12 USC 375b – Extensions of credit to executive officers, directors, and principal shareholders of member banks
(1) In general
No member bank may extend credit to any of its executive officers, directors, or principal shareholders, or to any related interest of such a person, except to the extent permitted under paragraphs (2), (3), (4), (5), and (6).
(2) Preferential terms prohibited
(A) In general
A member bank may extend credit to its executive officers, directors, or principal shareholders, or to any related interest of such a person, only if the extension of credit—
(i) is made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions by the bank with persons who are not executive officers, directors, principal shareholders, or employees of the bank;
(ii) does not involve more than the normal risk of repayment or present other unfavorable features; and
(iii) the bank follows credit underwriting procedures that are not less stringent than those applicable to comparable transactions by the bank with persons who are not executive officers, directors, principal shareholders, or employees of the bank.
(B) Exception
Nothing in this paragraph shall prohibit any extension of credit made pursuant to a benefit or compensation program—
(i) that is widely available to employees of the member bank; and
(ii) that does not give preference to any officer, director, or principal shareholder of the member bank, or to any related interest of such person, over other employees of the member bank.
(3) Prior approval required
Terms Used In 12 USC 375b
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- association: when used in reference to a corporation, shall be deemed to embrace the words "successors and assigns of such company or association" in like manner as if these last-named words, or words of similar import, were expressed. See 1 USC 5
- Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
- Federal Reserve System: The central bank of the United States. The Fed, as it is commonly called, regulates the U.S. monetary and financial system. The Federal Reserve System is composed of a central governmental agency in Washington, D.C. (the Board of Governors) and twelve regional Federal Reserve Banks in major cities throughout the United States. Source: OCC
- officer: includes any person authorized by law to perform the duties of the office. See 1 USC 1
- Partnership: A voluntary contract between two or more persons to pool some or all of their assets into a business, with the agreement that there will be a proportional sharing of profits and losses.
- State: means a State, the District of Columbia, the Commonwealth of Puerto Rico, or any other territory or possession of the United States. See 1 USC 7
A member bank may extend credit to a person described in paragraph (1) in an amount that, when aggregated with the amount of all other outstanding extensions of credit by that bank to each such person and that person’s related interests, would exceed an amount prescribed by regulation of the appropriate Federal banking agency (as defined in section 1813 of this title) only if—
(A) the extension of credit has been approved in advance by a majority vote of that bank’s entire board of directors; and
(B) the interested party has abstained from participating, directly or indirectly, in the deliberations or voting on the extension of credit.
(4) Aggregate limit on extensions of credit to any executive officer, director, or principal shareholder
A member bank may extend credit to any executive officer, director, or principal shareholder, or to any related interest of such a person, only if the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to that person and that person’s related interests, would not exceed the limits on loans to a single borrower established by section 84 of this title. For purposes of this paragraph, section 84 of this title shall be deemed to apply to a State member bank as if the State member bank were a national banking association.
(5) Aggregate limit on extensions of credit to all executive officers, directors, and principal shareholders
(A) In general
A member bank may extend credit to any executive officer, director, or principal shareholder, or to any related interest of such a person, if the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by that bank to its executive officers, directors, principal shareholders, and those persons’ related interests would not exceed the bank’s unimpaired capital and unimpaired surplus.
(B) More stringent limit authorized
The Board may, by regulation, prescribe a limit that is more stringent than that contained in subparagraph (A).
(C) Board may make exceptions for certain banks
The Board may, by regulation, make exceptions to subparagraph (A) for member banks with less than $100,000,000 in deposits if the Board determines that the exceptions are important to avoid constricting the availability of credit in small communities or to attract directors to such banks. In no case may the aggregate amount of all outstanding extensions of credit to a bank’s executive officers, directors, principal shareholders, and those persons’ related interests be more than 2 times the bank’s unimpaired capital and unimpaired surplus.
(6) Overdrafts by executive officers and directors prohibited
(A) In general
If any executive officer or director has an account at the member bank, the bank may not pay on behalf of that person an amount exceeding the funds on deposit in the account.
(B) Exceptions
Subparagraph (A) does not prohibit a member bank from paying funds in accordance with—
(i) a written preauthorized, interest-bearing extension of credit specifying a method of repayment; or
(ii) a written preauthorized transfer of funds from another account of the executive officer or director at that bank.
(7) Prohibition on knowingly receiving unauthorized extension of credit
No executive officer, director, or principal shareholder shall knowingly receive (or knowingly permit any of that person’s related interests to receive) from a member bank, directly or indirectly, any extension of credit not authorized under this section.
(8) Executive officer, director, or principal shareholder of certain affiliates treated as executive officer, director, or principal shareholder of member bank
(A) In general
For purposes of this section, any executive officer, director, or principal shareholder (as the case may be) of any company of which the member bank is a subsidiary, or of any other subsidiary of that company, shall be deemed to be an executive officer, director, or principal shareholder (as the case may be) of the member bank.
(B) Exception
The Board may, by regulation, make exceptions to subparagraph (A) for any executive officer or director of a subsidiary of a company that controls the member bank if—
(i) the executive officer or director does not have authority to participate, and does not participate, in major policymaking functions of the member bank; and
(ii) the assets of such subsidiary do not exceed 10 percent of the consolidated assets of a company that controls the member bank and such subsidiary (and is not controlled by any other company).
(9) Definitions
For purposes of this section:
(A) Company
(i) In general
Except as provided in clause (ii), the term “company” means any corporation, partnership, business or other trust, association, joint venture, pool syndicate, sole proprietorship, unincorporated organization, or other business entity.
(ii) Exceptions
The term “company” does not include—
(I) an insured depository institution (as defined in section 1813 of this title); or
(II) a corporation the majority of the shares of which are owned by the United States or by any State.
(B) Control
A person controls a company or bank if that person, directly or indirectly, or acting through or in concert with 1 or more persons—
(i) owns, controls, or has the power to vote 25 percent or more of any class of the company’s voting securities;
(ii) controls in any manner the election of a majority of the company’s directors; or
(iii) has the power to exercise a controlling influence over the company’s management or policies.
(C) Executive officer
A person is an “executive officer” of a company or bank if that person participates or has authority to participate (other than as a director) in major policymaking functions of the company or bank.
(D) Extension of credit
(i) In general
A member bank extends credit to a person by—
(I) making or renewing any loan, granting a line of credit, or entering into any similar transaction as a result of which the person becomes obligated (directly or indirectly, or by any means whatsoever) to pay money or its equivalent to the bank; or
(II) having credit exposure to the person arising from a derivative transaction (as defined in section 84(b) of this title), repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction between the member bank and the person.
(ii) Exceptions
The Board may, by regulation, make exceptions to clause (i) for transactions that the Board determines pose minimal risk.
(E) Member bank
The term “member bank” includes any subsidiary of a member bank.
(F) Principal shareholder
The term “principal shareholder”—
(i) means any person that directly or indirectly, or acting through or in concert with one or more persons, owns, controls, or has the power to vote more than 10 percent of any class of voting securities of a member bank or company; and
(ii) does not include a company of which a member bank is a subsidiary.
(G) Related interest
A “related interest” of a person is—
(i) any company controlled by that person; and
(ii) any political or campaign committee that is controlled by that person or the funds or services of which will benefit that person.
(H) Subsidiary
The term “subsidiary” has the same meaning as in section 1841 of this title.
(10) Board’s rulemaking authority
The Board of Governors of the Federal Reserve System may prescribe such regulations, including definitions of terms, as it determines to be necessary to effectuate the purposes and prevent evasions of this section.