FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Application of Regulation O to Loan Commitments
April 14, 1982
Pamela E. F. LeCren, Attorney
The following is in response to your March 23, 1982 letter in which you set forth the following facts and inquire whether or not the facts as described pose a problem under Regulation O (12 C.F.R. Part 215).
*** employed a *** in its *** office until August 1, 1980 in a capacity other than that of an executive officer. On August 1, 1980, *** was transferred to the bank's *** Regional Headquarters. He continued to function in a non-executive officer status after the transfer. Pursuant to the bank's then existing policy, *** "agreed" to provide *** with a residential real estate loan at an interest rate equivalent to the loans he had outstanding on his ***, residence. This would be accomplished by means of a "blend" mortgage. The average interest rate on his outstanding loans was 8.53 percent. The "commitment" as described above was due to expire on March 7, 1982. On June 1, 1982, after the expiration of the "commitment", *** was promoted to an executive officer position. According to your letter, it was not contemplated at the time *** was transfered and the "commitment" entered into that he would assume an executive officer position.
You pose several questions regarding the above facts: (1) may *** extend the "commitment" for an additional six months so as to make its terms co-extensive with the two-year period during which the Internal Revenue Service permits the sale of, and investment in, owner-occupied residential real property without incurring income; (2) assuming the "commitment" was still in effect, would the bank be in violation of Regulation O if it extended the "blend" mortgage to *** after he assumed the position of an executive officer; (3) if the bank re-evaluates *** position; determines that it no longer constitutes an executive officer position as defined in Regulation O; and the necessary resolutions are passed by the board of directors, can the bank freely extend "preferential" loans to ***.
Your questions are answered below in the order posed.
Question (1) - The FDIC has taken the position in the past that outstanding preferential extensions of credit to persons that were not executive officers, directors, or principal shareholders at the time the extensions were made do not constitute violations of Regulation O if and when the debtor becomes an executive officer, director, or principal shareholder. If those loans are renewed at preferential rates, however, the renewal would constitute a violation of the regulation. Furthermore, preferential loans made to persons in contemplation of their assuming a status subject to the regulation are covered by its restrictions. Clearly, if *** extends the "commitment" which expired in March, 1982, and later funds the loan at an interest rate that is not the same as that which would be made available to other customers of the bank, the extension of credit would be in violation of § 215.4(a) of Regulation O. The fact that the bank made the original "commitment'' so that *** would not suffer any detriment in accepting the transfer and it was not contemplated at the time of the transfer that he would assume an executive officer position prior to funding the commitment does not alter our opinion.
Question (2) - The Legal Division has had occasion to issue staff opinions indicating that where a bank is obligated by contract to renew a loan on terms that would be preferential and the contractual obligation arose when the original extension of credit was not subject to Regulation O, the renewal in accordance with the contract would not constitute a violation of the regulation. Of course, if it was contemplated at the time of the extension of credit that the recipient of the loan would have assumed, for example, an executive officer status by the time of the renewal, we would probably find differently.
In applying the above to the facts as hypothesized in question (2), we can say no more than that if *** is contractually obligated to fund a loan at preferential rates to a person who, at the time the contract arose, was not an executive officer, the loan would not violate Regulation O. We note that your letter refers to the bank's obligation as a "commitment" and states that the bank was "obligated" to extend the loan as per the contract. You have not provided us with any other information regarding the "contract". We therefore are not in a position to render an opinion on whether or not the "exception" pertaining to contractual obligations described above would be available if the bank were to have funded the "commitment" prior to its expiration.
Question (3) - Section 215.2(d) defines "executive officer" to mean a person who participates, or has the authority to participate (other than in the capacity of a director) in the major policymaking functions of a bank. It further provides that an individual can be excluded from consideration as an executive officer if the bank's board of directors (or the bank's bylaws) excludes the individual from participation in policymaking functions and the individual does in fact not participate therein. Therefore, if *** determines that *** position is not an executive officer position; excludes him by board resolution from so acting; and he does in fact not act as an executive officer, the bank may make extensions of credit to him without regard to the restrictions contained in Regulation O.