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 insurance sales? 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 life insurance? 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 consumer by: (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 CFR 343.40) * Not a deposit * Not FDIC-insured * Not insured by any federal government agency * 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: compliance@aba.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 each item. SEPTEMBER 2014 | ABA BANKING JOURNAL | 43

Table of Contents for the Digital Edition of ABA Banking Journal - September 2014

Chairman's View
Editor's Column
The Economy
Bank Notes
Picture This
Sales of insurance pay off
Pass the Aspirin
Payment trends: Threat or opportunity?
Working together to protect against identity theft
Tech Topics
Compliance Inbox
Around the ABA
First Person

ABA Banking Journal - September 2014

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