[Federal Register Volume 72, Number 105 (Friday, June 1, 2007)]
[Rules and Regulations]
[Pages 30470-30472]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-10402]


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FEDERAL RESERVE SYSTEM

12 CFR Part 215

[Regulation O; Docket No. R-1271]


Loans to Executive Officers, Directors, and Principal 
Shareholders of Member Banks

AGENCY: Board of Governors of the Federal Reserve System (``Board'').

ACTION: Final rule.

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SUMMARY: The Board is adopting amendments to the Board's Regulation O 
to eliminate certain reporting requirements. These amendments implement 
section 601 of the Financial Services Regulatory Relief Act of 2006.

DATES: Effective July 2, 2007 the interim rule published December 11, 
2006 ( 71 FR 71472, Dec. 11, 2006), is adopted as final without change.

FOR FURTHER INFORMATION CONTACT: Mark E. Van Der Weide, Senior Counsel 
(202-452-2263), or Amanda K. Allexon, Attorney (202-452-3818), Legal 
Division. Users of Telecommunication Device for the Deaf (TTD) only, 
contact (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

Background

    Section 22(h) of the Federal Reserve Act (``FRA'') restricts the 
ability of member banks to extend credit to their executive officers, 
directors, principal shareholders, and to related interests of such 
persons.\1\ Section 22(g) of the FRA imposes some additional 
limitations on extensions of credit made by member banks to their 
executive officers.\2\ Section 106(b)(2) of the Bank Holding Company 
Act Amendments of 1970 (``BHC Act Amendments'') adds further 
restrictions on extensions of credit to an executive officer, director, 
or principal shareholder of a bank from a correspondent bank.\3\ The 
Board's Regulation O implements sections 22(g) and 22(h) of the FRA, as 
well as section 106(b)(2) of the BHC Act Amendments.\4\ Sections 22(g) 
and 22(h) and Regulation O apply, by their terms, to all banks that are 
members of the Federal Reserve

[[Page 30471]]

System.\5\ Other Federal law subjects Federally insured state non-
member banks and Federally insured savings associations to sections 
22(g) and 22(h) and Regulation O in the same manner and to the same 
extent as if they were member banks.\6\
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    \1\ 12 U.S.C. 375b.
    \2\ 12 U.S.C. 375a.
    \3\ 12 U.S.C. 1972(2).
    \4\ 12 CFR part 215.
    \5\ Section 106(b)(2) of the BHC Act Amendments applies by its 
terms to insured banks, mutual savings banks, savings banks, and 
savings associations.
    \6\ 12 U.S.C. 1828(j), 1468(b); 12 CFR 563.43.
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    Section 601 of the Financial Services Regulatory Relief Act of 2006 
(``Act'') (Pub. L. No. 109-351) removed several statutory reporting 
requirements relating to insider lending by member banks. These 
amendments, which became effective on October 13, 2006, eliminated the 
statutory provisions that:
     Require a member bank to include a separate report with 
its quarterly Reports of Condition and Income (``Call Report'') on any 
extensions of credit the bank has made to its executive officers since 
its last Call Report (12 U.S.C. 375a(9));
     Require an executive officer of a member bank to file a 
report with the member bank's board of directors whenever the executive 
officer obtains an extension of credit from another bank in an amount 
that exceeds the amount the executive officer could obtain from the 
member bank (12 U.S.C. 375a(6));
     Require an executive officer or principal shareholder of a 
depository institution to file an annual report with the institution's 
board of directors during any year in which the officer or shareholder 
has an outstanding extension of credit from a correspondent bank of the 
institution (12 U.S.C. 1972(2)(G)(i)); and
     Authorize the Federal banking agencies to issue 
regulations that require the reporting and public disclosure of 
information related to extensions of credit received by an executive 
officer or principal shareholder of a depository institution from a 
correspondent bank of the institution (12 U.S.C. 1972(2)(G)(ii)).
    In December 2006, the Board adopted, and sought public comment on, 
an interim rule that implemented the changes made by section 601 of the 
Act.\7\ In particular, the interim rule eliminated:
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    \7\ 71 FR 71472 (Dec. 11, 2006).
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     Section 215.9 of Regulation O, which requires an executive 
officer of a member bank to file a report with the member bank's board 
of directors whenever the executive officer obtains certain extensions 
of credit from another bank;
     Section 215.10 of Regulation O, which requires a member 
bank to include a separate report with its quarterly Call Report on any 
extensions of credit the bank has made to its executive officers since 
its last Call Report; and
     Subpart B of Regulation O, which requires the reporting 
and public disclosure of extensions of credit to an executive officer 
or principal shareholder of a member bank by a correspondent bank of 
the member bank.
    The interim rule also made minor conforming changes to Regulation O 
to reflect the removal of these provisions.

Analysis of Comments and Description of Final Rule

    The Board received six comments on the interim rule: three from 
banks, two from bank trade associations, and one from an individual. 
The banks and trade associations supported the interim rule and the 
associated reduction in regulatory reporting burden. The individual 
commenter criticized the interim rule and stated that public reporting 
is an important device for preventing financial scandals.
    After reviewing the public comments on the interim rule, the Board 
has determined to adopt a final rule that is identical to the interim 
rule. Although the Board agrees that appropriate public reporting by 
depository institutions can be an effective mechanism of market 
discipline, the Board believes that elimination of these regulatory 
reporting requirements is consistent with the letter and spirit of the 
Act. In addition, the Board has long supported eliminating these 
reporting provisions because the Board has found that they did not 
contribute significantly to the effective monitoring of insider lending 
or the prevention of insider abuse.
    One commenter urged the Board to take steps to ensure that 
depository institutions recognize that section 601 of the Act and this 
final rule do not alter the underlying substantive insider lending 
restrictions in Federal law. The Board shares the concern expressed by 
this commenter. The Board notes that the changes made by section 601 
and the final rule do not alter the substantive restrictions on loans 
by depository institutions to their executive officers and principal 
shareholders found in Regulation O. In addition, section 601 and the 
final rule do not alter the substantive restrictions on loans made to 
executive officers and principal shareholders of depository 
institutions by their correspondent banks found at 12 U.S.C. 1972(2). 
To address the shared concerns of the Board and this commenter, the 
Board has amended the scope section of Regulation O (12 CFR 
215.1(b)(4)) to remind depository institutions of the correspondent 
bank insider lending restrictions.
    The Board also notes that elimination of these reporting 
requirements does not limit the authority of the appropriate Federal 
banking agency to take enforcement action against a depository 
institution or its insiders for violation of the Federal insider 
lending restrictions. Moreover, Regulation O would continue to require 
that a depository institution and its insiders maintain sufficient 
information to enable examiners to monitor the institution's compliance 
with the regulation,\8\ and the Federal banking agencies would retain 
authority under other provisions of law to collect information 
regarding insider lending by depository institutions.
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    \8\ 12 CFR 215.8.
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    Two commenters requested that the Board eliminate section 
215.5(d)(4) of Regulation O in light of the elimination of section 
215.9 of the rule. Section 215.5(d)(4) of Regulation O requires a 
member bank to make any extension of credit to an executive officer 
``subject to the condition in writing that the extension of credit 
will, at the option of the member bank, become due and payable at any 
time that the officer is indebted to any other bank or banks'' on non-
mortgage, non-educational loans in excess of a specific dollar 
threshold (typically $100,000).\9\ Section 215.9 of Regulation O 
previously required a member bank's executive officer to report to the 
bank's board of directors within 10 days of the date that the officer 
becomes indebted to other banks on non-mortgage, non-educational loans 
in excess of the same dollar threshold (typically $100,000).
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    \9\ 12 CFR 215.5(d)(4).
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    The ``due on demand clause'' requirement contained in section 
215.5(d)(4) of Regulation O derives directly from section 22(g)(1)(D) 
of the Federal Reserve Act.\10\ Accordingly, the Board does not have 
authority to eliminate this Federal insider lending restriction. The 
Board notes, however, that the continued existence of section 
215.5(d)(4) does not make the elimination of section 215.9 ineffective. 
A bank must continue to include the section 215.5(d)(4) ``due on 
demand'' clause in each of its extensions of credit to executive 
officers, but Regulation O no longer requires the specific internal 
reporting regime of former section 215.9 to ensure the utility of the 
due on demand clause. Going forward, a bank may choose to ensure the 
effectiveness of the due on demand clause requirement in any reasonably 
prudent

[[Page 30472]]

way. For example, a bank may comply with the requirement by mandating a 
periodic report from its executive officer borrowers. Alternatively, a 
bank may decide to obtain information about an executive officer 
borrower's indebtedness to other banks only at the time the bank would 
be interested in exercising the due on demand clause (for example, when 
the creditworthiness of the officer has dropped materially). Either of 
these methods could, based on all the facts and circumstances, be a 
reasonable way to ensure the utility of the due on demand clause 
requirement.
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    \10\ 12 U.S.C. 375a(1)(D).
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    The Board also has received numerous inquiries about how a bank can 
ensure compliance with the correspondent lending restrictions in 12 
U.S.C. 1972(2), given that all related reporting requirements are being 
eliminated as part of this rulemaking. Briefly, the correspondent 
lending restrictions in 12 U.S.C. 1972(2) require, among other things, 
that extensions of credit by a bank to an insider of a correspondent 
bank be on market terms. In light of the elimination of the statutory 
and regulatory reporting requirements associated with 12 U.S.C. 
1972(2), a bank may select any reasonably prudent method to ensure 
compliance with the restrictions. For example, a bank may establish 
policies and procedures to request additional information about a 
borrower's relationships with correspondent banks when the bank 
determines that a prospective extension of credit to the borrower will 
be on preferential terms.
    Finally, one commenter asked the Board to raise the $100,000 
``other purpose'' loan cap in section 215.5(c)(4) of Regulation O and 
to raise the $500,000 prior board approval threshold in section 
215.4(b)(2) of the rule.\11\ The Board has determined not to raise 
these dollar amounts as a part of this rulemaking but intends to 
consider raising these limits, in consultation with the other Federal 
banking agencies, in connection with an upcoming comprehensive review 
of Regulation O.
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    \11\ See 12 CFR 215.5(c)(4) and 215.4(b)(2).
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Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Board certifies that the final rule would not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). 
Although the final rule would apply to all member banks regardless of 
their size, the rule would reduce the regulatory burden on member 
banks, including small member banks, by removing requirements to report 
certain types of extensions of credit to insiders and to insiders of 
correspondent banks. Accordingly, a regulatory flexibility analysis is 
not required.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget.
    The collections of information that are revised by this rulemaking 
are found in 12 CFR 215.9 and 215.10, and 12 CFR part 215, subpart B. 
This information previously was required to evidence compliance with 
the requirements of the Federal Reserve Act (12 U.S.C. 375a and 375b) 
and 12 U.S.C. 1972. The respondents/recordkeepers are for-profit 
financial institutions, including small businesses, and individuals.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, an information collection unless it 
displays a currently valid OMB control number. The OMB control number 
associated with 12 CFR 215.9 and 12 CFR part 215, subpart B was 7100-
0034 (FFIEC 004). The OMB control number associated with 12 CFR 215.10 
was 7100-0036 (FFIEC 031 and 041).
    The FFIEC 004 was discontinued as a result of this rule as of 
December 31, 2006. The total amount of annual burden estimated to be 
saved as a result of this aspect of the rule is 5,331 hours. The 
estimated annual cost savings are $239,895. In addition, the last page 
of the FFIEC 031 and 041 reporting forms (loans to executive officers), 
which is associated with 12 CFR 215.10, was eliminated as a result of 
this rule as of December 31, 2006. The total amount of annual burden 
estimated to be eliminated as a result of this aspect of the rule is 
919 hours and there are estimated to be minimal cost savings.
    For the FFIEC 004, individual respondent financial information was 
regarded as confidential under the Freedom of Information Act (5 U.S.C. 
552(b)(4), (6) and (8)). However, until the passage of the Act and the 
issuance of the interim rule, upon request from the public the member 
bank was required to disclose the name of each executive officer and 
principal shareholder who, together with related interests, has loans 
from correspondent banks equal to a minimum of 5 percent of the member 
bank's capital and surplus, or $500,000, whichever was less. The FFIEC 
031 and 041 data on loans to executive officers were not considered 
confidential.
    Five of the six commenters, representing banks and bank trade 
associations, supported the reduction in reporting burden associated 
with the interim rule. One individual's comment criticized the interim 
rule and noted that public reporting is an important device for 
preventing financial scandals. However, the Federal Reserve believes 
that the elimination of these reporting requirements is consistent with 
the letter and spirit of the Act, and will make the reporting changes, 
as proposed.
    The Federal Reserve has a continuing interest in the public's 
opinions of our collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0034 or 7100-
0036), Washington, DC 20503.

Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (12 U.S.C. 4809) requires 
the Board to use ``plain language'' in all rules published in the 
Federal Register. The Board has sought to present the final rule in a 
simple and straightforward manner.

List of Subjects in 12 CFR Part 215

    Credit, Penalties, Reporting and recordkeeping requirements.

Authority and Issuance

0
For the reasons set out in the preamble, the interim rule published 
December 11, 2006 (71 FR 71472, Dec. 11, 2006) is adopted as final 
without change.


    By order of the Board of Governors of the Federal Reserve 
System, May 25, 2007.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E7-10402 Filed 5-31-07; 8:45 am]
BILLING CODE 6210-01-P