After hearing Sean’s presentation and taking a close look at the loan presentation sheet, what is your decision on the Sam Wilson loan? How will you vote? Yes, for approval? Yes, if certain issues are resolved? No, for denial?

After you’ve made your decision, watch the video clip and see what the rest of the board decided.

It looks like Madison is on top of things again and is keeping the bank out of trouble. She noted both the Regulation B and O issues.

She correctly saw that Sam met the bank’s credit standards on his own and that requiring his wife’s signature would trigger a Regulation B violation. She even recounted the remedies required of one bank that violated Regulation B. In that case, the bank increased its operational risk and, among other things, its reputational and legal risk exposures, all because it was not familiar with the provisions of Regulation B.

With respect to Regulation O, Madison correctly identified her father as an insider and noted that Regulation O applied. Thus, Sam’s low interest rate loan would violate Regulation O because there was no evidence that the bank gives the same low rate to its other good customers. Had Hiram not been an insider, the bank could have given Sam the low interest rate, even though there is “no evidence that the bank gives the same low rate to its other good customers.” That is, both factors have to be present to violate Regulation O—both insider involvement and preferential loan terms.

There are two major points to take from the Sam Wilson loan:

• Be especially leery of loans where the borrower may have some “inside track” with the bank because of position, relationship or ability to influence.
• Be watchful of loans that involve the spouse of the loan applicant. It is one thing for the borrower to volunteer to have a spouse co-sign on a loan. Depending upon state law, it’s a regulatory violation for the bank to require the spouse to co-sign. Even if the loan in question requires the added support of a co-signer or guarantor for the bank to safely extend credit, the bank should let the borrower suggest who the co-signer or guarantor might be, and the bank can determine if the suggested co-signer is acceptable.

It is also important to note that Madison did not mention that Insights Bank couldn’t make the loan. She didn’t question the borrower’s credit-worthiness. Instead, her focus was on the circumstances surrounding the loan and its potential for triggering regulatory issues.

Though regulatory issues may be involved in making a particular loan, that doesn’t mean that the loan proposal cannot be approved. It just means that the bank must abide by the restrictions of the particular regulation.