§375b — Title 12 Banks and Banking | U.S. Code

Summary

Banks must not make loans or give credit to their own top officers, board members, big shareholders, or businesses tied to those people, except in the limited ways described here. A bank may lend to those insiders only if the deal is basically the same as it would offer to a normal customer (same interest, same collateral), does not carry extra risk or bad terms, and uses the same strict credit checks. Loans that go over an amount set by the federal bank regulator need prior approval by a majority of the bank’s full board, and the insider cannot take part in the discussion or vote. Any single insider’s loan also must stay within the limits for loans to one borrower set in section 84. All loans to all insiders together cannot be more than the bank’s unimpaired capital plus unimpaired surplus. The Federal Reserve Board can set a lower limit. For banks with deposits under $100,000,000 the Board can allow exceptions to avoid harming small communities, but the total to insiders still cannot be more than two times the bank’s unimpaired capital and unimpaired surplus. A bank may not pay more from an officer’s or director’s account than the money actually on deposit, except for preapproved interest-bearing credit with a repayment plan or preapproved transfers from another account. Insiders must not knowingly accept credit that is not allowed. Short definitions: "company" means most business entities; "control" means things like owning 25% or more of voting shares, controlling director elections, or otherwise forcing company policy; "executive officer" means someone who makes major policy decisions; "member bank" includes its subsidiaries; "principal shareholder" means someone owning over 10% of voting stock; "related interest" means a company they control or a political/campaign committee that benefits them; "subsidiary" is as defined in section 1841. The Federal Reserve Board may make rules and definitions to enforce these limits and stop attempts to get around them.

Title 12, §375b

Banks and Banking — Source: USLM XML via OLRC

(1)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)(A)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)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)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)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)(A)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)The Board may, by regulation, prescribe a limit that is more stringent than that contained in subparagraph (A).

(C)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)(A)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)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)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)(A)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)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)For purposes of this section:

(A)(i)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)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)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)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)(i)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)The Board may, by regulation, make exceptions to clause (i) for transactions that the Board determines pose minimal risk.

(E)The term “member bank” includes any subsidiary of a member bank.

(F)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)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)The term “subsidiary” has the same meaning as in section 1841 of this title.

(10)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.

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

A prior section 22(h) of act Dec. 23, 1913, ch. 6, as added

June 19, 1934, ch. 653, § 3, 48 Stat. 1107, was classified to section 596 of this title, prior to repeal by act

June 25, 1948, ch. 645, § 21, 62 Stat. 862, eff. Sept. 1, 1948.

Amendments

2010—Subsec. (9)(D)(i). Pub. L. 111–203 substituted “extends credit to a person by—” for “extends credit by making”, inserted “(I) making” before “or renewing”, substituted “which the person” for “which a person” and “the bank; or” for “the bank.”, and added subcl. (II). 1996—Par. (2)(A). Pub. L. 104–208, § 2211(a)(1), (2), designated existing provisions as subpar. (A), inserted heading, redesignated former subpars. (A) to (C) as cls. (i) to (iii), respectively, and adjusted margins. Par. (2)(B). Pub. L. 104–208, § 2211(a)(3), added subpar. (B). Former subpar. (B) redesignated cl. (ii) of subpar. (A). Par. (2)(C). Pub. L. 104–208, § 2211(a)(1), redesignated subpar. (C) as cl. (iii) of subpar. (A). Par. (8)(B). Pub. L. 104–208, § 2211(b), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: “The Board may, by regulation, make exceptions to subparagraph (A), except as that subparagraph makes applicable paragraph (2), for an executive officer or director of a subsidiary of a company that controls the member bank, if that executive officer or director does not have authority to participate, and does not participate, in major policymaking functions of the member bank.” 1994—Par. (8). Pub. L. 103–325 designated existing provisions as subpar. (A), inserted heading, and added subpar. (B). 1992—Par. (6)(B)(i). Pub. L. 102–550, § 1605(a)(10), substituted “or” for “and” at end. Par. (9)(D). Pub. L. 102–550, § 955(a), designated existing provisions as cl. (i), inserted heading, and added cl. (ii). Par. (9)(F). Pub. L. 102–550, § 955(b), designated portion of existing provisions as cl. (i), realigned margin, substituted “; and” for period at end, and added cl. (ii). 1991—Pub. L. 102–242, § 306(a), amended section generally, substituting provisions relating to extensions of credit to executive officers, directors, and principal shareholders of member banks for provisions relating to prohibitions respecting loans and extensions of credit to executive officers and directors of banks, political or campaign committees, etc. Par. (1). Pub. L. 102–242, § 306(d)(2), inserted “(5),” after “(4),”. Par. (2)(C). Pub. L. 102–242, § 306(b), added subpar. (C). Par. (4). Pub. L. 102–242, § 306(c), inserted “, director,” after “executive officer” in heading and text. Par. (5). Pub. L. 102–242, § 306(d)(1), added par. (5). Par. (7). Pub. L. 102–242, § 306(e), added par. (7). Par. (8). Pub. L. 102–242, § 306(f), struck out “bank holding” before “company of which the member”. Par. (9)(E). Pub. L. 102–242, § 306(g), added subpar. (E). Par. (9)(F). Pub. L. 102–242, § 306(h), struck out last sentence of subpar. (F) which read as follows: “For purposes of paragraph (4), if a member bank has its main banking office in a city, town, or village with a population of less than 30,000, the preceding sentence shall apply with ‘18 percent’ substituted for ‘10 percent’.” 1982—Par. (2). Pub. L. 97–320, § 422, substituted “an amount prescribed in a regulation of the appropriate Federal banking agency” for “$25,000”. Par. (6)(C) to (F). Pub. L. 97–320, § 410(e), redesignated subpars. (D) to (G) as (C) to (F), respectively. Former subpar. (C), relating to definition of term “extension of credit”, was struck out.

of 1991 Amendment note above].” Reporting of Credit by Executive Officers and Directors Pub. L. 102–242, title III, § 306(o), Dec. 19, 1991, 105 Stat. 2360, provided that: “An executive officer or director of an insured depository institution, a bank holding company, or a savings and loan holding company, the shares of which are not publicly traded, shall report annually to the board of directors of the institution or holding company the outstanding amount of any credit that was extended to such executive officer or director and that is secured by shares of the institution or holding company.”

§375b Extensions of credit to executive officers, directors, and principal shareholders of member banks

Summary

Title 12, §375b

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