Thursday, June 20, 2019

Regulation O – 5 Easy ways to avoid violations

Posted by Sharon July 12, 2012 9:50am

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By: Sharon Geiger, Quality Control Specialist, P&G Associates

Regulation O covers transactions between the financial institution and their insiders (directors, executive officers, and related interests).  Regulation O limits the extensions of credit to these insiders in a number of ways.  While these suggestions may appear   straight forward on the surface,  they may not be the best bet for your particular institution  However, for most banks, these are ideas that could  provide you with some insight as to how to mitigate risk related to Regulation O in five “easy” steps.

 1.       Do not give loans to insiders.  If you don’t want Reg O loan violations when it comes to loans, make it your policy not to give any loans to insiders.  If your bank has as a policy to allow loans to insiders, ensure that you document thoroughly.  The loan approval document itself should contain a complete and accurate accounting of all outstanding loans to the particular insider and their related interests in aggregate, and the loan amounts, as well as the new aggregate total of loans outstanding if the new loan is to be approved.  This loan approval document should also list the FI’s current lending limit so that the Loan Committee and the Board of Directors have a clear picture to the total extensions of credit to that insider prior to approval of the new loan.  Also, the loan approval document should clearly and concisely list the interest rate, and state unequivocally that its comparable in terms to other regular customer loans.

 2.       Keep a master list of all of the financial institutions insiders and shareholders.  A lot of time is spent by auditors and regulators to compile a complete and accurate list of insiders.  If the financial institution keeps a master list, it becomes a lot easier for the auditor and the regulator to verify the insiders on this list all in one place.  This also shows the auditors and regulators that the Bank is taking a proactive approach to awareness and monitoring all of its insider’s accounts (including both deposit accounts and loan accounts).   This list should be complete and accurate and include all accounts that each of the insiders are signers on.  This is where monitoring for aggregate limits will come into play.

 3.       Do not waive overdraft fees for insiders.  Regulation O won't permit you to waive OD fees for executive officers or for directors unless you waive them for customers generally under similar circumstances, however, the problem that comes with this is scurrying to find other examples of accounts with similar circumstances when regulators are breathing over your shoulder.  Another easy way to avoid scrutiny when it comes to overdrafts is to monitor and document your monitoring in writing.  It’s a good idea to have your compliance officer or ROLO (Regulation O Officer) review all Insider accounts on at least a monthly basis to ensure that overdraft fees are not being waived.  In addition, if overdrafts ARE occurring, it would also be a good idea to have the compliance officer address in writing with the particular insider, the situation and that it should not continue.

 4.       Do not give any preferential deposit account rates to insiders and do not waive or reduce any account related fees.  12 USC 376 prevents banks showing insiders favoritism in the pricing of their deposits.  This would include monthly maintenance fees, any per transaction fees for business accounts, ATM fees, wire transfer fees, etc.  While it would not specifically be a violation of Regulation O to waive a wire transfer fee, this is a possible trap to fall into and this may cause potential criticism or speculation of favoritism.  It’s a good idea to also have your compliance officer monitor account fees at the same time as they monitor overdrafts.

 5.       Do not give any preferential loan interest rates to insiders and do not waive or reduce any loan related fees.  Regulation O prevents banks from showing insiders favoritism in their lending relations.  If you ARE going to give the particular insider a reduced interest rate or waive any of the normal loan related fees, it would be a good idea to document in writing on the loan approval doc, samples of other similar customer instances where related interest rates were reduced or fees were waived.  Again, similar to what I said about the documentation of similar instances of overdrafts, you don’t want to be scurrying to find other examples of accounts with similar circumstances when regulators are questioning a rate or fee waiver.  You should show a proactive approach that you took into consideration at the time of the loan approval, similar instances prior to the loan’s approval.

 The bottom line is, to avoid judgment and criticism, you’re better off being stricter with your insiders than the rest of your customers.


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Sharon Geiger

Senior Quality Control and Review Specialist

Sharon Geiger has 27 years banking experience, 21 of which have been involved in internal audit. She has extensive knowledge of all aspects of the banking industry, with a particular emphasis on regulatory compliance and identifying risks and controls. As QCR Specialist, she performs Quality Control Reviews to ensure all workpapers and reports are completed in compliance with the firm's standards.

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