Supts. Regulations Part 321
To: Examiner DeSimone
From: Jacquelyn A. Hart - Legal Division
Date: January 3, 2003
Subject: [ ]
In connection with an $18.0 million participation in a $130.0 million loan, increased from an original $1 5.0 million participation in a $1 23.0 million loan (the "Loan"), made by [ ], a New York State chartered savings bank ("[ ]"), to [ ], a private, not-for-profit corporation ("[ ]'), I have reviewed applicable sections of New York State Banking Law, the rules and regulations promulgated thereunder, various federal statues and the legal opinion of Thacher Proffitt & Wood, dated December 12, 2002 (the "Thacher Proffitt Opinion"), to determine if the Loan violated any applicable law, rule or regulation. (A copy of the Thacher Proffitt Opinion is attached.)
Based on the facts presented, it does not appear that the Loan conflicts with, or violates, any applicable law, rule or regulation.
[ ] is a private, not-for-profit mortgage lender specializing in financing low- income, moderate-income and middle-income housing throughout New York and New Jersey. [ ] is sponsored by in excess of 90 banking and insurance institutions. These institutions contribute capital, participate in lending activities and provide governance to [ ] by having members of their institutions sit on [ ] board of directors, Mortgage Committee and other policy making bodies. [ ] is one such institution, having been an active sponsor of [ ] since its founding in 1974.
On June 1, 1 999, a consortium of 14 banking institutions lent an aggregate of $123 million to [ ] for construction improvements to, and management preservation of, [ ]. [ ] participation in the original loan was $15.0 million. On January 26, 2000, the total amount of the Loan was increased to $130.0 million, and' [ ] participation was increased to $18.0 million. [ ] participation was approved in accordance with its Commercial Real Estate Lending Policy (the "Lending Policy") by [ ] President and Chief Executive Officer of [ ]; together with one Vice Chairman of [ ] in the case of the original $15.0 million participation and two Vice Chairman of [ ] in the case of the $18.0 million amended amount.
As previously stated, [ ] served as President and Chief Executive Officer of [ ] at the time the Loan was entered into, as well as when it was increased. Additionally, he served as Chairman of the Board of [ ] during those periods. [ ]service to the [ ] board of directors is on behalf of [ ] overseeing [ ] membership interest in [ ]. Neither [ ] nor [ ] has a pecuniary interest in [ ], and, [ ] receives no remuneration for his service as a member of [ ] board of directors.
New York State Banking Law
Section 103(8) of the Banking Law of the State of New York prohibits a bank from lending "any sum of money to any executive officer or director of such bank." Section 321.2 of the Superintendent's Regulations, which implements § 103(8), states that, except in certain instances,
each of the following shall be considered to be a loan to, extension of credit to or indebtedness of an executive officer or director of a bank under the provisions of Banking Lavv, sections 103(2), 130(5) and 130(6):
(1) any transaction as a result of which an executive officer or director of a bank becomes obligated, or renews his obligation, to such bank upon any note, draft, bill of exchange or other indebtedness, as maker, drawer, endorser, guarantor, surety or otherwise;
(2) any transaction as a result of which a corporation, in which such executive officer or director, or any combination of such persons, owns or controls a majority of the stock, or as a result of which a partnership in which an executive officer or director is a partner, becomes obligated, or renews its obligation, to such bank upon any note, draft, bill of exchange or other indebtedness, as maker, drawer, endorser, guarantor, surety or otherwise;
(3) any advance by means of an overdraft; and
(4) any issuance of a standby letter of credit.
Additionally, §130 of the Banking Law places restrictions on officers, directors and employees of a bank in, among other things, borrowing from such an institution. The Loan does not qualify as a prohibited transaction under any of the provisions set forth above. The Loan was not made to [ ] as an individual or to a corporation in which he owns or controls a majority of the stock. As previously stated, [ ] involvement in[ ] is limited to a directorship for the sole purpose of overseeing the interests of [ ] as a member of [ ].
12 U.S.C. §275b (Section 22(h) of the Federal Reserve Act) generally provides that "[n]o member bank may extend credit to any of its executive officers, directors, or principal shareholders, or to any related interest of such a person." 12 U.S.C. § 1828(j)(2) extends the applicability of that section to nonmember insured banks such as [ ].
Additionally, the Federal Reserve Board has promulgated Regulation 0, which implements Section 22(h) of the Federal Reserve Act and restricts the credit that a member bank may extend to its executive officers, directors, and principal shareholders and their related interests. A related interest is defined in Section 215.2 of Regulation 0 to include a company that is controlled by that person; or a political or campaign committee that is controlled by that person or the funds or services of which will benefit that person. In order to be deemed to have control over a company, the executive officer, director or principal shareholder of the bank must directly or indirectly, or acting through or in concert with one or more persons (i) own, control, or have the power to vote 25 percent or more of any class of voting securities of the company; (ii) control in any manner the election of a majority of the directors of the company; or (iii) have the power to exercise a controlling influence over the management or policies of the company. Section 215 of Regulation 0 further provides that an individual is not considered to have control, including the power to exercise a controlling influence over the management or policies, of a company or bank solely by virtue of the individual's position as an officer or director of the company.
[ ]is one of a number of directors of [ ]. [ ] is one of 90 + banking institutions that are involved in the activities of [ ].; [ ] is not in a position to elect a majority of the board of [ ] or to exercise a controlling influence over the management or policies of [ ]. Therefore, [ ] cannot be deemed to be a related interest to [ ] for purposes of Regulation 0.
[ ] Lending Policy
Under the terms of the Lending Policy in place at the time the Loan was made, [ ] was authorized to approve the loan, together with certain other individuals at [ ]. Based on the facts as presented in the Thacher Proffitt Opinion, the Lending Policy procedures appear to have been followed in the case of the Loan. Additionally, although not required under the existing Lending Policy, it appears that the [ ] board of directors was informed of the Loan in connection with periodic CRA updates.
Based on the facts presented, it does not appear that the Loan conflicts with, or violates, any applicable law, rule or regulation. Further, it appears that [ ] adhered to its internal procedures in approving the Loan. However, in the interest of avoiding any future appearance of conflict or impropriety, it is recommended that; [ ] adopt, on a going forward basis, the amendments to its Lending Policy proposed in the first full paragraph of page 4 of the Thacher Proffitt Opinion.