A common issue arising in bank exams during the first quarter of this year has been violations of Reg O as it deals with loans to bank directors. The problem stems from loan renewals.

Certain states and the OCC allow a bank whose capital has shrunk to renew a loan that was within the bank’s legal lending limit when made but which could not be made today based on the smaller capital base.  When renewing loans to directors a number of banks have made the assumption that loans to directors may be renewed in the same manner as loans to other customers.

Unfortunately, this is incorrect and is now resulting in a number of banks being cited for violations of Reg O.  According to the Federal Reserve, a loan renewal must be treated as a new extension of credit for purposes of Reg O analysis. Reg O limits total extensions of credit to any insider and the insider’s related interests to 15 percent of the bank’s unimpaired capital and unimpaired surplus.  This total generally may be increased by an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus to the extent the loans are fully secured by readily marketable collateral.

If the bank’s capital levels have declined since the loan was originally made, such that the loan could not now be made within the Reg O lending limits, the bank may not now renew or restructure that loan.

For further insights into this issue, please contact Jerry Blanchard at Jerry.Blanchard@bryancave.com or 404.572.6804 or your normal Bryan Cave contact.