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welcome to dollar banks compliance training series in this course we discuss regulation ou will cover what it is why the regulation exists and what are the different elements of the regulation and all of the terminology involved so let's get to it - first answer the question what's in it for me the answer is simple the banking industry is one of the most highly regulated industries and in most cases for good reason some people say we're in the money business and that's true but more so we're in the trust and integrity business people in companies trust us with their money they trust us to be prudent and careful while giving them a safe return on their investment part of that trust involves ensuring complete compliance with federal banking regulations thus our Chairman mr. Milburn Drysdale has established compliance policies that include specific training objectives in the case of regulation oh the policy is that the bank employees complete regulation o training at least once a year what is Regulation L simply regulation o is one small part of something called the Code of Federal Regulations and specifically the regulation is defined by section 22 H of the Federal Reserve Act but around the bank it's commonly referred to as reg Oh what's the point or purpose of regulation L the point is to make sure our bank loans money or otherwise extends credit to everyone under the same terms and conditions and particularly to ensure that bank insiders typically senior executives and board members are given no preferential terms or conditions if and when the bank lends them money it's about being completely transparent when it comes to loans and credit extensions to those who really have the greatest control over the overall loan portfolio the scope specifically defines who a bank Insider is according to the federal government it defines the term extension of credit it defines how much money can be loaned at one time and limits of lending to an individual and to all parties in aggregate and finally it defines the bank responsibilities with regard to keeping records and providing reports of insider lending activities why is regulation Oh important in other words other than our core values of trust and integrity which are primary if for no other reason it has the attention of all bank executives because in many cases the banking executives themselves assume personal liability for loan and credit extensions to insiders just like any of us if our own personal money were on the line in our day-to-day business decisions I'm sure you'll agree we take a strong interest in making sure we comply with regulations so if regulation o is all about lending and credit extension to bank insiders let's begin by defining what a bank insider is generally we're talking about the senior executives and managers who actively participate in establishing and managing policies and decisions about loans and other extensions of credit in particular the executive officers directors principal shareholders and what the Federal Reserve defines as those bank insiders related interest and that's a term we'll cover a little later on in this course now because the term executive officer could potentially have a different meaning in each Bank the regulation specifically identifies and defines the roles and responsibilities of certain titles the reason is to avoid any uncertainty as to who exactly is an executive officer in every bank charter the role and title of chairman and the board the president every vice president the cashier the secretary and the treasurer must exist and be staffed by a named individual the one exception of this rule is if the executive officer doesn't actively participate in making and managing policy decisions of the bank definition of Durr is simply and easily defined as a member of the bank's board of directors all banks have a board of directors while this slide recites the official wording from the published regulation I'll focus in on the word principle basically if the person or his or her immediate family members owned more than 10% of the stock of the bank that person is a principal shareholder now in particular the stock otherwise known as securities has to be considered voting securities by voting it means that the ownership of the stock or security entitles the stockholder to vote on company making policy decisions the concept of a related interest is meant to address transparency not only should a bank ensure that no individual received preferential terms and conditions but also any other business or political entity controlled by that individual insider to that end related interest is defined as a company that's controlled by an insider or a political campaign that's either controlled by that person or directly benefits that person what the regulation means by extension of credit is generally most types of loans and credit lines and when extending credit to insiders the spirit of the regulation is to ensure the bank doesn't give insiders any preferential terms payment structures or interest rates and just as importantly to ensure that extending credit to an Insider is no more risky than lending to anyone else here is the actual wording of the regulation which concisely defines extension of credit I think the key phrase in the wording is an extending of credit in any manner whatsoever the word credit has specific definition in the banking industry according to invest opee do it is amount of funds financial institutions are willing to provide an individual or organization here you see a list of all kinds of examples of extensions of credit the point is there are very few types of advances of money that don't qualify as an extension of credit to a person or entity a few types of money advances that don't fall under the definition of credit extension within regulation Oh aren't loans at all for example paying someone in advance of their regular payday for work they've already completed they did the work there were employer the bank owes them the money but payday is a week away a bank might pay the insider employee early but only for work already completed two other exclusions are for advanced reimbursement of authorized travel expenses or any other expense incurred or to be incurred by the Insider while doing business on behalf of the bank and finally to avoid any confusion when the bank enters into a legitimate business transaction to acquire or pay for property goods or services from the insider as an example a member of the board of directors may be the owner of a janitorial service that services the bank so payment to that company for janitorial services is simply a normal business transaction and not alone now there are parameters and limits involved in extensions of credit for example if the extension of credit would exceed the higher of $25,000 or 5% of the banks unimpaired capital and surplus the loan department would need prior approval from the board of directors any loan under this amount doesn't require the prior approval again when it comes to lending limits there are individual and aggregate limits and other for any individual or for the total of all loans to insiders the amounts can't exceed the bank's individual lending limits or exceed the banks unimpaired capital or unimpaired surplus by the way Regulation o specifically defines how to calculate unimpaired capital or unimpaired surplus but that's beyond the scope of this basic compliance training course overdrafts are specifically covered in the regulation that's because covering an overdraft is a type of loan so just because someone is a bank insider they shouldn't be given any preferential terms when it comes to covering an overdraft most of the time when you open a checking account or apply for a bank issued credit card the terms and conditions for covering overdrafts are spelled out and agreed to in advance so if there ever is an overdraft there's no question about how it's to be covered as it regards insiders they're subject to the same terms and conditions as the rest of the bank's customers executive officers are a subset of the insiders and a couple of additional rules apply only to executive officers first all of the restrictions for all insiders apply but in addition the bank can make a loan in any amount to the executive officer for the purposes of his or her children's education or can make a loan in any amount for the purpose of a home loan or for any other purpose as long as it doesn't exceed the higher of two and a half percent of the banks unimpaired capital and unimpaired surplus or twenty five thousand but never to exceed one hundred thousand no matter what any extension of credit must be accompanied by a detailed financial report from the Insider and any extension of credit must be reported to the bank's board of directors and can become due and payable if the executive directors debt to any other bank exceeds $25,000 or two-and-a-half percent of that banks unimpaired capital and unimpaired surplus not only does the bank as an organization have regulation Oh compliance responsibilities but so to do the individual investors one in particular is the insider's obligation to ensure they never knowingly receive any extension of credit that doesn't comply with the terms and conditions of regulation oh as you might expect records of loans to all insiders must be kept managed and available for inspection first the bank has to submit an annual report that identifies all insider credit extensions the bank also has to keep the records of public requests for information about insider loans and the disposition of those requests and all the records must be kept for a minimum of two years as I mentioned earlier projecting an image of trust and credibility are important to any bank and to the industry overall so when it comes to insider loans there a strong emphasis on transparency regulation Oh supports that transparency through the requirement for public disclosure of insider loans that requirement dictates that upon written request from the public the bank must provide a list of all executive officers and principal shareholders who individually had in aggregate loans that equalled or exceeded the lesser of $500,000 or 5% of the bank's unimpaired capital and surplus the only exception would be when the aggregate amount doesn't exceed $25,000 only the names are required in the disclosure not the amounts of the loans they may be bank insiders but the Federal Reserve recognises they have a right to some personal privacy to give you an idea of how serious the Federal Reserve is about regulation Oh a bank and insider or even a bank employee may be subject to a penalty of possibly up to a million dollars a day during the violation before we conclude this training let's quickly review what we covered first we identified the purpose and scope of regulation oh we defined a bank insider we define the term extension of credit we covered the lending limits the record-keeping and disclosure requirements and the possible civil penalties for non-compliance this concludes the regulation Oh compliance training course if you have any further questions or need more information either contact the bank's compliance officer or read the full specifications of the regulation