FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Clarification of Certain Requirements Regarding Limits on Loans to Executive Officers
August 20, 1992
Jeffrey B. Hill, Senior Regional Attorney
We have been asked by Regional Director James O. Leese to respond to your request for clarification of certain requirements regarding limits on loans to executive officers of state nonmember banks as provided in section 337.3 of the FDIC Rules and Regulations ("section 337.3") and section 215 ("section 215") of Federal Reserve Board Regulation O ("Regulation O"), both of which were recently amended.1 Specifically, you ask a series of questions about certain of the amendments and request our review for accuracy of the summary of Federal and South Dakota limits on loans to executive officers which your office developed. Your specific questions are addressed first, and our comments regarding your summary follow thereafter. We took the opportunity to confirm certain of these positions with the FDIC's Washington Office. We apologize if the time taken to respond has caused any inconvenience.
You ask whether the "exceptions" of section 337.3(a) as amended, to be codified at 12 C.F.R. § 337.3(a) (1992), continue to apply in light of the amendment of section 215.5(a), footnote 4, as amended ("the footnote"), to be codified at 12 C.F.R. § 215.5(a) n.4 (1992). You state that there is a nexus between section 337.3(a) and the footnote because they both reference certain sections of Regulation O.
Section 337.3(a) remains in effect.2 It is not modified by, nor does it conflict with, section 215.5(a), footnote 4. The footnote prior to its amendment stated, among other things, that section 215.5 and certain other sections of Regulation O implemented section 22(g) of the Federal Reserve Act and did not apply to nonmember banks. As amended, the footnote now states that section 215.5 and certain other sections of Regulation O implement section 22(g) of the Federal Reserve Act. The footnote no longer addresses whether said sections apply to nonmember banks. The application of section 22(g) of the Federal Reserve Act to insured nonmember banks is now addressed in section 337.3(a). While section 215.5 is generally applied to insured nonmember banks by section 337.3(a), the section provides that certain portions of section 215.5 (i.e., sections 215.5(b) and 215.5(c)(3)) are not applicable. Section 337.3(a) creates this exception because sections 337.3(c)(1) and 337.3(c)(2) as amended are substantially similar to the excepted portions of section 215.5. See, 57 Fed. Reg. 17847, 17850-17851 (April 28, 1992). Additionally, the FDIC has chosen not to adopt the disclosure requirements of section 215.11.
Applicable Loan Limit.
You note that, notwithstanding the amendment of section 337.3 and section 215, there remain differences between the federal and South Dakota (the "State") limits on loans to executive officers. You ask whether there has been a directive prepared for FDIC examiners addressing which limit applies under certain circumstances. No such directive has been prepared. The Kansas City Region of the FDIC (the "Region") continues to apply section 215.2(h), footnote 2, of Regulation O,3 12 C.F.R. § 215.2(h) n.2, which provides:
Where the State law establishes a lending limit for a State member bank that is lower than the amount permitted in section 5200 of the Revised Statutes, the lending limit established by applicable State laws shall be the lending limit for the State member bank.
In determining which limit is lower, the Region compares the State and federal lending limits in their entirety (i.e., not just the percentage limits, but also exceptions to such limits).
You also ask whether the State's limit on a loan to an executive officer secured by the residence, set out in the Administrative Regulations of South Dakota ("ARSD") 20:07:03:15(1), is more restrictive4 than the federal limit stated as section 215.5(c)(2), 12 C.F.R. § 215.5(c)(2).5 You suggest that the State's limit is more restrictive than the limit in Regulation O because section 215.5(c)(2) contains no limit on the amount that may be extended, only on the way the proceeds may be used.
Regulation O has limits on the amount of credit which may be extended to an executive officer. In some circumstances, the federal limit could result in an amount lower than the State's amount, and will be the limit applied pursuant to section 215.4(c) as amended, 57 Fed. Reg. 22417, 22425 (May 28, 1992), to be codified at 12 C.F.R. § 215.4(c). Section 215.4(c) provides, in pertinent part:
No member bank may extend credit to any of its executive officers, . . . in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in § 215.2(h) of this part. (Emphasis added.)
The limit established in section 215.2(h) is, generally, 15 percent of the bank's unimpaired capital and unimpaired surplus and an additional 10 percent of the bank's unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan. These percentage limits were unchanged by the recent amendments of Regulation O, but they are now applied to "unimpaired" capital and "unimpaired" surplus rather than "capital stock."
In addition, newly added section 215.4(d), 57 Fed. Reg. 22417, 22425 (May 28, 1992), to be codified at 12 C.F.R. § 215.4(d), sets an aggregate limit on extensions of credit to all "insiders."6 The overall limit, pursuant to section 215.4(d)(1), is the amount of the bank's unimpaired capital and unimpaired surplus. For banks with deposits of less than $100 million, under certain circumstances until May 18, 1993, pursuant to section 215.4(d)(2), the aggregate amount may be twice that of the bank's unimpaired capital and unimpaired surplus.
The lending limits of sections 215.4(c) and 215.4(d) apply, as previously noted, to all extensions of credit to an executive officer by a bank, notwithstanding language in section 215.5(c)(2) which provides, in pertinent part:
A member bank is authorized to extend credit to any executive officer of the bank: . . . (2) In any amount to finance the purchase, construction, maintenance or improvement of a residence of the executive officer . . . . (Emphasis added.)
Despite the fact that section 215.5(c)(2) states that certain extensions of credit to executive officers may be made "in any amount," extensions of credit by an insured bank to an executive officer are, nevertheless, subject to the lending limits of sections 215.4(c) and 215.4(d).7 As previously stated, the amount of the federal limit stated in section 215.4(c) would be the applicable Regulation O limit for extending credit to executive officers if the amount permitted to be extended as credit to the executive officer for the purchase, etc., of a residence is less than the State's $150,000 limit. For example, if an insured State bank has unimpaired capital and unimpaired surplus of $750,000, assuming there have been no other loans made to the executive officer, pursuant to the federal limit stated in section 215.4(c), the amount which may be extended as credit to an executive officer for the purchase of a house may not exceed $112,500 (i.e., which is less than the State's $150,000 limit), and the federal limit, rather than the State limit, will be applied for purposes of determining the bank's compliance with Regulation O.
Comments on Summary
1. Summary page 1, concerning limits on loans to executive officers, in points 1 and 2 under the "Federal" heading: as previously noted, extensions of credit to an executive officer for the education of his or her children or the purchase, etc., of a residence is limited by sections 215.4(c) and 215.4(d), notwithstanding the "in any amount" language in section 215.5(c). As a result, it is incorrect to make the statement in the last paragraph of page 1 that the State limit always will be more restrictive. As the previously stated example demonstrates, there may be certain circumstances where the federal limit may be more restrictive than the State limit.
2. Summary page 2, concerning limits on loans to each insider, under the paragraph labeled "Federal": the summary states that "readily marketable collateral" will suffice as security for the 10 percent addition to the lending limit of section 215.4(c). This may be misleading to the extent that it suggests that all such collateral will suffice. The fact that the collateral's market value must be determinable from available price quotations is a key element for compliance with the lending limit which does not appear in the summary.
3. Summary page 2, last paragraph: the statement is correct as far as it goes, but you might consider adding that the aggregate lending limit of section 215.4(d) applicable to the credit extended to all bank insiders is also applicable in concert with that limit in section 215.4(c) and the specific purpose limits of section 215.5.
4. Summary page 3, concerning aggregate loan limits for all insiders, in the paragraph below the heading "Federal": the summary does not note the exception to the general rule, i.e., that until May 18, 1993, banks with deposits of less than $100 million may choose to
operate with a lending limit for insiders of two times the bank's unimpaired capital and unimpaired surplus if they comply with certain condition's precedent.
I trust this is responsive to your request. Please note that this opinion letter is provided as a public service, and in an effort to enhance understanding the statutes and regulations administered by the FDIC. This letter expresses the views and opinions of an individual FDIC staff attorney of the Kansas City Regional Counsel's Office and is not binding on the FDIC, its Board of Directors, or any board member, and any representation to the contrary is expressly disclaimed.
If you have any questions, please call.
1Section 337.3(a) was amended effective May 18, 1992. See, 57 Fed. Reg. 7647, 7649 (March 4, 1992). It was corrected on June 25, 1992, replacing reference to "section 215.10" with "section 215.11" because the Federal Reserve Board, among other things, redesignated § 215.10 as § 215.11, effective May 18, 1992 (57 Fed. Reg. 22417 (May 28, 1992)). See, 57 Fed. Reg. 28457 (June 25, 1992). Go back to Text
2Section 337.3(a), as amended, provides: "With the exception of § § 215.5(b), 215.5(c)(3), and 215.11, insured nonmember banks are subject to the restrictions contained in subpart A of Federal Reserve Board Regulation O (12 C.F.R. Part 215) to the same extent and to the same manner as though they were member banks." Go back to Text
3This section and footnote are unaffected by the amendments of Regulation O. See, 57 Fed. Reg. 22417, 22424 (May 28, 1992). Go back to Text
4The State regulation provides: "A bank may make the following kinds of loans to an executive officer: (1) A loan not exceeding $150,000 if, at the time the loan is made, it is secured by a first lien on a dwelling which is expected, after the making of the loan, to be owned by the officer and used by him as his residence." Go back to Text
5This section is unaffected by the amendments of Regulation O. See, 57 Fed. Reg. 22417, 22425 (May 28, 1992). Go back to Text
6Pursuant to section 215.2(f) as amended: "Insider' means an executive officer, director, or principal shareholder, and includes any related interest of such a person." See, 57 Fed. Reg. 22417, 22424 (May 28, 1992), to be codified at 12 C.F.R. § 215.2(f). Go back to Text
7See, e.g., the caption of section 215.5 which in apparent recognition of the lending limits of the preceding section 215.4 states: "Additional restrictions on loans to executive officers." (Emphasis added.) Go back to Text