus

Question 21

No bank may pay an overdraft of an executive officer or director unless the payment is made (select all that apply):

A. Under a written preauthorized credit plan that specifies a method of repayment
B. As a part of the employee benefit plan
C. Pursuant to a written agreement to transfer funds from another account
D. A bank may never pay an insider’s overdraft.

Answer 21

A & C.

A. Under a written preauthorized credit plan that specifies a method of repayment
C. Pursuant to a written agreement to transfer funds from another account

Question 22

A bank may lend any amount to executive officers in what 3 situations?

Answer 22

• To finance the education of the officer’s children
• To finance or refinance the purchase, construction, maintenance, or improvement of the officer’s residence, if secured by a first lien on the residence
• If the loan is secured by US gov’t obligations, unconditional take out commitments of any US government agency or segregated deposits in the bank.

Question 23

Unless there is an exception, the bank may only lend to executive officers up to what thresholds?

Answer 23

Amounts up to the higher of 2.5% of the bank’s capital and unimpaired surplus or $25,000, but not to exceed $100,000 unless the request falls under an exception.

Question 24

True/False: Before making a loan to an Executive Officer, the bank must require the EO’s detailed financial statement.

Answer 24

True

Question 25

Who does the executive officer promptly need to report to after an extension of credit is received from the bank?

Answer 25

The Board of Directors

Question 26

Upon written requests from a member of the public, what must the bank disclose for Reg O?

Answer 26

The names of each of its executive officers and principal shareholders to whom the bank had aggregate credit outstanding at the end of the latest quarter that equaled or exceeded 5% of the bank’s capital, and unimpaired surplus or $500,000, whichever is less.

Question 27

True/False: If a member of the public provides written request, the bank must disclose the names of each of its executive officers and principal shareholders to whom the bank had aggregate credit outstanding at the end of the latest quarter of $25,000 or less.

Answer 27

False. Disclosure is not required if the aggregate credit is $25k or less.

Question 28

How long must the bank retain records of compliance with the public disclosure rule, including the identification of all executive officers, directors and principal shareholders and their related interests?

Answer 28

2 years

Question 29

Which of the following is true regarding extensions of credit to executive officers, directors, and principal shareholders?

A. Must be approved in advance by the board of directors if the aggregate credit is more than the greater of either $25,000 or 5% of the bank’s capital and surplus, not exceeding $500,000
B. Must be approved in advance by the board of directors if the credit is greater than $50,000 or 5% of the bank’s capital and surplus
C. May not exceed $100,000 in the aggregate, regardless of approvals
D. May not exceed $250,000 in the aggregate, regardless of approvals

Answer 29

A. Must be approved in advance by the board of directors if the aggregate credit is more than the greater of either $25,000 or 5% of the bank’s capital and surplus, not exceeding $500,000

Question 30

First National Bank would like to adopt a recordkeeping system that complies with the requirements of Regulation O. Which of the following best describes the recordkeeping system required by Regulation O?

A. A system in which the bank annually surveys all executive officers of First National and its affiliates to determine the insiders’ related interests
B. A system in which the bank asks all borrowers as loans are made whether the borrower is a related interest of an insider
C. A system that surveys insiders of First National annually and requires each insider to disclose his or her related interests
D. A system that requires an annual survey of affiliate insiders

Answer 30

C. A system that surveys insiders of First National annually and requires each insider to disclose his or her related interests

Question 31

For purposes of insider lending laws and regulations, what is the definition of the term executive officer?

A. All bank officers at or above the level of executive vice president
B. Anyone who has the authority to participate in major policymaking functions at the bank
C. Anyone who has the authority to participate in lending decisions at the bank
D. All bank officers at or above the level of Assistant Vice President

Answer 31

B. Anyone who has the authority to participate in major policymaking functions at the bank

Question 32

Which of the following is not considered an extension of credit?

A. An advance by means of an overdraft or cash item
B. The making or renewal of any loan or granting of a line of credit
C. An advance against accrued salary
D. An acquisition of a note on which an insider is a maker, drawer, or guarantor

Answer 32

C. An advance against accrued salary

Question 33

For Reg O, loans to insiders must be pre-approved by the board if over — % capital or $ –.

Answer 33

5%
$500,000

Question 34

The bank made a loan to a director of the bank in compliance with Regulation O at the time it was made. Now that the rates are lower for that type of loan, the director wants to restructure the loan at a lower rate. As the bank’s compliance officer, you should advise the bank to:

A. Not change the loan, because it would be considered preferential treatment
B. Ask the director to pay off the loan and refinance it at another institution
C. Consider the loan request and follow the bank’s credit policy for such modification
D. Amend the loan terms to the requested lower interest rate

Answer 34

C. Consider the loan request and follow the bank’s credit policy for such modification