Became EO After Obtaining Loan - Reg O Violation?

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Question:

We have an employee who obtained a $250,000 loan secured by a second trust deed on his residence and used the proceeds to purchase a new home. After the loan was made the employee was promoted and is now an executive officer of the bank. Do we have a potential Reg O violation? The credit does not fit within the established exemptions and is in excess of $100,000.

Answer:

No, existing loans at the time of appointment do not represent a violation.

3--1036
"EXECUTIVE OFFICER"--Indebtedness at Appointment
The prohibitions of section 22(g) of the Federal Reserve Act refer to an executive officer of a member bank who is an executive officer thereof at the time he borrows from or otherwise becomes indebted to the bank. Accordingly, when a loan is made in good faith by a member bank to an individual who is not at the time of the making of the loan an executive officer thereof and the loan is not made in contemplation of his becoming an executive officer of the bank, there is nothing in the statute which would prohibit such person from subsequently becoming an executive officer of the bank, notwithstanding his outstanding indebtedness thereto. Digest of 1936 Fed. Res. Bull. 121; ¶ 3750.

First published on BankersOnline.com 11/03/08