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FIL-5-95 Attachment

[Federal Register: December 28, 1994]



 

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 337


 

RIN 3064-AB50


 

 

Unsafe and Unsound Banking Practices


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Final rule.


 

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SUMMARY: The Board of Directors of the Federal Deposit Insurance

Corporation is amending its regulations to except loans which are fully

secured by certain types of collateral from the general limit on

``other purpose'' loans to executive officers of insured nonmember

banks. The amendment parallels changes by the Board of Governors of the

Federal Reserve System to that agency's regulations on insider loans.


 

EFFECTIVE DATE: December 28, 1994.


 

FOR FURTHER INFORMATION CONTACT: Mark Mellon, Senior Attorney,

Regulation and Legislation Section, Legal Division, (202) 898-3854, or

Michael D. Jenkins, Examination Specialist, Division of Supervision,

(202) 898-6896, Federal Deposit Insurance Corporation, 550 17th Street,

NW., Washington, DC 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. The Proposed Rule


 

On August 16, 1994, the FDIC published for public comment a

proposed revision to 12 CFR 337.3 concerning limits on extensions of

credit to executive officers. 59 FR 41990 (August 16, 1994). The

proposed rule sought to ease the restrictions on extensions of credit

by insured nonmember banks to executive officers by creating an

additional exception to the general limit on ``other purpose'' loans to

executive officers.1 This exception is for loans which are fully

secured by the following types of collateral:

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\1\ The other purpose lending limit is currently 2.5 percent of

the bank's capital and unimpaired surplus but in no event more than

$100,000; see 12 CFR 337.3(c)(2).

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(a) A perfected security interest in bonds, notes, certificates of

indebtedness, or Treasury bills of the United States or in other such

obligations fully guaranteed as to principal and interest by the United

States;

(b) Unconditional takeout commitments or guarantees of any

department, agency, bureau, board, commission or establishment of the

United States or any corporation wholly owned directly or indirectly by

the United States; or

(c) A perfected security interest in a segregated deposit account

in the lending bank.

This exception will be in addition to the statutory exceptions to

the other purpose lending limit for home mortgage loans and education

loans.

Section 337.3 currently provides that, with certain exceptions,

insured nonmember banks are subject to the restrictions contained in

Subpart A of 12 CFR Part 215 (Regulation O). 12 CFR 337.3(a). One of

these exceptions, 12 CFR 215.5(c)(3), sets out the amount of extensions

of credit which may be made to an executive officer for purposes other

than those specifically authorized by section 22(g) of the Federal

Reserve Act (FRA) (12 U.S.C. 375a) (other purpose loans). Section

22(g)(4) provides that the lending limit on other purpose loans must be

set by the appropriate federal banking agency. With respect to insured

nonmember banks, the appropriate federal banking agency is the FDIC.

Section 337.3 must therefore specifically set out the limit on other

purpose loans for insured nonmember banks, and any exceptions thereto.

Recently the Board of Governors of the Federal Reserve System made

changes to Federal Reserve Board Regulation O. 59 FR 8831 (February 24,

1994). Most of these changes were immediately applicable to insured

nonmember banks. The changes, however, to Sec. 215.5(c)(3) which

provide that a loan may be made by a member bank to one of its

executive officers in any amount if it has been secured by certain

types of collateral (the same types proposed by the FDIC which are

described above) can only be made available to insured nonmember banks

if Sec. 337.3 is amended. As indicated above, the FDIC proposed doing

so on August 16, 1994. The Board of Governors of the Federal Reserve

System also concurrently redesignated the provision which sets forth

the limit for other purpose loans by member banks to their executive

officers as 12 CFR 215.5(c)(4). 59 FR at 8840-8841. The FDIC therefore

also proposed to amend Sec. 337.3 to cross-reference Sec. 215.5(c)(4)

as one of the provisions of Regulation O that is inapplicable to

insured nonmember banks.


 

II. Comments on the Proposed Rule


 

The FDIC received a total of 31 comment letters in response to its

proposal. Five letters were from state or national trade associations

representing depository institutions, two letters were from bank

holding companies, one letter was from a state bank regulator, and the

remaining 23 letters were from insured nonmember banks. All of the

commenters supported the proposed revisions.


 

Recommended Substantive Amendments


 

Thirteen commenters went beyond expressions of support for the

proposed amendment to recommend that the FDIC consider and implement

additional exceptions to further loosen the restrictions on extensions

of credit by insured nonmember banks to their executive officers. Seven

commenters recommended that, in addition to the types of secured loans

which were specified by the FDIC in its proposal, other categories of

secured loans should be exempted from the general limit on other

purpose loans. The recommendations for exemption included loans secured

by marketable securities, real estate, or cash value life insurance

policies.

Two commenters recommended that the $100,000 limit on other purpose

loans should be adjusted to reflect inflation. Another commenter stated

that the $100,000 limit should be eliminated altogether and that banks

should instead be allowed to lend up to 2.5 percent of their capital

and unimpaired surplus to executive officers for other purpose loans.

Two other commenters stated that the FDIC should permit loans in any

amount for any purpose to an executive officer provided the loans are

secured by the executive officer's principal residence. One commenter

who made this recommendation also stated that home equity lines of

credit which are adequately collateralized by the executive officer's

primary residence should be exempted from the other purpose loan limit

and should be exempted from the acceleration requirement set forth in

Sec. 215.5(d)(4) of Regulation O.2 One commenter stated that

unsecured personal loans for up to $5,000 should be excepted from the

definition of ``extension of credit''. Another suggested that executive

officers should be allowed to take out a second mortgage on their

primary residence of up to $100,000.

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\2\ Section 215.5(d)(4) provides that any extension of credit by

a bank to an executive officer will be subject to the condition in

writing that the extension of credit will, at the option of the

bank, become due and payable at any time that the officer is

indebted to any other bank or banks in an aggregate amount greater

than $100,000.

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One commenter noted that community banks have experienced problems

in justifying the terms and interest rates of loans to their insiders.

The commenter contended that fear of criticism by examiners frequently

leads banks to charge higher rates to insiders and that problems arise

for small banks when they do not have ``comparable'' loans within the

bank to compare to their insider loans.3 The commenter argued that

in small communities where the executive officer is often the most

creditworthy individual in the community and therefore likely to

qualify for the most favorable terms, the bank will often have no other

loans to compare to the insider loan. The commenter requested that

banks be allowed in such situations to look to offers of credit to

their executive officers from other depository institutions and their

terms and procedures as a substitute for comparable transactions by the

bank.

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\3\ Section 215.4(a) of Regulation O states that a loan offer

from a bank to its executive officer or director must be made on

substantially the same terms as and follow the same procedures that

prevail with comparable transactions by the bank with persons not

associated with the bank.

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Two commenters stated generally that executive officers should have

the same loan opportunities that insured nonmember banks provide for

their non-insider customers. One requested that banks be allowed to

make the same loans to an executive officer that they make for any

other customer as long as the executive officer owns less than fifty

percent of the bank and the institution has a return on assets of one

percent or more. The other commenter suggested that regulators might

rely on two independent appraisals of non-cash property pledged by

executive officers and directors as security for a loan to ensure

against abuse by insiders.

The FDIC welcomes suggestions that will reduce the regulatory

burden on depository institutions without affecting their safety and

soundness. Some of the suggested amendments, however, would require

amendments to Regulation O by the Board of Governors of the Federal

Reserve System. Other requested changes would require amendments by

Congress to sections 22(g) and (h) of the FRA. While those suggested

changes to the restrictions on insider lending requirements which are

within the authority of the FDIC deserve consideration, the FDIC does

not think that it would be appropriate to make such changes

unilaterally.

As previously indicated, the FDIC proposed the same exceptions to

the limit for other purpose loans to executive officers that the Board

of Governors of the Federal Reserve System promulgated for member

banks. The proposal was undertaken in order to put insured state

nonmember banks on an equal footing with state member banks, thus

avoiding disparity of treatment among banks based upon their

membership, or lack of membership, in the Federal Reserve System.

Unilateral adoption by the FDIC of any of the proposed changes would

result in such disparity of treatment.

Unilateral adoption of the proposed substantive amendments might

also interfere with a recent directive from Congress to the federal

banking agencies. Section 303 of the Riegle Community Development and

Regulatory Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160)

provides that the federal banking agencies must streamline their

regulations, reduce unnecessary costs, and eliminate unwarranted

constraints on credit availability. The federal banking agencies are

also directed to work jointly to make regulations uniform that

implement common statutory or supervisory policies. Unilateral adoption

by the FDIC of the suggested substantive amendments would be

inconsistent with this statutory directive to make regulations uniform.

For these reasons, the Board of Directors of the FDIC declines to

adopt any of the suggested substantive amendments at this time. Such

proposed amendments are best considered through an interagency

initiative to revise insider lending restrictions. As noted previously,

the FDIC will be coordinating with the other federal banking agencies

for purposes of streamlining its regulations and to eliminate

unwarranted constraints on credit availability. Regulation O and 12 CFR

337.3 will be subject to review and possible amendment as part of that

project. The FDIC will recommend at that time that the federal banking

agencies consider those suggested substantive amendments which are

within the regulatory authority of the federal banking agencies.


 

Recommended Procedural Amendment


 

In addition to the suggested substantive changes, one commenter

recommended that the FDIC make Regulation O applicable to insured

nonmember banks by cross-reference to Regulation O rather than through

its own separately promulgated regulation. The commenter argued that

this change would lessen confusion as to the applicability of

amendments by the Board of Governors of the Federal Reserve System to

Regulation O to insured nonmember banks.

The FDIC is not able to take this step, however. Under section

22(g)(4) of the FRA, the lending limit for other purpose loans to

executive officers must be set by the ``appropriate federal banking

agency''. In addition, section 7(k) of the Federal Deposit Insurance

Act (12 U.S.C. 1817(k)) directs the appropriate federal banking agency

to issue rules and regulations to require the reporting and public

disclosure of loans made by depository institutions to their executive

officers and principal shareholders. The FDIC interprets these

statutory provisions to mean that each federal banking agency must

independently implement these requirements for the institutions which

are subject to its supervision.4 Incorporation of insider lending

requirements for insured nonmember banks by cross-reference to

Regulation O therefore would not fulfill the statutory mandates which

Congress has imposed upon the FDIC, particularly since any subsequent

amendment by the Board of Governors of the Federal Reserve System would

then have the effect of ``automatically'' amending the FDIC's rule.

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\4\ The other purpose lending limit for insured nonmember banks

is established by the FDIC at Sec. 337.3(c)(2). Regulations setting

forth insider loan disclosure requirements for nonmember banks are

found at part 349 of the FDIC's regulations (12 CFR Part 349).

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III. The Final Rule


 

After considering the comments received, the Board of Directors of

the FDIC has decided to adopt the proposed rule to amend 12 CFR 337.3

without change. The Board of Directors of the FDIC has decided, in

agreement with the conclusion of the Board of Governors of the Federal

Reserve System, that extensions of credit to an executive officer pose

minimal risk of loss to a bank when they are secured by the types of

collateral described above. 59 FR at 8836. The Board of Directors is of

the opinion that it is consistent with safe and sound banking practices

to increase the amount of credit that a bank may extend to its

executive officers when the credit is secured as described above. The

Board of Directors has also taken into consideration the fact that the

proposed rule parallels the changes to Regulation O which have already

been promulgated by the Board of Governors of the Federal Reserve

System and the fact that all of the comments pertaining to the proposed

rule were in favor of the proposed changes.


 

IV. Effective Date


 

The rule will become effective immediately upon publication in the

Federal Register. The necessity for a 30-day delay in effective date

has been waived since this rule relieves a restriction. 5 U.S.C.

553(d)(1).


 

V. Regulatory Flexibility Act


 

Pursuant to section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. 605(b), the FDIC hereby certifies that the proposed rule will

not have a significant economic impact on a substantial number of small

entities. The rule will not impose burdens on depository institutions

of any size and will not have the type of economic impact addressed by

the Regulatory Flexibility Act.

The FDIC has reached this conclusion because the effect of the rule

will be to reduce the regulatory requirements that are imposed upon

small depository institutions rather than to increase them. Small

depository institutions will have greater freedom of action to extend

credit to executive officers as a result of the proposed rule rather

than less.


 

VI. Paperwork Reduction Act and Regulatory Burden


 

No additional collections of information pursuant to section

3504(h) of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are

contained in the proposed rule. Consequently, no information has been

submitted to the Office of Management and Budget for review.

Section 302 of the Regulatory Improvement Act provides that the

federal banking agencies must consider the administrative burdens and

benefits of any new regulations that impose additional requirements on

insured depository institutions. Section 302 also requires that any

regulations which impose additional reporting, disclosure, or other

requirements on insured depository institutions shall take effect on

the first day of a calendar quarter which begins on or after the date

on which the regulations are published in final form.

The Board of Directors of the FDIC has concluded that the final

amendment to 12 CFR 337.3 does not impose additional reporting,

disclosure or other requirements on insured nonmember banks. This is

because the effect of the amendment is to create an exception to the

limits on insider loans by such institutions rather than to impose

additional restrictions. We have therefore concluded that section 302

of the Regulatory Improvement Act does not require that the effective

date of these amendments be on the first day of the calendar quarter

which begins on or after the date of publication of the final

amendments.


 

List of Subjects in 12 CFR Part 337


 

Banks, Banking, Reporting and recordkeeping requirements,

Securities.


 

In consideration of the foregoing, the Board of Directors amends

Part 337 of Chapter III of title 12 of the Code of Federal Regulations

as follows:


 

PART 337--[AMENDED]


 

1. The authority citation for Part 337 continues to read as

follows:


 

Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b),

1819, 1821(f), 1828(j)(2), 1831f, 1831f-1.


 

2. Section 337.3 is amended by revising paragraphs (a) and (c)(2)

to read as follows:



 

Sec. 337.3 Limits on extensions of credit to executive officers,

directors, and principal shareholders of insured nonmember banks.


 

(a) With the exception of 12 CFR 215.5(b), 215.5(c)(3),

215.5(c)(4), and 215.11, insured nonmember banks are subject to the

restrictions contained in subpart A of Federal Reserve Board Regulation

O (12 CFR Part 215, subpart A) to the same extent and to the same

manner as though they were member banks.

* * * * *

(c) * * *

(2) An insured nonmember bank is authorized to extend credit to any

executive officer of the bank for any other purpose not specified in

Sec. 215.5(c)(1) and (2) of Federal Reserve Board Regulation O (12 CFR

215.5(c)(1) and (2)) if the aggregate amount of such other extensions

of credit does not exceed at any one time the higher of 2.5 percent of

the bank's capital and unimpaired surplus or $25,000 but in no event

more than $100,000, provided, however, that no such extension of credit

shall be subject to this limit if the extension of credit is secured

by:

(i) A perfected security interest in bonds, notes, certificates of

indebtedness, or Treasury bills of the United States or in other such

obligations fully guaranteed as to principal and interest by the United

States;

(ii) Unconditional takeout commitments or guarantees of any

department, agency, bureau, board, commission or establishment of the

United States or any corporation wholly owned directly or indirectly by

the United States; or

(iii) A perfected security interest in a segregated deposit account

in the lending bank.

* * * * *

By order of the Board of Directors.


 

Dated at Washington, D.C., this 20th day of December 1994.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary

[FR Doc. 94-31706 Filed 12-27-94; 8:45 am]

BILLING CODE 6714-01-P