We have a loan request from an entity that is substantially owned by two of our board members. These two board members are also substantial owners of our bank, roughly 75%. The size of the loan is greater than $100,000 and does not fit any of the exceptions provided in Reg O. We have a total of five directors on the Board. Three of the board members are not financially interested in the borrower but one of these is related (daughter) to one of the interested borrowers. The daughter is more than 21 years of age. Provided the three directors (not owners of the borrower) approve to grant the loan, will the bank be in compliance with Reg O?
You have not provided the information needed to determine if your bank is in compliance with Regulation O.
Let’s begin with an observation. Your scenario appears to involve a related interest of two of your directors. Your question mentions a loan size of $100,000 and exceptions. That language arises when discussing loans to an executive officer, which does not appear to be the case with your transaction.
Your transaction may be subject to several major rules contained in Regulation O.
* – Transactions with insiders cannot be done on preferential terms. You did not list the terms of the transaction.
* – When loans exceed a certain threshold then subsequent loans must receive prior approval. You did not provide information about the transaction amount or the amount of total debt of the borrower.
* – There is a lending limit for transactions with an insider. You did not provide information about the transaction amount or the amount of total debt of the borrower.
With the levels of ownership mentioned in your question this may also be a transaction with an affiliate, which is subject to additional limits and restrictions under Section 23a of the Federal Reserve Act.