Reg O: Insider Lending

Question 1

When is an advisory director not considered a director under Reg O? (3 things)

Answer 1

If s/he:

• Is not elected by the shareholders
• Is not authorized to vote in board meetings
• Provides only general policy advice to the board

Question 2

What is a principal shareholder under Reg O?

Answer 2

An individual or company other than an insured or foreign bank that directly or indirectly owns, controls or has the power to vote more than 10% of any class of voting securities of a bank.

Question 3

What are “related interests” under Reg O?

Answer 3

A company controlled by a person or a political or campaign committee controlled by a person or from which a person receives funds or benefits.

Question 4

What is an “affiliate” under Reg O?

Answer 4

Any company of which the bank is a subsidiary or any other subsidiary of the same company of which the bank is a subsidiary.

Question 5

When is a person considered to have “control” of a bank or company?

Answer 5

If the person owns, controls, or has the power to vote (directly or indirectly) 25% or more of any class of voting securities of the company.
OR
If the person owns, controls, or has the power to vote more than 10% of any class of voting securities of the company and no other person has a higher percentage of that class of voting securities.
OR
In any manner controls the election of a majority of the directors of the company or bank.

Question 6

When is a director or executive officer considered to have “control” of a bank or a company?

Answer 6

If the person owns, controls, or has the power to vote 10% or more of any class of voting securities.

Question 7

Which of the following is an extension of credit, for Reg O purposes?

a. Advances against accrued salary or other accrued compensation
b. Debts of $15,000 or less if represented by charge accounts, time accounts or credit cards
c. Debts of $5,000 or less arising under an interest-bearing overdraft protection plan
d. Acquire any note, draft, bill of exchange or other debt on which an insider may be liable as a maker, drawer, guarantor, endorser or surety.

Answer 7

d. Acquire any note, draft, bill of exchange or other debt on which an insider may be liable as a maker, drawer, guarantor, endorser or surety.

Question 8

What is the tangible-economic-benefit rule under Reg O?

Answer 8

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.

This rule doesn’t apply if the credit is made on substantially the same terms & conditions as those made to a noninsider and if the proceeds are used in a bona fide transaction involving the acquisition of property, goods or services from the insider.

Question 9

Banks may not lend to executive officers, directors, principal shareholders or any of their related interests unless the credit is what?

Answer 9

Unless the credit is made on substantially the same terms and following credit underwriting standards that are not less stringent than those on loans to person who are not insiders.

Question 10

If the bank offers a benefit program widely available to its employees, can the bank lend to insiders on the same terms and conditions as it lends to its other employees, pursuant to the employee benefit program?

Answer 10

Yes.

Question 11

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 11

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

Question 12

Does an insider need prior approval to draw against a line of credit if the LOC was approved within the preceding 14 months based on a then-current financial statement?

Answer 12

No

Question 13

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

Answer 13

15% of unimpaired capital and surplus

Question 14

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

Answer 14

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

Ba 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 15

What is the aggregate lending limit?

Answer 15

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 16

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 16

200% of unimpaired capital and surplus

Question 17

No bank may pay an overdraft of an executive officer or director unless the payment is made:

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 17

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 18

Banks may pay inadvertent overdrafts of $____ or less (in the aggregate) if he account is not overdrawn for more than __ days and the executive officer or director is charged the same fee charged to other customers under the same circumstances.

Answer 18

$1000

5

Question 19

In what situations do the overdraft restrictions under Reg O not apply?

Answer 19

The overdraft restrictions do not apply to a payment of an OD of a principal shareholder (unless the shareholder is also a director or an executive officer); they also do not apply to related interests.

Question 20

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

Answer 20

• 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 21

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

Answer 21

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 22

Before making a loan to an executive officer, what does the bank require?

Answer 22

A detailed financial statement from the executive officer

Question 23

When lending to an executive officer, what provision is in the loan document?

Answer 23

A call provision. A provision that the loan is payable on demand if the executive officer becomes indebted to any other bank or banks in an aggregate amount greater than the amount the officer could borrow from his/her own bank under Reg. O.

Question 24

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

Answer 24

the board of directors.

Question 25

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

Answer 25

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 26

T/F: 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 was $25,000 or less.

Answer 26

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

Question 27

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 27

2 years

Question 28

Which of the following transactions is subject to the provisions of Regulation O?

a. Time deposit account held by a director
b. Travel advance to an executive officer outstanding for less than 30 days
c. Extension of credit to a director of an unaffiliated, competing, noncorrespondent bank
d. Extension of credit to a member of the bank’s board of directors

Answer 28

d. Extension of credit to a member of the bank’s board of directors

Question 29

In a review of a bank’s compliance with the Regulation O overdraft provisions, what should the compliance officer do?

a. Identify the related interests of all directors, executive officers, and principal shareholders
b. Examine the bank’s overdraft reports for a selected time period
c. Examine the annual FFIEC-004 reports on indebtedness to correspondent banks
d. Examine the bank’s latest report of condition and income

Answer 29

b. Examine the bank’s overdraft reports for a selected time period

Question 30

When may a bank pay an overdraft of $5,000 created by an executive officer of the bank?

a. When the officer is at the level of a vice president or lower.
b. When the officer has previously signed an overdraft protection credit agreement in an amount sufficient to cover the overdraft.
c. When the officer has enough funds in another account to cover the overdraft.
d. When the bank pays the overdrafts for other good customers in the ordinary course of business.

Answer 30

b. When the officer has previously signed an overdraft protection credit agreement in an amount sufficient to cover the overdraft.

Question 31

First National Bank has an employee benefit program whereby all bank employees who meet the bank’s credit underwriting standards may obtain consumer loans for major purchases or expenses at a rate that is less than the bank’s prime rate. Can the bank allow its executive officers to borrow under this program?

a. No. Executive officers may not have preferential interest rates under any circumstances.
b. No. However, the related interests of the executive officers may take advantage of it.
c. Yes. However, executive officers must secure their loans with collateral valued at 100 percent of the loan balance or more.
d. Yes. Provided the program is available to everyone at the bank as an employee benefit, executive officers may also participate

Answer 31

d. Yes. Provided the program is available to everyone at the bank as an employee benefit, executive officers may also participate

Question 32

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 percent 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 percent 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 32

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 percent of the bank’s capital and surplus, not exceeding $500,000

Question 33

What is the longest time after board approval that a bank can approve a line of credit for an executive officer?

a. 12 months of such approval
b. 9 months of such approval
c. 14 months of such approval
d. 6 months of such approval

Answer 33

c. 14 months of such approval

Question 34

How may a bank limit the definition of executive officer?

a. By strictly defining, in writing, the duties and responsibilities of the officers to be excluded from the definition
b. By passing a board of directors resolution setting forth the bank’s definition of an executive officer
c. By requiring that those officers to be excluded from the definition not attend loan committee meetings or loan review meetings
d. By limiting the amount of confidential information given to those officers to be excluded from the definition

Answer 34

b. By passing a board of directors resolution setting forth the bank’s definition of an executive officer

Question 35

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 35

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

Question 36

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 36

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

Question 37

Which of the following does an extension of credit NOT include?

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 37

c. An advance against accrued salary

Question 38

The bank must establish a recordkeeping system in order to comply with Reg O. What are the requirements of the recordkeeping system?

Answer 38

It must include either an annual survey of insiders to identify related interests, or a requirement as part of each extension of credit that the borrower indicates whether he or she is an insider.

It must also provide for the maintenance of records of all credit to insiders, including the amounts and terms.

Question 39

Who is considered an executive officer under Reg O?

Answer 39

• Those who participate or have the authority to participate in major policy making functions.
• Any person, even if the person is serving without a title or compensation, or if the title denotes the person as “assistant”

Question 40

Unless excluded by a board resolution or bylaws, what officers are considered executive officers? *Hint: 6

Answer 40

Chairman of the board
President
VP and above
Cashier
Secretary
Treasurer

*Even if these individuals are excluded from a board resolution or bylaws, they are still considered executive officers if they participate in major policy making functions.

Question 41

What if an executive officer of an affiliate of the bank requests an extension of credit and the person is specifically excluded from major policy making functions of the bank by either a board resolution or the bylaws of the bank?

Answer 41

So long as

• the affiliate’s assets do not constitute more than 10% of the assets of the company that controls the bank
• the controlling company is not owned by any other company, and
• the executive officer of the affiliate is not otherwise subject to restriction, the EO is not subject to the specific lending restrictions and recordkeeping requirements.

Question 42

Who is a director under Reg O?

Answer 42

Someone who’s voted into the position.

Question 43

What are the two loans that are not subject to Reg O requirements?

Answer 43

$5,000 overdraft line

$15,000 LOC

Question 44

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

Answer 44

5%

$500,000

Question 45

T/F: There are aggregate lending limits to all insiders.

Answer 45

T

Question 46

For Reg O, credit lines must be re-approved at least every __ months.

Answer 46

14

Question 47

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 47

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