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4000 - Advisory Opinions


Regulation O: Prior Approval by Majority of Board of Directors

FDIC-82-3

February 9, 1982

John C. Deal, Regional Counsel

This responds to your letter of February 5, 1982, describing a proposal under which seven of the bank's directors would purchase certain real estate from another director. The real estate is presently being leased by the bank as a branch. The purchasing directors, who will operate as a partnership, propose to finance 90 percent of the $75,000 selling price with a loan from the subject bank. The loan would be prohibited by Regulation O.

Under section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and section 106(b)(2) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C. § 1972(b)(2)) "extension of credit'' has the meaning given in section 23A of the Federal Reserve Act (12 U.S.C. § 371c). Sections 22(h) of the Federal Reserve Act and 106(b) of the Bank Holding Company Act Amendments of 1970 were added by the Financial Institutions Regulatory and Interest Rate Control Act of 1978.

Because the seven directors in concert would control the partnership, it would be a "related interest" of each of them. Section 215.2(a), (b), and (k) of Regulation O (12 C.F.R. § 215.2(a), (b), and (k)), promulgated under Section 22(h) of the Federal Reserve Act. Because the extension of credit would exceed $25,000, the prior approval of a majority of the entire board of directors of the bank would be required under section 215.4(b) of Regulation O (12 C.F.R. § 215.4(b)). Apparently, the board of directors of the bank consists of nine individuals. It is therefore impossible for the loan to receive the prior approval required under section 215.4(b).

As further defined in section 215.3(f) of Regulation O (12 C.F.R. § 215.3(f)), an extension of credit to this related interest would be considered an extension of credit to the directors. Under this analysis, an extension of credit by a correspondent would also be an extension of credit to the directors and section 106(b)(2) of the Bank Holding Company Act Amendments of 1970 would apply.

In view of the effect of section 215.4(b), it is unnecessary to review the proposal for compliance with section 215.4(a) and (c) of Regulation O (12 C.F.R. § 215.4(a) and (c)) at this time.


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