Pub. 6 2016-2017 Issue 3

Regulation O—A Quick Refresher A s much of the to-do surrounding TRID and the recent flood changes dies down, many financial institutions are finding themselves preoccupied with those old standby compliance concerns, like Regulation O and loans made to insiders. While there have been many tweaks and changes to other rules, RegulationOhas remained fairly static. But it’s always important to circle back to a few of the quirks that make this particular regulation one of the more difficult ones with which to comply. Below are a few of the regulation’s finer points that have come up in the course of answering recent questions from our members: Home Loans to Executives Typically, financial institutions are (typically) capped at $100,000 of loans to executives, per 12 CFR § 215.5(c)(4) of Regulation O, unless those loans fall into one of a select few categories. One such category is for first lien loans on dwell - ings. Many executives will spot this exception and instantly assume they can take a cash-out loan on their 100%-owned dwelling, regardless of the amount of that loan. But not so fast! §215.5(c)(2) states, “A member bank is authorized to extend credit to any executive officer of the bank: . . . In any amount to finance or refinance the purchase, construction, mainte - nance, or improvement of a residence of the executive officer, provided: (i) The extension of credit is secured by a first lien on the residence and the residence is owned (or expected to be owned after the extension of credit) by the executive offi - cer; and (ii) In the case of a refinancing, that only the amount thereof used to repay the original extension of credit, together with the closing costs of the refinancing, and any additional amount thereof used for any of the purposes enumerated in this paragraph (c)(2), are included within this category of cred - it[.]” So it’s not as simple as just any first lien loan on a dwelling being exempted. The executive must own the dwelling, and the loan must be “In any amount to finance or refinance the purchase, construction, maintenance, or improvement ” of a residence. Non-construction cash-out loans on a home that an executive owns outright do not count for this exception, and therefore must go toward an executive’s $100,000 cap. Furthermore, this exemption only applies to “a” residence, rather than “any” residence, meaning that it only works for one first lien loan on one home, regardless of however many homes an executive may own. CD-Secured Loans to Executives On the flipside, one type of executive loan that always will qualify as an exception to the $100,000 cap is a loan fully secured by a segregated certificate of deposit (CD) at the bank. Section 215.5(c)(3) allows for “extension[s] of credit . . . secured in a manner described in §215.4(d)(3)(i)(A) through (d)(3)(i) (C) of this part[.]” Section 215.4(d)(3)(i)(C), in turn, describes, “Extensions of credit secured by a perfected security interest in a segregated deposit account in the lending bank[.]” Long story short: if your institution plans to make a loan to an executive, and that loan is running up close to the executive’s $100,000 cap, make sure the loan is secured by a segregated CD at your institution in (at least) the full amount of the loan, and you shouldn’t have any problems with exceeding the cap. Don’t forget a tricky aspect of this exception: the loan must be fully secured by the CD. So, for instance, if a $150,000 loan is partially secured by a $100,000 CD, all of that $150,000would count toward the $100,000 cap because the loan is not fully secured by the CD, therefore yielding a Regulation O violation. Loaning to Insiders Under “Lines of Credit” Confusion continues to abound regarding extending credit to insiders under “lines of credit.” Despite section 215.3(a)’s statement that an “extension of credit” includes “a granting of a line of credit,” prior treasury opinions have indicated that loose “lines of credit” and “extensions of credit” are not the same thing; rather, each individual extension of credit made under a line should be treated as an “extension of credit” in and of itself and, for the most part, must comply with Regulation O as if it were a single loan existing outside the line. I say “for the most part” because there is one notable exception: prior board reporting. Section 215.4(b)(3) states that any extension of credit granted under a pre-existing line of credit does NOT need prior board approval if it “is made pursuant to a line of credit that was approved . . . within 14 months of the date of the extension of credit.” As a result, many institutions will have a loose line of credit to their insiders, which they will renew annually, thereby removing the requirement for prior board approval for each individual extension of credit grant - ed under that line. That is fine, but just keep in mind that for parts of the regulation other than prior board approval, every extension made under the line must be considered a single “extension of credit.” Regulation O has remained fairly steady through a stretch of rough seas in the compliance field; nevertheless, as it is a favorite target of federal examiners, it’s crucial to check back with the provisions of this complicated regulation to ensure it is being followed correctly. It’s also important to keep one’s eyes on the horizon for any surprise Regulation O changes that may spring up in the future, so make sure to stick with Compliance Alliance for all your Regulation O and insider lending updates. n James McGuire has worked as an attorney and legal researcher in the financial industry since 2010. After graduating from the University of Minnesota Law School in 2007, he served as As - sistant General Counsel for the Texas Attorney General in the Open Records Division, and later worked as a solo practitioner in the Austin area. Prior to joining Compliance Alliance in July of 2015, James assisted a major mortgaging servicer with the OCC’s independent foreclosure audit and was an SEC filing researcher for a major financial and legal research firm. He has extensive first-hand experience with open records, mortgage servicing, consumer law and securities regulation. Compliance Alliance offers a wide variety of compliance support solutions. To learn how to put them to work for your bank, call us at (888) 353-3933 or visit compliancealliance.com . BY JAMES MCGUIRE