Banking Interpretations

Gen. Reg. Part 11

New York State Banking Department

To:  Robert Mengani
From: Bryan Farrell
Date: December 18, 2007
Subject: [—] ("Bank") – Insider Sale of Mortgages to Bank


The application of Part 11 "Insider Transactions" regulation to agreement between the Bank and an entity partly owned by one of the Bank's directors.


Part 11 requires that each mortgage purchase transaction be specifically reviewed by the Bank's board of directors.


The Bank entered into a agreement with [—] ("Funding") in 2004 pursuant to which the Bank may, from time to time, buy residential mortgages from Funding. Funding is 23% owned by a Bank director. The umbrella agreement provides the terms in the event the Bank elects to purchase a particular mortgage. Particular loans are individually purchased pursuant to a separate agreement described in the umbrella agreement as an "electronic commitment." The price of each loan purchased is determined individually, pursuant to the electronic commitment. The terms of each purchase are a combination of those set forth in the individual electronic commitments and the umbrella agreement.

The transaction described above is an "insider transaction" within the meaning of Part 11.1(f)(1) since the director is considered an "insider" pursuant to Part 11.1(e) and Funding is considered a "person related to an insider" pursuant to Part 11.1(i) because it is more than 10% owned by the director. With respect to the disclosure requirements of Part 11.3, (i.e., those insider transactions of sufficient size that they must be reviewed and approved by the Bank's board) you have advised that the disclosure trigger amount is $50,000 based on the total assets of the Bank.

Assuming the correctness of the facts you have provided, the questions then become (1) whether the transaction above has ever been "specifically reviewed" by the Bank's board of directors, and if so, (2) whether the transaction constitutes a "part of a series of related business transactions." If the transaction is "part of a series of related business transactions" then bank board review and approval is required only once. If it is not, then such a review is required every time there is a purchase transaction.

Answering the questions in reverse order, I do not believe the transactions described above are interrelated. The umbrella agreement binds neither party to anything. At most it is a conditional agreement, the terms of which do not go into effect unless and until the Bank makes an independent decision to purchase a mortgage. Purchases occur only in the event the Bank chooses to make one.

Nor could the umbrella agreement constitute an agreement by itself because the all ­important price term is missing. There can be few terms more material than price. Without an agreement on price, there is no substantial agreement. Hence, each transaction stands alone.

Thus, it appears to me that Part 11.3 would require that each purchase transaction be specifically reviewed by [—]’s board of directors as each is separate and only comes into existence when an "electronic commitment," described above, is made. However, in any event, the board resolution made in 2004 to disclose these then proposed transactions is not adequate to satisfy Part 11 even if the transactions above were to be considered a single series of interrelated transactions. The purpose of the board review requirement is so that independent directors can assess whether the transactions to be conducted with an insider are indeed in the best interests of the bank. The board resolution in question merely authorizes certain officers to purchase mortgages from Funding, without any reference to the fact that a director has a stock interest in Funding. There is no evidence whatsoever that such director's interest has been made known to the board or that the specifics of any given loan transaction have been considered by the board. Without such disclosure, of course, it cannot be said that the Bank's transactions with Funding have ever been approved.

Concluding, it is my opinion that a blanket approval in this case would not serve as board authorization for all of the mortgage purchases under the umbrella agreement because each transaction is separate. Given that each transaction is separate, every loan purchased, including those that might not conform to underwriting standards, must be disclosed to and reviewed by the board. I am not aware of any other way that the Bank can proceed with the individual purchases. If it is difficult to get the board together, if the Bank meets the requirements of Banking Law § 7008(2), meetings can be held by way of a conference call. The difficulty of convening meetings to consider these transactions does not unburden the board from having to do it.

You also inquired whether section 215.4 of Federal Reserve Regulation O (12 CFR 215.4) would be applicable. Regulation O pertains to extensions of credit from member banks to directors, among other insiders. Section 215.4 prohibits a member bank from extending credit to any insider of the bank or an insider of a bank affiliate on terms more favorable than it would extend credit to other persons. We do not believe that this section or other sections of Regulation O would be applicable here, as the purchase of a loan by the Bank from Funding would not appear to constitute an "extension of credit" as that term is defined in section 215.3 of Regulation O.

We note that Section 23A of the Federal Reserve Act and the Federal Reserve's Regulation W (Part 223) apply to so-called "covered transactions" between member banks and their affiliates. A purchase of an asset, such as a loan, would be considered a "covered transaction". However, we do not believe that 23A or Regulation W would be applicable to this situation either, since Funding does not appear to be an "affiliate" of the Bank, as that term is defined in 12 CFR 223.2.

Noted: MEG