Anthony J. Correro, III, Esq.
Correro, Fishman, Haygood, Phelps,
   Weiss, Walmsley & Casteix, L.L.P.
201 St. Charles Avenue
47th Floor
New Orleans, Louisiana 70170-4700

Dear Mr. Correro:

This is in response to your letter, dated October 14, 1997, to the Federal Reserve Bank of Dallas concerning the application of the Board's Regulation O (12 C.F.R. Part 215) to revolving commercial lines of credit ("revolvers"). As described in your letter, a revolver typically permits the borrower to obtain extensions of credit ("draws") under the revolver over an extended period of time. The insider must satisfy certain financial covenants and other conditions of the revolver at the time of each draw. You have asked whether a revolver that is extended to an insider or a related interest of an insider is subject to the 14-month limit in section 215.4(b)(3) of Regulation O (12 C.F.R. 215.4(b)(3)) on the length of time that a line of credit may operate without additional review by the bank's board of directors.¹

Under section 215.4(b)(1) and (2), a line of credit to an insider that triggers the bank's prior approval requirement could not operate because the prior approval of the bank's board of directors would be required for each draw. Section 215.4(b)(3), however, opens a window in which such lines of credit may operate. The window is open no more than 14 months, since the board of directors must approve a line of credit within 14 months of the time the credit is extended.

In your letter, you argue that a revolver should not be subject to this time limit. You contend that repeated board of directors review (and the possibility that the board of directors may not renew its approval of an outstanding revolver) puts the bank at a competitive disadvantage in making such loans. Regulation O, however, provides no basis to distinguish revolvers from other types of extensions of credit subject to section 215.4(b).² Indeed, the Board considered the competitive effect of the prior approval requirement on lines of credit when it adopted section 215.4(b), and added the 14-month window specifically to address this concern in a manner consistent with the overall prophylactic purposes of Regulation O.³

You also argue that, in view of the covenants contained in a typical revolver agreement, further board of directors review of draws under a revolver is unnecessary. Once again, Regulation O provides no basis to distinguish revolvers from other types of extensions of credit subject to section 215.4(b). Moreover, the requirement under section 215.4(b)(1)(i) that loans be approved by a majority of a bank's entire board of directors prohibit the board of directors from delegating its loan review responsibilities.⁴ This provision prevents the board of directors from substituting review by the bank's lending officers or credit officers for its own review.

It therefore is my opinion that an extension of credit by a bank to an insider or a related interest of an insider under a commercial revolving line of credit that triggers the bank's prior approval requirements must comply with the provisions of section 215.4(b)(3) of Regulation O, including the requirement that the board of directors of the bank approve the line of credit within 14 months of the credit extension.

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

1. Under section 215.4(b)(1) and (2) of Regulation O (12 C.F.R. 215.4(b)(1) and (2)), an extension of credit by a bank to its insiders or the related interests of its insiders must be approved by the board of directors of the bank before the credit is extended if the credit extended, together with all other credit extended by the bank to the insider and his related interests, exceeds $25,000 or 5 percent of the bank's unimpaired capital and surplus, or in any event exceeds $500,000. Under section 215.4(b)(3), prior approval of an extension of credit under a line of credit is not required if the bank's board of directors approved the line of credit within 14 months of the extension of credit. Return to text

2. Cf. 12 C.F.R. 215.3(b)(5), which excludes qualifying indebtedness under credit card plans and similar arrangements from treatment as an extension of credit. Return to text

3. As originally proposed, section 215.4(b) made no exception to the prior approval requirement for lines of credit. See 44 Federal Register 893 (January 3, 1979). A 14-month exception for draws on approved lines of credit was adopted in response to public comments. See 44 Federal Register 12,959 (March 9, 1979). Return to text

4. See also Letter from General Counsel to Peter Greco (dated June 13, 1988). Return to text