[LRobbins]

I am seeking some advice in regards to Reg W. Would the 130% collateral coverage ratio be applicable to this loan scenario: Loan applicant/borrower is purchasing a piece of real estate from an LLC that is owned by two director/stockholders of the bank that will be financing the purchase. These two bank directors collectively have controlling interest and own over 50% interest in the said bank. I realize that Reg O is applicable, but what about Reg W?

[jholzknecht]

Regulation W require a 130% collateral ratio in a transaction with an affiliate that is secured by real property. It appears that the LLC is an affiliate of the financial institution, but the transaction appears to be with an unaffiliated borrower. However Section 223.16(a) 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.”

I am not sure I agree with your conclusion regarding Regulation O.
• The loan is not made to any insider.
• There is no indication that the loan is guaranteed by the insiders.
• An extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider. However an extension of credit is not considered made to an insider if:
o The credit is extended on non-preferential terms; and
o The proceeds of the extension of credit are used in a bona fide transaction to acquire property, goods, or services from the insider.

[LRobbins]

Thanks Jack! So, you are saying that the 130% Reg W collateral coverage is applicable for this loan? Also, Reg O is not applicable if the credit is extended on non-preferential terms, and the proceeds of the credit are used in a bona fide transaction to acquire property, correct?

[jholzknecht]

Yes. Under both Regulations O and W the loan is not made to an insider, it is made to a third party. The issue here is the tangible economic benefit that flows from the actual borrower to the insiders. The issue is handled differently under Regulations O and W.

[LRobbins]

Thank you for your response!

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