Are You Reporting Regulation O Exposure Appropriately?
Are You Reporting Regulation O Exposure Appropriately?
Regulation O – Loans by Members Banks to their Executive Officers, Directors, and Principal Shareholders governs the requirements for Banks in handling extensions of credit to their executive officers, directors, principal shareholders and their related interests. There are some common pitfalls Banks experience when identifying, approving and reporting these types of credits. The mistakes include:
- Identification of an executive officer – have you captured the right persons in this category? Executive officers should include employees who participate or have authority to participate in policy making decisions no matter what title they may carry at the bank. Do you have a method in place to review your definition of executive officers annually and create a Board resolution to limit executive officers, as needed?
- Identification of related interests – a related interest of a Regulation O insider is a company in which the insider owns, controls or has voting power of at least 25% of securities of that company; controls a majority of the election of directors for the company; or can exercise a controlling influence over management or policies of the company. It also includes situations where the insider has greater than 10% ownership, control or voting power in any class of a company’s voting securities and no other individual holds a greater percentage.
- Proper handling of lines of credit – Not obtaining re-approval for existing lines of credit. In cases where the Board of Directors has approved a line of credit for an insider of the Bank and the aggregate exposure of all extensions of credit to the insider is in excess of $500,000, the line of credit will require re-approval of the line of credit at least every 14 months. If the line of credit is not approved by a majority of the Board of Directors at least every 14 months, every advance made under the line after that 14 month period would require approval by the Board of Directors prior to the advance being made in order to be in compliance with the regulation.
- Reporting proper exposures on call reports – commonly the Bank will misreport credit exposures for insiders when reporting on the FFIEC Reports of Condition and Income (Call Report). Misreporting mistakes include: (1) not including maximum credit limit on lines of credit; and instead reporting just the outstanding balance; (2) not including overdraft lines of credit that are in excess of $5,000 or credit card accounts in excess of $10,000; or (3) not including indirect obligations of insiders for limited guarantees they hold for extensions to credit made to non-related interests. These loans should be reported at the amount equal to the limited guarantee of the insider. Double check system reports used to capture insider exposures for inclusiveness and accuracy.
- Insider Overdrafts – do you have the correct processes in place to avoid penalties associated with paying an overdraft on an insider’s account that is not permissible under the regulation? Remember, an overdraft can be paid if 1) a written, pre-authorized extension of credit plan or transfer from another account exists or 2) the overdraft is deemed inadvertent – less than $1,000 and outstanding less than 5 business days and the Bank charges fees that any other customer of the Bank would be charged under similar circumstances. Are all personnel who make NSF decisions aware of insider rules?
Take some time to determine if these pitfalls exist in your Banking environment. Correcting these issues if they exist in your banking environment can lead your Bank in the right direction for compliance with Regulation O.
For additional information please contact the author Rachelle L. Gordon at rgordon@fosaudit.com.
Are You Reporting Regulation O Exposure Appropriately? | Rachelle L. Gordon