American Bar Association Business Law Today – July 2022

On July 8, 2022, the Federal Reserve Board (“Board”) updated “Question 3” of its Frequently Asked Questions (FAQ) regarding Regulation O, “Loans to Officers, Directors and Principal Shareholders of Member Banks “. In the update, the Board clarified that premium payment by a bank under a shared dollar life insurance arrangement is not an improper extension of credit to an insider if certain conditions are met. .

The update explains that a two-dollar life insurance agreement is an agreement under which the bank has the right to receive a pre-negotiated amount out of the proceeds of the insurance policy upon the death of the insured or when the insured surrenders the policy. The FAQ notes that the arrangement can take several forms – the insurance policy can be owned by the bank, the employee or a third party.

Certain conditions must be met for the shared dollar life insurance arrangement not to constitute an improper extension of credit. Specifically, the arrangement is not an extension of credit where “(i) the bank is not entitled to payment of an amount greater than the premiums paid by the bank (for example, the bank is not entitled payment of the premiums plus a portion assessed interest), and (ii) the insider has no independent obligation to repay the premiums to the bank, other than out of the proceeds of the insurance policy”.


Reprinted with permission from the American Bar Association’s Business Law Today July in Brief: Business Regulation and Regulated Industries.

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