The Office of the Comptroller of the Currency (OCC) has issued an interpretive letter (April 2008 – Number 1096) regarding the treatment, for purposes of Regulation O, of loans that are granted prior to a borrower becoming an executive officer. In issuing its interpretive letter, the OCC was reviewing a situation in which an individual had become an executive officer of the bank and a member of the bank’s Board of Directors, thus making him an “insider” of the bank subject to Regulation O. Approximately six months to one year prior to becoming an “insider” the bank had granted him two home equity lines of credit on non-preferential terms. The combined total of these lines of credit exceeded Regulation O’s limit of $100,000 on loans to executive officers. The bank requested confirmation that the loans were “grandfathered” and did not constitute violations of Regulation O because they were granted prior to the borrower becoming an executive officer.
The OCC has long taken the position that the requirements of Regulation O apply at the time a loan or extension of credit is made. Thus, loans or extensions of credit that are made to an individual before he or she becomes an executive officer are “grandfathered” as long as they were made in good faith and not in contemplation of the individual becoming an executive officer. If such loans exceed the amount permitted by Regulation O, they will be considered non-conforming rather than a violation of Regulation O. However, no new loans may be made and existing loans may not be renewed, except in compliance with Regulation O.