OFFICIAL SEAL OF THE BOARD OF GOVERNORS 

OF THE FEDERAL RESERVE SYSTEM 

OFFICIAL LETTERHEAD STATIONERY FOR 

SCOTT G. ALVAREZ, GENERAL COUNSEL 

BOARD OF GOVERNORS OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

May 22, 2006 

Douglas H. Jones, Esq. 

Acting General Counsel 

Federal Deposit Insurance Corporation 

550 17th Street, N.W. 

Washington, DC 20429 

Dear Mr. Jones: 

This is in response to your letter dated February 13, 2006, requesting 

clarification of the application of the Board’s Regulation O (12 CFR part 215) to credit 

cards issued to bank insiders for the bank’s business purposes. Specifically, you have 

asked whether and under what circumstances an insider’s use of a bank-owned credit 

card would be deemed an extension of credit by the bank to the insider for purposes of 

Regulation O. 

You have indicated that insiders of a bank often use a bank-owned credit 

card to purchase goods and services for the bank’s business purposes. A bank-owned 

credit card is a credit card issued by a third-party financial institution to a bank to enable 

the bank (through its employees) to finance the purchase of goods and services for the 

bank’s business. I understand that a bank that provides a bank-owned credit card to its 

employees typically forbids or discourages use of the card by employees for their 

personal purposes and that an employee who uses the card for personal purposes is 

obligated to promptly reimburse the bank. I also understand that the bank is liable to the 

card-issuing institution for all extensions of credit made under the card (whether for the 

bank’s business purposes or for an employee’s personal purposes). [Footnote 1. Begin text 

of Footnote 1. I also understand that some banks directly issue credit cards to their 

employees to enable the employees to finance the purchase of goods and services 

for the bank’s business (“bank-issued credit cards”). The principles set forth in this 

letter with regard to bank-owned credit cards also would apply to bank-issued credit 

cards. End Footnote.] 

Although section 215.3(a) of Regulation O defines an extension of credit 

broadly to include “a making or renewal of a loan, a granting of a line of credit, or an 

extending of credit in any manner whatsoever,” the rule also provides several important 

exceptions to the definition that are relevant to your inquiry. Section 215.3(b)(1) of 

Regulation O excludes from the definition of extension of credit any advance by a bank 

to an insider for the payment of authorized or other expenses incurred or to be incurred 
2 

on behalf of the bank. Section 215.3(b)(5) of Regulation O excludes from the definition 

of extension of credit indebtedness of up to $15,000 incurred by an insider with a bank 

under an ordinary credit card. 

In light of these provisions of the regulation and the purposes of the 

insider lending restrictions in the Federal Reserve Act, it is my opinion that a bank does 

not make an extension of credit to an insider for purposes of Regulation O at the time of 

issuance of a bank-owned credit card to the insider (regardless of whether the line of 

credit associated with the card is greater than $15,000). In addition, a bank does not 

extend credit to an insider for the purposes of Regulation O when the insider uses the 

card to purchase goods or services for the bank’s business purposes. When an insider 

uses the card to purchase goods or services for the insider’s personal purposes, however, 

the bank may be making an extension of credit to the insider. An extension of credit 

would occur for the purposes of Regulation O if (and to the extent that) the amount of 

outstanding personal charges made to the card, when aggregated with all other 

indebtedness of the insider that qualifies for the credit card exception in 

section 215.3(b)(5) of Regulation O, exceeds $15,000. 

You also ask whether incidental personal expenses charged by an insider 

to a bank-owned credit card are per se violations of the market terms requirement in 

section 215.4(a) of Regulation O because non-insiders do not have access to this form of 

credit from the bank. Section 215.4(a) requires extensions of credit by a bank to its 

insiders to (i) be on substantially the same terms (including interest rates and collateral) 

as, and subject to credit underwriting standards that are not less stringent than, those 

prevailing at the time for comparable transactions with non-insiders; and (ii) not involve 

more than the normal risk of repayment or other features unfavorable to the bank. 

A bank may be able to satisfy the market terms requirement, however, if 

the bank approves an insider for use of a bank-owned credit card only if the insider meets 

the bank’s normal credit underwriting standards and the card does not have preferential 

terms (or the card does not have preferential terms in connection with uses of the card for 

personal purposes). Nonetheless, use of a bank-owned credit card by an insider for 

personal purposes may violate the market terms requirement of Regulation O if the card 

carries a lower interest rate or permits a longer repayment period than comparable 

consumer credit offered by the bank. 

This opinion applies only to the specific issues and circumstances 

described above and does not address any other issues or circumstances. Please do not 

hesitate to call me if you have any additional questions concerning this matter. 

Sincerely, 

(signed) 

Scott G. Alvarez