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4000 - Advisory Opinions

Regulation O: Employment Compensation Package


July 28, 1980

Pamela E. F. LeCren, Attorney

Your letter of June 26, 1980 to FDIC's Madison Regional Office has been forwarded to the Legal Division of the Washington, D.C. Office for reply. According to your letter and its supporting documentation (letter dated February 26, 1980 to ***) entered into an employment agreement earlier this year with *** whereby *** was hired as senior vice president of *** and was to be elected to the board of directors. The employment compensation package included a commitment by *** to finance the purchase of *** personal residence "on regular bank terms" but with interest at 10 percent. *** assumed his position at *** on March 17, 1980.

The employment compensation package extended to *** does, in our opinion, present a potential problem under Federal Reserve Board Regulation O (12 C.F.R. Part 215). In general, Regulation O requires that a bank, in making extensions of credit to its executive officers,1 deal with those persons as if they were members of the general public. Section 215.4(a) of Regulation O provides that all extensions of credit made to executive officers must be made on substantially the same terms, including interest rate and collateral, as those extended to persons not employed by the bank. If the terms of the loan to *** are not substantially the same as those that would be extended an equally creditworthy customer not employed by the bank, the loan would be in violation of section 215.4(a) of Regulation O.2

We are not persuaded that Regulation O is inapplicable simply because the loan arrangement was part of an employment compensation package. The bank is free to negotiate the terms of employment to be offered prospective employees, however, those terms may not violate any Federal law or regulation. If we were to find that such an employment compensation package were not subject to Regulation O because at the time of the commitment the individual was not an executive officer, the prohibitions of the statute and its implementing regulations would be significantly weakened in cases such as this where the commitment was entered into in contemplation of the individual assuming the responsibilities of a director or executive officer.

We are unable to determine whether or not the loan in question is in violation of section 215.4(a) as we do not have sufficient facts. If the loan is in violation of that section, it will have to be renegotiated on terms that would have been available to *** had he not been about to assume a position at the bank. The bank is free to raise *** salary to compensate him for the alteration of the terms of his loan if it should desire to do so. Regulation O only applies to extensions of credit. A bona fide salary does not fall within the definition of extension of credit as used in Regulation O (section 215.3).

Should you have any questions regarding the substance of this opinion or Regulation O in general, please contact me.

1 Section 215.2(d) defines an executive officer as someone who participates or has the authority to participate in major policymaking functions. The term is presumed to include every vice president of a bank. Go back to Text

2 Regulation O prohibits a bank from making loans as a matter of course to its executive officers, directors, and principal shareholders at rates below those offered to members of the general public. A bank "insider" may receive better terms than another borrower if he or she qualifies for such terms and other similarly situated borrowers may receive those terms. Go back to Text

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