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4000 - Advisory Opinions

Regulation O: "Control" Extension of Credit


August 23, 1979

Pamela E. F. LeCren, Attorney

The Omaha Regional Office has forwarded to the Legal Division a series of questions regarding the application of Federal Reserve Regulation O (12 C.F.R. Part 215) to a fact situation involving *** and a series of banks and other companies in which he owns stock.1 Regulation O generally restricts the aggregate amount of credit (10 percent of capital and unimpaired surplus) a nonmember insured bank may extend to its executive officers, principal shareholders, and their related interests.2 In addition, those extensions of credit may not be preferential. *** is a principal shareholder, as that term is defined in § 215.2(j) of the regulation, of five bank holding companies. As a principal shareholder of the holding company, he is a principal shareholder of each bank held by the holding company. Any extensions of credit by any of these banks to *** must therefore be aggregated with extensions of credit by the banks to his related interests to see whether or not the loan ceiling has been exceeded. Your questions deal with the identification of *** related interests and whether or not there have been extensions of credit to those interests.

Specifically you raise the following questions: (1) Does *** "control" *** Distributing Co.? (2) Does *** "control" *** Warehouse, Inc.? (3) Does the participation of lease obligations among several of the banks in which *** owns a controlling interest give rise to an extension of credit when the obligors are his related interests? (4) Does the floor-plan financing arrangement involving *** Distributing Co. and independent dealers selling *** products give rise to an extension of credit to *** ? (5) If *** participates the loans to these independent dealers to other banks controlled by *** is there an extension of credit subject to Regulation O? (6) Are fees charged by *** to the banks he controls for accounting services extensions of credit to him?; and (7) Are fees charged by two companies wholly owned by *** for services rendered to the banks he controls extensions of credit to him? Each question is taken up separately below.

Question 1: Control of *** Distributing Co. (***)

*** Distributing Co. is a related interest of *** if it is a "company controlled by" him within the meaning of 215.2(k). A partnership is a "company" under 215.2(a) of the regulation. Although the presumptions relating to control all require some stock ownership, control may be found in a company which has no stock. The statute contemplates that control may be exerted directly or indirectly, alone or in concert with one or more persons, where that person or group of persons exerts a controlling influence over the management or policies of the company. The principal partners of a firm, acting together, are responsible for all the major policy and hiring decisions of the partnership and thus exert such a controlling influence. It is our opinion that *** controls *** and that *** is his related interest within the meaning of Regulation O. Loans to *** must therefore be aggregated with loans made directly to ***.

Question 2: Control of *** Warehouse, Inc. (***)

*** does not have an ownership interest in *** therefore, any control *** exerts over that company must come as a result of his position as chairman of the board. Section 215.2(b)(3) makes it clear that a person is not considered to control a company by virtue of position alone. Regulation O recognizes that real control over a company depends on the particular decision-making structure. Whether or not *** is considered to control *** depends on his power as board chairman and the role he plays with regard to the management of the company. If he has the power to exercise a controlling influence over the policies of ***, he will be said to control that company.

Question 3: Participation by *** National Bank of leases to *** and ***

Section 215.3(e) provides that a participation without recourse is considered to be an extension of credit by the participating, rather than the orginating bank.3 When a bank in which *** is a principal shareholder participates in a lease to *** Distributing Co., a "related interest" of ***, an extension of credit has been made by that bank to a related interest of one of its principal shareholders. The extension of credit is therefore subject to the lending limits of Regulation O. The limits may also be applicable to lease obligations of *** should it be concluded that that company is controlled by *** and is therefore his related interest as well.

Question 4: The floor-plan financing of independent dealers by ***

It has already been determined that the *** partnership is controlled by *** and hence loans to it are subject to the lending limits of Regulation O. Since the independent appliance dealers are in no way connected to ***, credit which is extended directly to them is not covered by Regulation O. The question becomes whether or not *** agreement to purchase repossessed appliances upon the default of the independent dealers constitutes an extension of credit to ***.

The repurchase agreement seems to fall within the category of credit described in section 215.3(a)(8): any transaction as a result of which a person directly or indirectly incurs a monetary obligation to a bank. In this case, *** is obligated to pay *** a pre-determined price for the repossessed appliances. Although payment is due only upon the default of a dealer, once that condition has been fulfilled *** is obligated to the bank. However, § 215.3(b)(4)(ii) is in our opinion applicable. That section excludes from the definition of "extension of credit" any indebtedness that is for the purpose of protecting the bank. When the floor-plan financing arrangement is bona fide; the independent dealer's credit worthiness is fully considered; and the distributor is not looked to for repayment of the loan, we do not consider it appropriate to attribute the extension of credit to the distributor. Thus, there has been no extension of credit by *** to a related interest of one of its principal shareholders.

Question 5: Participation of the Floor Plan Financing Agreement

As we concluded that *** financing of independent dealers was not an extension of credit to *** within the meaning of § 215.3, if a bank with respect to which *** is a principal shareholder participates in these loan obligations, no extension of credit will result that must be counted against *** loan ceiling.

Question 6 & 7: Fees Charged by *** and ***

The term "extension of credit," as used in the regulation, refers only to loans and other monetary advances and guarantees; it does not encompass every situation in which value is exchanged among banks, bank officials and their related interests. Payments for accounting, transportation and advertising services are not generally thought of as "credit." Only if payment by the banks controlled by *** to his related interests is made in the form of an advance of unearned salary or other unearned compensation for a period in excess of 30 days would such charges be considered an extension of credit. See section 215.3(a)(7).

This opinion is based on the facts as presented to the Legal Division. Should the facts alter in the future or some fact be present of which we are not currently aware, the substance of this opinion may change.

If you have any questions regarding this opinion or Regulation O in general, please contact me.

1 *** holds the controlling interest in five one bank holding companies. In addition he is a partner with a 39 percent interest in *** Distributing Company, a wholesale appliance distributorship. He is Chairman of the board of directors of *** Warehouse, Inc. but holds no interest therein. He is one of two partners with a firm that provides accounting and other services to each of the five banks. He owns 100 percent of the stock of *** and ***, both of which supply transportation and advertising services to the five banks. One of the banks (***) finances the inventory of independent dealers who are supplied by *** Distributing Company. *** has agreed to repurchase at a set price any of the inventory repossessed upon default. *** Leasing Company, a wholly owned subsidiary of one of the banks (*** (***) leases property to *** and ***. These leases are participated out to the other banks. Go back to Text

2 A related interest is defined to be (1) a company controlled by a person or (2) a campaign committee controlled by or benefitting a person. (§ 215.2(k)). A person controls a company for the purposes of Regulation O if he/she (1) owns, controls, or has the power to vote 25 percent of the stock of the company, (2) controls in any manner the election of a majority of the directors of the company, or (3) has the power to exercise a controlling influence over the management or policies of the company. Go back to Text

3 A participation with recourse is considered to be an extension of credit by the originating bank. Go back to Text

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