4000 - Advisory Opinions
Regulation O: Prior Approval
June 1, 1979
Douglas H. Jones, Attorney
Your May 10, 1979 letter, addressed to FDIC Philadelphia Regional Counsel Ronald Goldstein, has been referred to this office for reply. In your letter, you indicate your bank purchased a participation in a loan made by an affiliate of your bank to a director of the affiliated bank. The amount of the loan exceeded $25,000 and, as required by the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRIRCA"), the full board of directors of the affiliate (with the interested director abstaining) approved the extension of credit in advance. The purchase of the participation was not approved in advance by the board of directors of your bank. You ask whether approval by your bank's board of directors was required.
The implementing regulation for the insider lending restrictions of FIRIRCA is Regulation O of the regulations of the Board of Governors of the Federal Reserve System. 12 C.F.R. 215. Regulation O requires that a bank may not extend credit (or grant a line of credit) to any of its executive officers, directors or principal shareholders, or to any related interests of these persons, in an amount that, when aggregated with the amount of all other extensions of credit by the bank to that person and to all related interests of that person, exceeds $25,000 without the prior approval of the entire board of directors (the interested party abstaining from participating in the vote) of the bank. 12 C.F.R. 215.4(b). For purposes of Regulation O, the director of any subsidiary of a bank's holding company is considered a director of the bank. 12 C.F.R. 215.2(c). The purchase of a participation without recourse is considered an extension of credit by the participating bank, not by the originating bank. 12 C.F.R. 215.3(e). (In general, the purchase of a participation with recourse is considered an extension by the originating bank.)
Under the facts you presented, if your bank purchased without recourse an extension of credit to a director of an affiliate of your bank, we view the participation as an extension of credit by your bank. If this extension of credit, when aggregated with all other extensions by your bank to this individual and any related interests of the individual, exceeds $25,000, then the board of directors of your bank should have approved the purchase in advance. This prior approval would not necessarily require approval immediately prior to the purchase. Prior approval could have been made pursuant to a line of credit approved by the board of directors of your bank for the individual within fourteen months of the purchase. 12 C.F.R. 215.4(b)(2).
You indicate that to require the prior approval of your bank's board of directors results in double approval of the loan, which, in your opinion, would be useless. The prior approval is intended to represent more than a determination by the bank's board of directors of the credit worthiness of the insider and the terms and conditions of the loan. Prior approval is intended to serve as a form of notice to the board of directors of the total outstanding debt (or potential debt in the case of a line of credit) of an insider to the bank. Although the board of directors of your affiliate undoubtedly made a determination regarding the credit worthiness of your affiliate's director and the terms and conditions of the loan, it cannot make the decision whether these criteria are adequate for your bank. Moreover, it cannot determine the maximum amount of indebtedness your bank intends to grant this insider. Consequently, your bank is required to review and approve in advance a purchase of a participation (if it is without recourse), even though the loan has already been approved by the board of directors of the bank that originally made the loan.