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4000 - Advisory Opinions

Regulation O: Loans to Related Interests


May 23, 1979

Pamela E. F. LeCren, Attorney

Your letter to Mr. Redford J. Wedel, Acting General Counsel of FDIC, has been forwarded to me for reply. In your letter, you request an opinion on whether or not the *** can make loans to certain companies that you own, either on your personal note or the notes of the companies involved.

Regulation O generally restricts loans by a nonmember insured bank to its executive officers and their related interests (companies they control) to a total of ten percent of the bank's capital and unimpaired surplus. As the president of the ***, you are an executive officer as that term is defined in Section 215.2(d) of the regulation. Any loans to the companies you control are considered loans to yourself and thus fall under the ten percent ceiling applicable to you.

You should note, however, that certain extensions of credit are subject to a higher ceiling than the general ten percent limit. The appendix to FDIC Bulletin BL-17-79, which sets out the regulation, contains a list of fourteen types of extensions of credit that either have no ceiling or have a ceiling higher than ten percent. For example, if you or one of your related interests were to take out a loan from the *** and to give the bank a note secured by goods or commodities in the process of shipment, the loan would not be subject to any statutory limit. If the loan were secured by a like amount of United States bonds, Treasury bills, or notes, the loan is subject to a fifteen percent and not a ten percent ceiling. The effect of the fourteen exceptions is to permit you or your related interests to borrow an aggregate amount greater than ten percent of the bank's capital and unimpaired surplus. The amounts borrowed would, however, count against your ten percent ceiling. For example, if you had outstanding balances on loans to yourself and to your related interests that amounted to ninety-five percent of the ten percent ceiling, the bank could make an extension of credit to you that used up the remaining five percent and exceeded the ceiling if the extension was an excepted extension. But having fully used your ten percent ceiling, no further extensions could be made unless the extension was an excepted extension.

In short, ***, Regulation O does not prohibit you from taking out loans with the *** to finance the companies you control. It does, however, limit the extent to which you can do so. If the needs of your companies cannot be satisfied within the confines of the regulation, then you will need to seek credit at another institution.

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