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Section 223.16 of Reg. W states that a member bank must treat any of its transactions with any person as a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, an affiliate.
We have a customer who is purchasing farmland from an LLC. The LLC is owned, in part, by two Board members (who are brothers) of the bank. Together they own 41.67% of the LLC and they also own 32.48% of the bank, so the LLC appears to be an affiliate of the bank based on control.
My question is this, since the proceeds of the loan will be paid to the LLC, will Reg. W apply to this transaction?
Thank you.
It seems like it would qualify and Reg W would be applicable. If you are comfortable doing so, since this is a unique situation and the transaction hasn’t been completed yet (still time to comply), it might be a good idea to run this scenario by your regulator to get their input.
What about the collateral requirements of 223.14? We have made sure the loan meets the standards from a safety and soundness standpoint, however do we need to require additional collateral to meet the 130% requirement? That doesn’t sound like the intent of the regulation when its a true arms length transaction but I’m not sure on the collateral part.
Thanks.
I think you already understand that Regulation W is an extremely complicated regulation. Based on the very few details provided it appears the transaction is covered by Regulation W. If that is the case, it appears that the collateral requirements are applicable. The applicable collateral margin requirement appears to be 130%.
There is also a possibility that Section 215.3(f) (Tangible Economic Benefit) of Regulation O (Lending to Insiders) could apply. We suspect that the exemption under 215.3(f)(2) would prevent coverage, but the matter should be explored.
Before moving forward with the loan we suggest that your bank obtain a legal opinion on the applicability of both Regulation O and Regulation W. The potential liability to your bank and your board for a violation of either regulation is considerable.
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