By the Division of Banks


  1. APPLICABILITY AND SCOPE

    The purpose of this bulletin is to clarify the relationship between certain Massachusetts banking statutes1 governing extensions of credit to officers, and directors or trustees and applicable federal provisions found in Regulation O2. The bulletin also sets forth approval and record keeping requirements governing certain service or contract transactions between a financial institution and specified insiders. It is intended to limit the potential for unsafe and unsound insider abuses and self-dealing. It also seeks to eliminate apparent or unnecessary compliance conflicts between state and federal provisions and thereby avoid unnecessary regulatory burden.

    State-chartered trust companies, co-operative banks, and savings banks are subject to the provisions of this bulletin. State-chartered credit unions are not subject to Regulation O.

  2. DEFINITIONS

    The following words shall, unless the context otherwise requires, have the following meanings:

    Affiliate: the word as defined by 12 CFR 215.2(a).

    Company: the word as defined by 12 CFR 215.2(b).

    Control: the word as defined by 12 CFR 215.2(c).

    Director: any director of a stock co-operative bank, stock savings bank, trust company, or credit union. However, the term does not include an honorary director provided such honorary position meets the requirements of 12 CFR 215.2(d) (1)-(3).

    Division: the Division of Banks, including the Commissioner of Banks.

    Immediate family: the words as defined by 12 CFR 215.2(g).

    Insider: the word as defined by 12 CFR 215.2(h), except that "executive officer" shall mean "officer."

    Officer: any person who is subject to the provisions of G.L. c. 168, s. 19; G.L. c. 170, s. 19; G.L. c. 172, s. 18. The term also includes any officer of a credit union specified in G.L. c. 171, s. 15 for the purposes of Section III of this bulletin.

    Person: the word as defined by 12 CFR 215.2(l).

    Principal shareholder: the words as defined by 12 CFR 215.2(m).

    Related interest: the words as defined by 12 CFR 215.2(n).

    State-chartered institution: a savings bank, co-operative bank, trust company, or credit union chartered under the laws of the Commonwealth of Massachusetts.

    Subsidiary: the word as defined by 12 U.S.C. § 1841(d).

    Trustee: any trustee of a savings bank, including a member of its board of investment. The term does not include a corporator unless such corporator also is a trustee or officer. However, the term does not include an honorary trustee provided such honorary position meets the requirements of 12 CFR 215.2(d)(1)-(3).

  3. POLICY

    A. Extensions of Credit to Officers, Directors or Trustees, and Principal Shareholders and Related Interests

    1. Relationship Between Massachusetts Statutes and Regulation O

      It is the Division’s position that Massachusetts statutory prohibitions and limitations on loans to officers and directors or trustees are to be read in conjunction with applicable comparable provisions of 12 CFR Part 215 – Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks (Regulation O). The general rule is that the more stringent or restrictive provision of state or federal law shall ordinarily control. For example, Regulation O generally permits certain types of credit to be extended by a financial institution to its executive officers up to the institution’s legal lending limit in certain circumstances. (See 12 CFR 215.5(c)(1)-(4), expressly authorizing unlimited education loans; residential mortgage loans; certain secured loans under 12 CFR 215.4 (d)(3)(i)(A); and, other credit for unspecified purposes up to specified aggregate limits.)

      State statutory provisions, however, substantially limit extensions of credit by state-chartered institutions to their officers.

      Such institutions are generally limited to credit extensions of up to: (a) $200,000 for educational purposes; (b) $750,000 for residential mortgage loans; and, (c) $100,000 for secured or unsecured loans for unspecified purposes3. Certain loans secured by deposits also are exempted from the general statutory prohibitions. Since state law is more restrictive as to the types and amounts of credit a state-chartered institution may extend to its officers, it is legally controlling notwithstanding the relatively more liberal provisions of Regulation O.

    2. Extensions of Credit to Officers
      1. All extensions of credit by a state-chartered institution to its officers shall be limited to the types of credit and subject to the maximum aggregate loan limitations specified in the applicable provisions of G.L. c. 168, s. 19; G.L. c. 170, s. 19; c 171, s. 20 and 58, or G.L. c. 172, s. 18, as dictated by the institution’s type of bank charter4. Such credit extensions shall also be subject to the provisions of Section III (A)(4) and (6) of this bulletin.
      2. An institution may utilize the corporate procedures or documents specified in 12 CFR 215.2 (e)(1) to exclude individual officers if such persons do not "participate in major policy functions" provided other state statutory criteria are satisfied.
    1. Extensions of Credit to Directors or Trustees

      All extensions of credit by a state-chartered institution to its directors or trustees shall be subject to the maximum aggregate loan limitations specified in G.L. c. 168 s. 19, c. 170 s 19, c. 171 s 20, c. 172 s 18 in or 12 CFR 215.2(i) and 12 CFR 701.21(d) (to the extent it is applicable), whichever is less. Such credit extensions also shall be subject to the provisions of Section III of this bulletin.

    2. Extensions of Credit to Principal Shareholders and Related Interests

      Extensions of credit by a state-chartered institution to principal shareholders and related interests are governed by Regulation O, except to the extent that G.L. c. 172, s. 18, imposes specific public reporting requirements for extensions of credit to principal shareholders and related interests of trust companies, stock savings banks, and stock co-operative banks. (See above Section III (A)(1).

    3. Non-Preferential Credit Terms and Conditions and Prohibited Fees
      1. No state-chartered institution shall extend credit, contracts or services to officers, directors or trustees upon preferential terms and conditions.
      2. The term "preferential terms and conditions" or similar terms used in this bulletin shall be construed in accordance with 12 CFR 215.4(a) and the prohibitions contained therein, excluding credit extensions made under employee benefit or compensation programs which are otherwise permitted under 12 CFR 215.4(a)(2)(i)-(ii).
      3. A credit union shall not make any loan or extend any line of credit if, either directly or indirectly, any commission, fee or other compensation is to be received by the credit union’s directors, senior management employees, loan officers, or any immediate family members of such individuals, in connection with underwriting, insuring, servicing, or collecting the loan or line of credit. However, salary for employees is not prohibited by this section (12 CFR 701.21(c)(8)(i).
    1. Abstention and Prior Approval Requirement
      1. A director or trustee, including an officer who is also a director or trustee, shall formally abstain from reviewing or approving any loan, insider contract or service or extension of credit authorized by Section III (A) of this bulletin from which he or she will receive a benefit.
      2. All loans or extensions of credit, insider contracts or services covered by Section III (A and B) of this bulletin shall require the formal prior approval of a majority of the state chartered institution’s disinterested directors or trustees.
      3. The term "prior approval" or similar terms used in this bulletin shall be construed in accordance with 12 CFR 215.4(b) and the requirements set forth therein.
    1. Record keeping Requirements
      1. Internal Records

        State-chartered institutions shall maintain complete and accurate internal records and documentation demonstrating compliance with Section II (A) of this bulletin. Such internal records shall be deemed to be in compliance with this provision if they meet the requirements of 12 CFR 215.8. The records required to be maintained hereunder shall be subject to examiner review for compliance with this bulletin.

      2. Public Reports

        State-chartered institutions shall prepare and file with the Division the information on loans and credit extensions to officers and directors or trustees, principal shareholders and related interests required by G.L. c. 168, s. 20; G.L. c. 170, s. 19; or G.L. c. 172, s. 18. Filed reports are subject to disclosure upon request pursuant to the Commonwealth’s Public Records Law, G.L. c. 66, s. 10. (See Regulatory Bulletins 1.1-104 and 2.1-103). These reports are distinct from and in addition to the publicly available data required under 12 CFR 215.11.
  1. B. Contracts or Services between State-chartered Institutions and Insiders

    1. Insider Contracts or Services
      1. Types of Contracts and Services

        Transactions between a state-chartered institution and an insider, as defined in Section III above, for: (i) goods, including but not limited to, insurance, supplies and other goods used in the normal course of transacting a banking business; (ii) professional or other services, including but not limited to, legal, accounting, management, consulting, facility maintenance and management, brokerage of all kinds (i.e., real estate, securities and insurance brokerage); architectural or general contracting; and, (iii) the lease or sale of personal or real property to the institution are subject to the requirements of Section III (B) of this bulletin.

      2. Determining the Threshold Allowance of Insider Contracts or Services

        Determining the Threshold Allowance of Insider Contracts or Services refers to the annual aggregate amount of related insider contracts, outstanding extension(s) of credit, commissions, fees and or any other related compensation that meets or exceeds the following minimum thresholds:

        1. $20,000 - if the institution has less than $100 million in total assets;
        2. $50,000 - if the institution has more than $100 million in total assets, but less than $500 million in total assets;
        3. $100,000 - if the institution has more than $500 million in total assets.

        A written application can be submitted to the Division to modify these threshold amounts. However, an approval will be considered on a case by case basis (See RB 1.1-103, Advisory Opinion and Approval Requests.)

      3. Exception for Intercompany Transactions

        The provisions herein applicable to the application of the voting, record keeping and other requirements of this bulletin do not apply to "transactions" between "affiliates" as those terms are defined in 12 U.S.C. § 371(c) or to "intercompany transactions" which involve a federal bank holding company which controls 100% of the common stock, directly or indirectly, of all parties to a transaction.

    1. Record Keeping Requirements

      State-chartered institutions shall maintain complete and accurate internal records and documentation demonstrating compliance with Section III (A and B) of this bulletin. Such internal records shall include, at a minimum: (a) records and data relied upon by the board in approving each insider transaction; (b) the insider’s name, position or relationship that causes such person to be deemed an insider; (c) the date the transaction was approved; (d) minutes of the board vote, including a statement articulating the board’s rationale and statements of any dissenting board members; and (e) all pertinent contracts or agreements and payment records. The records required to be maintained by Section III above shall be subject to examiner review for compliance with this bulletin.

  1. HISTORICAL NOTES,

    This bulletin incorporated Opinion #93-O96 and Opinion #97-O53, and rescinded, repealed, and replaced Administrative Bulletin 9-1, which was originally issued on November 10, 1978. It was subsequently reissued in substantially the same form on July 1, 1979 and again in February 1993. On March 29, 2013, this bulletin was updated where necessary and to reflect the consolidation of Regulatory Bulletin 4.1-101 Loans and Fees to Directors and Senior Management Employees, which had applied only to credit unions, into this bulletin. Accordingly, Regulatory Bulletin 4.1-101 was repealed as of the same date.

  2. AUTHORITY

    G.L. c. 66, s. 10; c. 167, s. 6; c. 168, ss. 6, 19-20; c. 170, s. 19; c. 171, s. 15; c. 172, s. 18; 12 CFR 215; 12 CFR 337.3; 12 U.S.C. 1842(d).

1 The Massachusetts banking statutes generally prohibit any extensions of credit to certain officers of state-chartered institutions except for certain enumerated types of credit on a non-preferential basis. Maximum loan limits are prescribed for each type of authorized credit. Non-preferential extensions of credit to directors and related interests are permitted up to statutory limits on maximum loans to one borrower requirements provided certain approval and abstention requirements are met. Specific public reporting requirements also are prescribed. (See generally, G.L. c. 168, ss. 19-20; G.L. c. 170, s. 19; G.L. c. 172, s. 18; G.L. c. 171 s. 20)

2 References to Regulation O are cited to 12 CFR Part 215 which governs state-chartered member banks and state-chartered, FDIC insured, non-member banks through an incorporation by reference in 12 CFR Part 337.3.

3 The cited maximum aggregate loan limitations reflect statutory amendments as of June 30, 2012.

4 Stock form savings banks and co-operative banks are governed by G.L. c. 172 s. 18. Only mutual form savings banks and co-operative banks are governed by G.L. c. 168 ss. 19-20 and G.L. c. 170 s. 19, respectively.