ABA Banking Journal - September 2014 - (Page 43)
ABA COMPLIANCE CENTER | INBOX
Does new chairman have an insider loan problem now?
Q. "Mr. Smith" sits on our board
and is a shareholder. He was just
appointed the chairman. In that
capacity, he is fully involved with any
board decisions. Currently, he has
a $300,000 business line-of-credit
which he has personally guaranteed.
As I interpret the regulatory commentary, "Mr. Smith" would be
considered an executive officer.
Likewise, I understand the regulation to state that the lending limit
to him would be $100,000. I need
to know if I am on the right track,
or if I've overlooked other factors
to establish lending limits. The
business line of credit matures this
month. If we have exceeded the
legal limit under the regulation,
what action would we need to take?
A. You are essentially "on track" with
your analysis.You are correct in that
a chairman is generally considered
an "executive officer." This would be
the case unless the officer is excluded,
by resolution of the board or by the
bylaws of the bank or company, from
participation-other than in the capacity of a director-in major policymaking functions of the bank or company,
and the officer does not actually participate therein.
As to the $100,000 limit, this limit
applies to loans to "executive officers"
for "other purposes"; i.e., those purposes not permitting higher amounts,
such as an extension of credit to
finance the education of the "executive
officers' " children, or to finance or
refinance the purchase, construction,
maintenance, or improvement of a
residence of the "executive officer" as
long as it is owned by the "executive
officer" and is secured by a first lien.
And whereas an extension of credit
to an entity other than a partnership or
directly to an "executive officer" would
typically not be subject to this limit,
the fact that he personally guaranteed
the loan would mean that it would, in
fact, be subject to the limit.
Finally, as to what "action"
needs to be taken: Nothing needs to
be done currently, yet future actions
may be warranted.
An existing loan made prior to
(or before anticipation of) a person
becoming an "executive officer"
or 'insider' is considered a "nonconforming loan." This means that it
would not currently violate the regulation. However, such a loan may not
be renewed, refinanced, or otherwise
modified, nor may new extensions of
credit be originated, until such time as
the "executive officer" is able to comply with the requirements.
Therefore, the $300, 000 line of
credit personally guaranteed by the
new chairman would not be a violation
if made prior to, or before anticipation
of, his becoming an "executive officer."
Yet that loan could not be renewed or
refinanced when it matures this month
(nor would new loans be able to be
made) unless the aggregate of "other
purpose" loans are brought into compliance with the $100K limit. (Response
provided August 2014.)
What disclosures apply to
Q. When advertising credit insurance for a loan the required disclosures include: not a deposit,
not FDIC-insured; not insured by
any federal agency; not guaranteed
by the bank; and may go down in
value. Is such disclosure applicable
when advertising car insurance and
A. Yes. The disclosures apply to car or
life insurance products and apply in
connection with retail sales practices,
solicitations, advertising, or offers of
any insurance product or annuity to a
(a) Any bank; or
(b) Any other person that is engaged
in such activities at an office of the
bank or on behalf of the bank.
Disclosures must be readily understandable and used "as appropriate."
The disclosures provided shall be
conspicuous, simple, direct, readily
understandable, and designed to call
attention to the nature and significance of the information provided.
For instance, you may use the following disclosures in visual media,
such as TV, ATM screens, billboards,
signs, posters, and written advertisements and promotional materials, as
appropriate: (See the OCC's rule at
12 CFR 14.40; the Fed's rule at 12
CFR 208.84, or the FDIC's rule 12
* Not a deposit
* Not FDIC-insured
* Not insured by any federal
* Not guaranteed by the bank
* May go down in value
The "as appropriate" means that if
any of those disclosures are not appropriate to the product, you are advertising, you can remove it. For example,
"May go down in value" could be
removed from an advertisement for
car insurance and for some types of life
insurance. Remember, too, that under
FDIC advertising rules, you cannot
advertise a non-deposit product and
a deposit product together unless
you can make very clear distinctions
regarding FDIC coverage.(Response
provided August 2014.)
Leslie Callaway, CRCM,
ABA Compliance Project
Manager, and Mark Kruhm,
CRCM, ABA Senior Compliance
Analyst, and other ABA experts,
answer member questions here.
Member banks may submit
them to: email@example.com.
Disclaimer: Our answers do not
provide, nor are they intended to
substitute for, professional legal
advice. Answers were current
as of date shown at the end of
ABA BANKING JOURNAL
Table of Contents for the Digital Edition of ABA Banking Journal - September 2014
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Pass the Aspirin
Payment trends: Threat or opportunity?
Working together to protect against identity theft
Around the ABA
ABA Banking Journal - September 2014