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4000 - Advisory Opinions


Regulation O: Applicability of Regulation O When Bank "B" Provides Credit Cards to Bank "A" Insiders Under Bank B's Name

FDIC--95--13

August 28, 1995

Mark A. Mellon, Senior Attorney

This is in response to your letter of July 18, 1995 concerning 12 C.F.R. Part 215 - Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (Regulation O) ("Regulation O") which is made applicable to insured nonmember banks by section 337.3 of FDIC regulations (12 C.F.R. § 337.3).

You state in your letter that your institution ("Bank A") and another insured nonmember bank ("Bank B") are both wholly owned by a bank holding company along with a number of other banks. Under an agreement between Bank A and Bank B, Bank B issues credit cards under Bank A's name. Approval and processing of credit card applications is handled by Bank B and Bank B carries the debt of the credit card holders on its books. You have represented to me over the telephone that the credit card agreement between the credit card holder and the issuer specifies that the credit card is an obligation of Bank B. Bank B and Bank A are correspondent banks.

You are concerned that the provision of credit cards by Bank B to its insiders (executive officers, directors, and principal shareholders) and the insiders of Bank A may cause problems under Regulation O. Specifically, you request that we advise you on the applicability of the requirement under section 215.4 (b) of Regulation O that certain extensions of credit to insiders must be approved beforehand by the board of directors of the bank to the following situations:

a)  A director of Bank A who owes no debt to either Bank A or B has a credit card approved with a limit of $15,000;

b)  A director of Bank A who owes no debt to either Bank A or B has a credit card approved with a limit of $16,000;

c)  A director of Bank A who owes $1 million to Bank A but nothing to Bank B has a credit card from Bank B approved with a limit of $15,000 or alternatively $16,000;

d)  An executive officer of either institution has a credit card approved with a limit of $10,000;

e)  A director of Bank A owes over $500,000 to Bank B and also wants a credit card with a limit in excess of $15,000; and

f)  An executive officer of Bank A owes over $100,000 to Bank B and also wants a credit card with a limit in excess of $15,000.

Section 215.4 of Regulation O provides that a bank may not extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with the amount of all other extensions of credit to that person and to all related interests of that person, exceeds the higher of $25,000 or 5 percent of the member bank's unimpaired capital and unimpaired surplus, unless the extension of credit has been approved in advance by a majority of the entire board of directors of that bank. In no event may a member bank extend credit to any insider of the bank or insider of its affiliates in an amount that, when aggregated with all other extensions of credit to that person, and all related interests of that person, exceeds $500,000, except by complying with the requirements of prior approval.

An insider is defined by section 215.2 (h) of Regulation O to mean an executive officer, director, or principal shareholder, or any related interest of such a person (a company controlled by that person; or a political or campaign committee that is controlled by that person or the funds or services of which will benefit that person [see 12 C.F.R. § 215.2(n)]). Certain financial transactions are exempted from the definition of an extension of credit. Specifically, an extension of credit does not include an indebtedness of $15,000 or less under a bank credit card plan. See 12 C.F.R. § 215.3(b)(5). Banks must maintain records of their extensions of credit to their insiders and to the insiders of their affiliates. See 12 C.F.R. § 215.8.

An executive officer of a bank is even further restricted in the amount of credit which he or she may receive but only with respect to extensions of credit from the bank where the executive officer works and not from affiliates. See 12 C.F.R. § 215.5. An executive officer who becomes indebted to another bank in an amount greater than $100,000 must report that indebtedness to the board of directors of the executive officer's bank. See 12 C.F.R. § 215.9. Banks must report their extensions of credit to their executive officers to the appropriate federal banking agency. See 12 C.F.R. § 215.10.

The resolution of your questions turns in large part on the answer to the question as to who is the issuer of the credit cards: Bank A or Bank B? It is our opinion that Bank B should be deemed to be the issuer of the credit cards even though they are issued in Bank A's name. We reach this conclusion in light of the fact that the credit card agreement specifies that a credit card is an obligation of Bank B and because Bank B and not A handles the approval and processing of the credit cards. As a result, if prior approval is required under Regulation O before a credit card may be issued (that is, if the credit card falls within the Regulation O definition of an extension of credit), it should be the board of directors of Bank B that gives such approval. Bank B must therefore comply with the prior approval requirement of section 215.4 whenever an extension or extensions of credit to an insider of Bank B or an insider of an affiliate of Bank B are over $500,000.

After application of the above legal requirements to the hypothetical situations discussed above, we have come to the following conclusions:

With respect to the director of Bank A in situations a) and b), it would not be necessary to seek the prior approval of the board of directors of Bank B before a credit card may be issued to the director with a limit of either $15,000 or $16,000. The credit card with a limit of $15,000 falls outside the definition of an "extension of credit" by operation of 12 C.F.R. § 215.3(b)(5). The credit card with a limit of $16,000 would be an extension of credit for purposes of Regulation O but because the director owes no other debt to Bank B, there is no need for prior approval under 12 C.F.R. § 215.4. There would be no need for the director to report the credit card approval to the Bank A board of directors since a director has no duty to report extensions of credit from other banks, unlike executive officers. Bank B would have to maintain a record of the credit card with a $16,000 limit, however, as required by section 215.8.

With respect to the director of Bank A in situation c), prior approval would not be required by the board of directors of Bank B if the credit card has a limit of $15,000, again because the credit card would fall outside the definition of an extension of credit. With respect to the credit card with a limit of $16,000, the prior approval of the board of directors of Bank B would also not be required, in spite of the fact that this would count as an extension of credit under Regulation O. This is because the director owes no other debt to Bank B. This is true even though the director owes $1 million to Bank A. It is only the extensions of credit made by a bank itself to its insiders and the insiders of its affiliates that count for purposes of section 215.4. Again, the director would have no duty to report a credit card with a $15,000 or $16,000 limit to the board of directors of Bank A because only executive officers have a duty to report extensions of credit from other banks in excess of Regulation O limits to their board of directors but Bank B would have to maintain a record of the credit card with a $16,000 limit.

With respect to the executive officer of either Bank A or Bank B in situation d), prior approval by the board of directors of Bank B would not be necessary since a credit card with a limit of $10,000 would not count as an extension of credit. It would therefore not be necessary for the executive officer to report the credit card to his or her board of directors nor would Bank B have to maintain a record of the credit card for purposes of Regulation O.

With respect to the director in situation e), prior approval of the board of directors of Bank B would be required before a credit card with a limit in excess of $15,000 could be issued. This is because the director has had over $500,000 in credit extended by Bank B. The director would be under no obligation to report the credit card to the board of directors of Bank A. Bank B would have to maintain a record of the credit card for purposes of Regulation O along with records of the previous extensions of credit.

With respect to the executive officer in situation f), it would be permissible for Bank B to issue a credit card with a limit in excess of $15,000 without first seeking prior approval from the board of directors of Bank B, provided that the executive officer's aggregate debt does not exceed $500,000. Bank B would have to maintain a record of the credit card for purposes of Regulation O along with records of any previous extensions of credit.

I hope that this letter is responsive to your query. Please do not hesitate to contact me if you should have any questions about this matter.


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