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4000 - Advisory Opinions

REG O: Whether the Whole Line of Credit Should Be Attributed to an Insider or Only the Portion That the Insider Actually Draws Upon


August 30, 1994

Mark A. Mellon, Senior Attorney

The following is in response to your letter of August 15, 1994 to Michelle Johns, Financial Analyst, FDIC, requesting an opinion regarding the interpretation of section 215.3 of Federal Reserve Board Regulation O (12 C.F.R. 215.3) which is made applicable to insured state nonmember banks by section 337.3 of FDIC regulations (12 C.F.R. 337.3).

In general, 12 C.F.R. Part 215, Regulation O ("Regulation O") limits extensions of credit by depository institutions to "insiders", that is, executive officers, directors and principal shareholders, or to their related interests (any company or political or campaign committee that is controlled by an executive officer, director, or principal shareholder). An extension of credit is considered to be made to an insider or his related interest for purposes of determining lending limits and whether the prior approval of the extension of credit is required by the depository institution's board of directors "at the time the bank enters into a binding commitment to make the extension of credit." 12 C.F.R. 215.3(d); see also 12 C.F.R. 215.4.

You refer to an FDIC advisory opinion dated October 9, 1981 (FDIC--81--22) which states that the granting of a line of credit is not the equivalent of making a binding commitment to extend credit as that term is used in section 215.3(d) of Regulation O because the bank may refuse to lend under the line of credit. The opinion further states that a binding commitment on the part of the bank occurs when a draw is made upon the line of credit and the borrower becomes obligated to the bank for the amount drawn. You inquire whether this advisory opinion is still valid. If it is, you ask further whether it is consequently necessary to report only the drawn portions of lines of credit as extensions of credit attributable to insiders for Regulation O purposes.

Advisory opinions of the FDIC are only applicable to the facts and circumstances which they describe. The FDIC advisory opinion which you cite discussed a line of credit where the issuing bank retained a right of refusal when the borrower drew upon the line of credit. Credit is therefore only extended when the draw is made and the borrower becomes obligated to the bank. In those particular circumstances, we are of the opinion that only the amounts drawn under the line of credit would count for purposes of Regulation O. In a situation, however, where a borrower becomes immediately obligated when the bank grants a line of credit for the whole amount of the line of credit, that entire amount would be taken into consideration for purposes of Regulation O.

I hope that this letter satisfactorily answers your query. Please do not hesitate to contact me if you have any questions.

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