Extensions of Credit to Executive Officers, Directors, and Principal Shareholders
Question
Which of the following is true regarding extensions of credit to executive officers, directors, and principal shareholders?
Answers
Explanations
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A. B. C. D.A
Under the Federal Reserve's Regulation O (12 CFR Part 215), banks are required to comply with certain restrictions and guidelines regarding extensions of credit to executive officers, directors, and principal shareholders.
One of the key requirements is that any extension of credit to these individuals must be on terms and underwriting standards that are consistent with safe and sound banking practices. Additionally, there are limits on the amount of credit that can be extended to these individuals, and certain approvals may be required.
Regarding the specific question, the correct answer is A: extensions of credit to executive officers, directors, and principal shareholders must be approved in advance by the board of directors if the aggregate credit is more than the greater of either $25,000 or 5 percent of the bank's capital and surplus, not exceeding $500,000.
This means that if the total amount of credit extended to all executive officers, directors, and principal shareholders is greater than either $25,000 or 5 percent of the bank's capital and surplus (whichever is greater, up to a maximum of $500,000), then approval must be obtained from the bank's board of directors before the credit can be extended.
Option B is incorrect because it only mentions a dollar threshold of $50,000 without considering the bank's capital and surplus, which is a key factor in determining the maximum amount of credit that can be extended without board approval.
Option C is incorrect because it suggests that there is a hard limit of $100,000 on the amount of credit that can be extended to executive officers, directors, and principal shareholders, which is not the case. The limit is based on a percentage of the bank's capital and surplus.
Option D is also incorrect because it suggests that the aggregate credit limit is $250,000, which is not accurate. The limit is based on a percentage of the bank's capital and surplus, as discussed in option A.
