Stephens B. Woodrough, Esq.
4801 Osprey Pointe South, Suite 604
St. Petersburg, Florida 33711-5600

Dear Mr. Woodrough:

This is in response to your letter and additional information you have provided by telephone concerning the applicability of section 215.5(d) of the Board's Regulation O (12 C.F.R. 215.5(d)) to a transaction involving an outside director of a bank.

You have indicated that a non-insider of a bank obtained an unsecured personal loan from the bank and used the loan to pay a debt that he owed to an outside director of the bank for legal services rendered by the director in a divorce proceeding. The borrower did not disclose the purpose of the loan to the bank at the time the loan was made, and you have stated that the director did not know that the borrower had applied for or obtained the loan from the bank until after the borrower paid his legal fee. Neither the borrower nor the director has disclosed to the bank that the borrower paid the proceeds of the loan to the director. The director has inquired of you whether his receipt of the loan proceeds without complying with section 215.5(d) violated Regulation O.

Section 215.5 imposes certain restrictions on extensions of credit by a bank to its executive officers. These restrictions are in addition to the restrictions found elsewhere in Regulation O on extensions of credit to insiders in general, and apply only to executive officers. Since the director in your case was not an executive officer of the bank, he was not subject to section 215.5, and his failure to disclose the transfer of funds to himself did not violate section 215.5(d).

We believe it is appropriate, however, that the director disclose the transfer of funds to himself to the bank in order that the bank may make the determination in this case and that the record of this transaction be available to examiners of the bank to review. The director's desire, as you have discussed with my staff, to avoid disclosure of the transfer to the bank unless required by law to do so illustrates his conflict of interest in addressing this case for himself. Bank compliance officers and bank examiners, however, are trained to apply Regulation O in cases like this, and it is not unusual for them to review a transaction and ultimately determine that the transaction is not subject to regulation or a violation of law. If insiders are permitted to determine for themselves if they are subject to Regulation O, then the prophylactic effect of the regulation and of the bank's compliance program, based on general education of insiders about the law and consistent application of the law, would be greatly diminished. Indeed, the fiduciary duty of the director to the bank to see that proper procedures are in place to maintain the bank's compliance with Regulation O may require the director to disclose the transaction to the bank.

You also have stated certain policy arguments why you believe that section 215.5(d) should not be applied as a general rule in situations such as this. In view of the determination above that section 215.5(d) is inapplicable in this particular case, and the absence of any additional information concerning the specific transaction in question, we believe it would be inappropriate to address these issues at this time.

I hope that this response is helpful to you. If you have any additional questions concerning this matter, you may contact Gordon Miller of my staff at 202/452-2534.

Sincerely,

(Signed) J. Virgil Mattingly

J. Virgil Mattingly