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4000 - Advisory Opinions


Loans to Executive Officers and Related Interests Thereof

FDIC-79-15

December 3, 1979

Pamela E.E. LeCren, Attorney

The following is in response to your September 6, 1979 letter requesting an opinion from the Legal Division regarding the application of Federal Reserve Board Regulation O (12 C.F.R. Part 215) to a particular set of circumstances all of which involve lending to executive officers and related interests thereof. Specifically you inquired as to how the Legal Division would treat (1) loans by a bank to a common related interest of two or more of its executive officers, (2) a loan to an executive officer the proceeds of which are used to invest in his/her related interest, (3) a loan to an executive officer the proceeds of which are in turn loaned to his/her related interest, and (4) a loan to an executive officer used for his/her personal use coupled with use by the executive officer of other resources for the benefit of his/her related interest.

1. Loans to a common related interest.

It is the position of the Legal Division1 that the entire amount of an extension of credit made to a related interest of more than one executive officer or principal shareholder of an insured nonmember bank is to be counted against each executive officer's or principal shareholder's borrowing limit under Regulation O. In our opinion the clear language of sectin 104 of Title I of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 requires this result. That clear language has been carried over into the restatement of the statutory prohibitions as found in the regulation (section 215.4(c)). To read the language of the statute and the regulation as you suggest (prorating the extension of credit among the executive officers or principal shareholders in accordance with their control interest) runs contrary to the intent of the statute in several respects. The statute does not require that an individual benefit from an extension of credit, only that an extension of credit be made. Pro rata treatment embodies the concept of proportionate benefit. The protections embodied in the statute would be weakened if the approach you suggest is adopted. Under your approach, a bank could extend credit to insiders in an aggregate amount greatly exceeding the total amount permissible under our reading of the statute. The ultimate result would be to jeopardize the safety or soundness of the institution. Lastly, the statute could have utilized a pro rata approach but it did not. A related interest is considered to be one and the same as those who control it, thus extensions of credit to a related interest are extensions of credit to the persons who control that related interest.

2. Investment of proceeds in related interest.

We will presume from the manner in which you phrased your question that an executive officer of a bank is taking out a loan and the proceeds are used to purchase a controlling interest in a company. In short the loan is used to create a related interest. We agree that the above fact pattern does not qualify as a loan to a related interest under section 215.3(f).2 If the related interest status has already been established, and the proceeds of the loan are used to purchase partnership assets for example, the loan would be an extension of credit to the related interest under section 215.3(f) and not an extension of credit to the executive officer. The practical result is the same however no matter whether the loan is treated as made to the executive officer personally or treated as made to the related interest.3

3. Proceeds loaned to related interest.

If an executive officer obtains a loan from his/her bank and in turn loans the money to a related interest, under section 215.3(f) the loan is treated as made to the related interest. That the executive officer and not the related interest is obligated to the bank is not determinative of the question to whom was the extension of credit made.

4. Use of other resources to benefit related interest.

There has been no extension of credit to a related interest when an executive officer transfers funds obtained from some other source than the bank to the related interest. The restrictions embodied in section 215.3(f) only apply to the proceeds of extensions of credit and do not reach transfers from other resources.

1 The staff of the Federal Reserve Board has informally agreed to the position the Legal Division is taking in this opinion. Go back to Text

2 An extension of credit is considered made to a person covered by this Part to the extent that the proceeds of the extension of credit are used for the tangible economic benefit of, or are transferred to, such a person. Go back to Text

3 If a portion of the loan is considered under section 215.3(f) to be made to the related interest, that portion is not added to the total amount of the loan taken out by the executive officer as to do so would result in counting the proceeds twice. Go back to Text


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