29.2 Insider Approvals, Lending Limits and Executive Restrictions

2. Prior Board Approval Rule (§ 215.4(b))

A bank may not extend credit (or renew, modify, or increase a line of credit) to an insider or their related interests without the advance approval of a majority of the entire Board of Directors if:

• The extension of credit, when aggregated with all other outstanding extensions of credit to that insider and all of their related interests, exceeds the higher of $25,000 or 5% of the bank's unimpaired capital and unimpaired surplus; OR
• In any case, aggregate credit extensions to that insider and their related interests exceed $500,000.

Governance and Recusal Mandates:

• Approval must be by a majority of the entire board, not merely a majority of a quorum.
• The interested insider must be fully recused: they must abstain from direct or indirect voting; participating in discussion or attempting to influence the vote counts as indirect participation. Leaving the meeting is a useful recusal control rather than a separately specified physical-location requirement.
• Pre-Approved Lines of Credit: Board approval may be granted for an ongoing line of credit for a period not exceeding 14 months; subsequent advances under the approved line do not require re-approval provided the line remains in compliance with terms.

3. Individual Lending Limit (§ 215.4(c))

Total extensions of credit to any individual insider and all of their related interests combined cannot exceed the bank's legal lending limit under national banking law (12 U.S.C. § 84, 12 CFR Part 32):

• 15% of unimpaired capital and surplus for unsecured credit extensions; plus
• An additional 10% of unimpaired capital and surplus for credit fully secured by qualifying, readily marketable collateral (total combined cap of 25%).

4. Aggregate Insider Lending Limit (§ 215.4(d))

The total cumulative extensions of credit by a bank to all insiders and their related interests combined cannot exceed 100% of the bank's unimpaired capital and unimpaired surplus.

• Small Bank Safe Harbor: For banks with deposits of less than $100 million, meeting the rule’s conditions, the Board of Directors may adopt an annual formal resolution increasing this aggregate bank-wide limit up to 200% of unimpaired capital and surplus, provided the bank meets regulatory capital and safety benchmarks.

5. Strict Overdraft Restrictions (§ 215.4(e))

A depository institution is strictly prohibited from paying an overdraft on an account maintained at the bank by an executive officer or director (or executive officers and directors of its parent holding company).

• Permissible Overdraft Payment Methods: Overdrafts may be paid only pursuant to:
  1. A written, preauthorized transfer of funds from another deposit account at the bank; or
  2. A written, preauthorized interest-bearing credit plan specifying repayment.
• The De Minimis Exception: A bank may pay an inadvertent, uncoordinated overdraft if all three conditions are met:
  1. The total aggregate overdraft balance does not exceed $1,000 at any time;
  2. The account remains overdrawn for no more than five (5) consecutive business days; and
  3. The bank charges the insider the standard overdraft fee that it assesses non-insider customers in the normal course of business.
• Principal Shareholder Exclusion: Notably, principal shareholders who are neither executive officers nor directors are not subject to the § 215.4(e) overdraft prohibition.

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Heightened Special Restrictions on Executive Officers (12 CFR § 215.5)

Executive officers bear direct, daily operational control over bank assets and credit decisions. Consequently, Section 22(g) of the Federal Reserve Act and 12 CFR § 215.5 subject executive officers to special category restrictions that do not apply to directors or principal shareholders.

Mandatory Written Demand Clause (§ 215.5(d))

Every extension of credit made to an executive officer must be made subject to the express written condition that the loan shall become due and payable on demand at any time the executive officer becomes indebted to any other bank or banks in an aggregate amount greater than the permissible limits of § 215.5.

Recordkeeping and public requests

Part 215.8 requires records sufficient to demonstrate compliance and identify insiders and related interests. Part 215.9 requires the bank, on written public request, to disclose the names of executive officers and principal shareholders whose aggregate credit exceeds the specified lesser-of threshold at the previous quarter end; it does not require disclosure of individual amounts. Do not confuse this disclosure rule with executive-officer loan conditions. Section 215.5 requires prompt reporting of executive-officer extensions to the board, a current detailed financial statement, and an acceleration condition based on specified outside indebtedness.

Insider Classifications and Rule Comparison

Apply the executive-officer purpose limits

Section 215.5 applies to executive officers of the lending bank; executive officers of affiliates are subject to the general insider rules but not automatically to these additional purpose restrictions. Permitted categories include education of the officer’s children; qualifying first-lien financing or refinancing of a residence owned or expected to be owned by the officer; and credit secured by the specified government obligations, guarantees or segregated deposits. “In any amount” in these purpose categories does not remove other applicable insider limits.

For other purposes, aggregate credit cannot exceed the higher of twenty-five thousand dollars or 2.5 percent of unimpaired capital and surplus, with an absolute maximum of one hundred thousand dollars. With twelve million dollars of capital and surplus, 2.5 percent is three hundred thousand dollars, but the maximum still reduces the basket to one hundred thousand dollars. A one-hundred-twenty-five-thousand-dollar motor-home loan with no qualifying collateral therefore fails the purpose limit even if ordinary board-approval and individual lending-limit tests would permit it.

Partnerships majority-owned by one or more bank executive officers have a separate attribution provision under Section 215.5(b). Do not infer that every company controlled by an executive officer automatically has the identical purpose test; analyze the entity rule and any tangible-benefit attribution. Preserve the current financial statement, prompt board report and required written demand condition.

Current executive-officer restrictions.