Banking Interpretations

General Regulations Part 11

March 25, 2008

Issue

Is there any legal objection to a loan purchase by the Bank as outlined below?

Recommendation

The Bank should get approval from its board of directors prior to purchasing the loan.

Reasoning

[---], a director of the Bank, purchased a building which currently is occupied by a branch of the Bank.  The purchase of the building was financed by a $440,000 commercial mortgage loan from [---], a Michigan affiliate of the Bank.

The Bank proposes to purchase the commercial loan from its Michigan affiliate, and has therefore asked the Banking Department for approval to do so.

A the outset, I note that under section 11.1(c) of the General Regulations of the Banking Board (“GRBB”), a "loan" is a "business transaction."  Further, the regulation does not differentiate between a loan that is "acquired" and a "loan" that is made by a bank.  Actually, I don't think the drafters of the regulation intended for loans "acquired" and "purchased" to be treated differently for (as can be observed in this case) this differential treatment would allow for circumvention of the regulation.

In accordance with sections 11.1(e)(3) and 11.1(f) of the GRBB, the purchase of the loan would result in the Bank being involved in an "Insider transaction," and therefore, the Bank should receive approval from its board of directors prior to the purchase.