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4000 - Advisory Opinions

Limitations on Insider Loan Transactions: Voting Trusts


February 21, 1979

B. Shelby Baetz, Attorney

Mr. Quinton Thompson, Regional Director for the FDIC in Dallas, forwarded the Legal Division in Washington your letter to him dated January 15, 1979, in which you raise five questions regarding limitations on insider loan transactions. This responds to those inquiries.

You first ask whether the existence of the Voting Trust Agreement created by the ten directors of your bank has any bearing on the loan limits for directors who are not executive officers, other than for purposes of disclosure. The answer is yes. The Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRIRCA) imposes certain limitations on loans by insured nonmember banks to principal shareholders and their related interests. More specifically, FIRIRCA requires that no insured nonmember bank in a town with less than 30,000 people shall make a loan to any person who directly or indirectly or acting through or in concert with one or more other persons has the power to vote more than 18% of any class of bank stock where the amount of the loan, when aggregated with the amount of all other loans by the bank to that person and to all companies and political or campaign committees controlled by that person, would exceed 10% of the bank's capital and surplus. Since, under the Voting Trust Agreement created by the directors, all trustors are contractually bound to vote as a single block, each trustor, acting in concert with the other trustors, has the power to vote more than 18% of the bank's common stock. Each is thus a principal shareholder. Consequently, under FIRIRCA, the bank cannot extend a loan to any individual trustor if the amount of the loan, when aggregated with the amount of other loans by the bank to that trustor and his related interests, would exceed 10% of the Bank's capital and surplus.

Your second inquiry concerning the status of ***, an "Inactive" Vice President who draws no salary or compensation, can be answered by looking at proposed Federal Reserve Regulation O (copy attached). Reg. O defines the term "executive officer" for purposes of FIRIRCA. According to the regulation, an executive officer means an officer who participates or has authority to participate, otherwise than in the capacity of a director, in major policy-making functions of the bank, regardless of whether: (1) the officer has an official title; (2) the title designates the officer an assistant; and (3) the officer is serving without salary or other compensation. The chairman of the board, the president, every vice president, the cashier, secretary, and the treasurer of a bank shall be deemed executive officers, unless any such officer is excluded by resolution of the board of directors or by the bank's bylaws, from participation in major policy-making functions, other than in the capacity of a director of the bank, and the officer does not actually participate therein. Thus, unless *** is excluded, either by resolution of the board of directors or by the bank's bylaws, from participation in major policy-making functions and does not actually participate therein, he will be deemed an executive officer.

You should know, however, that the Federal Reserve may revise proposed Reg. O. As a result, it is possible, although we believe unlikely, that the definition of executive officer will be changed. The FDIC will advise you of any changes that are incorporated in the final regulation.

I now turn to your third inquiry: If the bank's directors, who are also principal shareholders, are subject to the 10% loan limitation due to the existence of the Voting Trust Agreement, are their families affected, specifically grown children who are not domiciled with the director? Under FIRIRCA the answer is no. FIRIRCA only requires the Bank to aggregate the loans to each principal shareholder or executive officer and his related interests in order to determine if the Bank's lending limitation has been exceeded. FIRIRCA does not require the bank to aggregate the loans to each trustor's immediate family.

The answer to your fourth question, whether mortgage loans for executive officers must be aggregated for purposes of determining how much money the bank may loan to such officers under FIRIRCA, is yes. The statute is clear that all loans and extensions of credit to an executive officer are to be aggregated.

The fifth and final question you posed in your letter actually consists of two separate questions. You wrote as follows: "In the past, at the beginning of our crop year, we have approved farm loans for our insiders up to a certain amount to be made in increments as needed. These loans have been approved as a series of related transactions.' Would we be able to overdraw a Director's account under these conditions? Would we be able to overdraw a Director's son's account in any event?"

In response to the first question about overdrawing a director's account, FIRIRCA states: "No member bank may pay an overdraft on an account at such bank of an executive officer or director." The statute goes on to say that the term pay an overdraft on an account' means the payment by a bank of an amount for an account holder in excess of the funds on deposit in the account and does not include a payment of funds by the bank in accordance with either a written preauthorized, interest-bearing extension of credit specifying a method of repayment or a written preauthorized transfer of funds from another account of the account holder at that bank. Thus *** cannot overdraw a director's account. It can, however, enter into an arrangement whereby the director is given, in writing, a line of credit under which he can request the Bank to deposit from time to time a certain amount of money in his demand account, within the limits of the line of credit. Please remember, however, that any loan or extension of credit to a director which, when aggregated with the other loans or extensions of credit then outstanding to such director and his related interests, exceeds $25,000, must be approved in advance by a majority of the entire board of directors with the interested party abstaining from participating directly or indirectly in the voting.

Finally, please note that FIRIRCA does not address itself to overdrafts of accounts of an insider's family members.

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