Reg O and Arm's Length Transactions

by Mary Beth Guard, BOL Guru

Question: An executive officer of the bank, as defined in Reg O, sells land to a bank customer. The bank loans the customer the money to finance the land transaction. Does this present any problems for the bank?

Answer: It depends. An arm's length transaction provision was added to Regulation O back in the '90s to allow insiders to be able to conduct normal business transactions (and have the persons with whom they conduct them be able to obtain financing from the subject institution without creating a Reg O nightmare).

Found at Section 215.3(f), the tangible economic benefit rule, and its arms length transaction exception, read as follows:
(f) Tangible economic benefit rule--(1) In general. An extension of credit is considered made to an insider to the extent that the proceeds are transferred to the insider or are used for the tangible economic benefit of the insider.
(2) Exception. An extension of credit is not considered made to an insider under paragraph (f)(1) of this section if:
(i) The credit is extended on terms that would satisfy the standard set forth in Sec. 215.4(a) of this part for extensions of credit to insiders; and
(ii) The proceeds of the extension of credit are used in a bona fide transaction to acquire property, goods, or services from the insider.

If the land transaction meets the requirements for the tangible economic benefit rule exception, it will not pose a Reg O problem for you.

The original version appeared in the October 2002 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 03/24/03