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4000 - Advisory Opinions


Adjustment on Loans Made in Violation of Regulation O

FDIC-81-24

October 21, 1981

Pamela E. F. LeCren, Attorney

The following is in response to your September 25, 1981 letter and intended as confirmation of our discussion concerning certain loans outstanding at *** inadvertently extended in violation of Regulation O.

As indicated by you, *** extended a loan to the president, chief executive officer and director of *** said loan being made at a 10% interest rate when the market rate for such loans was 12.5%. As *** and *** are subsidiaries of the same bank holding company, the individual in question is a director and executive officer of *** under sections 215.2(c) and (d) of Regulation O. It is our understanding that the necessary resolutions were passed by *** and *** which would remove the individual from consideration as an executive officer of ***, however, the regulation does not provide any such mechanism where the borrower is a director of an affiliate of the lending bank. We conclude therefore that the loan was made in violation of section 215.4(a) which requires that all loans made to a bank's own directors be made on substantially the same terms as those prevailing at the time for comparable transactions with persons not covered by Regulation O and who do not work for the bank.

It is the opinion of the Legal Division that the outstanding violation can be corrected by rewriting the loan at the interest rate that would have been applicable if the loan was originally extended in compliance with Regulation O. To require that the interest rate be brought up to current rates (i.e. prevailing at time of renegotiation) would serve no useful purpose under the regulation and would be overly burdensome.

Finally, you ask whether the bank holding company could lawfully extend loans to the directors of its affiliate banks without regard to the restrictions of Regulation O. (It is apparently contemplated that the holding company, rather than the subsidiary banks, would meet the credit needs of the directors of subsidiaries in an effort to avoid the type of problem under disucssion.) Your inquiry initially raises the question of whether or not it would be proper for the holding company to engage in making loans. It is our understanding from informal conversations with staff of the Federal Reserve Board that a holding company must have approval to make loans, and that once approval is given, the company must be engaged in the business of making loans, i.e. cannot simply extend one or two loans. As to the application of Regulation O, such a practice may or may not result in a violation. Although a bank holding company is not itself an entity subject to Regulation O when it makes extensions of credit, it is conceivable that the loans in question could be viewed as extensions of credit by the subsidiary banks depending upon the source of the funds and other relevant facts.


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