4000 - Advisory Opinions
Applicability of Regulation O on Contemplated Credit Accommodations for Senior Bank Officers
September 19, 1984
Pamela E. F. LeCren, Senior Attorney
The following is in response to your August 23, 1984 letter to Roger Hood wherein you request an opinion on whether certain "credit accommodations contemplated for senior officers" of * * * would be in violation of section 215.4(a) of Federal Reserve Board Regulation O (12 C.F.R. 215.4(a)). Section 215.4(a) prohibits a bank from making any extension of credit to any of its executive officers unless the extension of credit: (1) is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with other persons that are not covered by Regulation O and who are not employed by the bank, and (2) does not involve more than the normal risk of repayment or present other unfavorable features.
The "credit accommodations" the bank would like to make available to its executive officers are described in your letter as follows. Bank employees may obtain adjustable rate purchase-money mortgages for primary residences starting at 13% APR with a three year rate adjustment. Normal credit guidelines are observed in granting employee mortgages and the APR is the same as for any bank customer. The bank does, however, waive the 3% commitment fee charged to non-employees. (Your letter indicates that this fee is "occasionally" waived for other bank customers.) Bank employees may also obtain two different credit cards through the bank. Employees are charged a 12% APR on their cards but are not charged any annual fee for the card. Other customers of the bank are charged a 19.8% APR plus an annual fee of $15.00 ($25.00 for both cards). The bank is proposing to make the credit cards available to its executive officers at the 19.8% rate charged to other bank customers but would like to waive the annual fee. (Again your letter indicates that the bank has "occasionally" waived the annual fee for other bank customers.)
After considering your letter, it is the opinion of this office that participation by the bank's executive officers in either "credit accommodation" would violate section 215.4(a) of Regulation O. Both fees are a cost of obtaining credit. In the case of the annual fee for the credit card, the fee is one of only two terms under which the credit is made available. In the case of the commitment fee, 3% can hardly be viewed as an insubstantial cost of credit. What is more, the waiver of either of these fees would be based solely upon the status of the individual as an executive officer. This is not a case where a term or condition of the credit is waived or modified based upon the individual's creditworthiness or the particular facts of the transaction.