Federal Reserve Board Proposes to Modernize Regulation O Insider Lending Rules

The Board of Governors of the Federal Reserve System (the “Board”) has released a notice of proposed rulemaking (the “Proposal”) to “modernize” Regulation O, which governs loans by member banks to their insiders (directors, certain officers and principal shareholders) and insiders of their affiliates. It would be the first comprehensive update to Regulation O since 1979. The Federal Deposit Insurance Corporation (“FDIC”) separately proposed its own amendments to align the FDIC’s regulations with the Board’s proposed thresholds.

Comments on both proposals are due October 5, 2026.

A. Overview

Regulation O implements sections 22(g) and 22(h) of the Federal Reserve Act, which restrict extensions of credit by Federal Reserve member banks to their executive officers, directors, principal shareholders (holders of more than 10% of any class of voting securities), and their “related interests” (entities controlled by such insiders). These restrictions apply to all banks, not just Federal Reserve member banks, by operation of section 18(j) of the Federal Deposit Insurance Act.

The core substantive requirements of Regulation O include: (1) a prohibition on preferential lending terms to insiders (loans must be made on substantially the same terms as comparable transactions with non-insiders); (2) an individual lending limit capping extensions of credit to any one insider at the higher of $500,000 (proposed to increase to $2,000,000) or 25% of the bank’s unimpaired capital and surplus; and (3) an aggregate lending limit of 100% of unimpaired capital and surplus for all insider loans combined. Certain categories of loans are subject to prior board approval by a majority of disinterested directors.

While Regulation O has been amended periodically on narrow issues, the Board has not undertaken a comprehensive modernization of the regulation since its original adoption. The Board states that the current proposal addresses accumulated inefficiencies, outdated dollar thresholds, and statutory provisions enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act that have not yet been implemented through rulemaking.

B. Key Proposed Changes

Updated Dollar-Based Thresholds

The Proposal would increase six dollar-based thresholds that define exemptions and approval requirements under Regulation O. The proposed methodology would update Regulation O’s dollar-based thresholds based on nominal gross domestic product (“GDP”) measured from 1994, the last time the Board adjusted any of the thresholds. Going forward, the thresholds would be updated every five years based on changes in nominal GDP. Specifically, the Proposal would increase and index the following limits:

• For the amount of certain credit card debt that is exempt from the definition of “extension of credit,” from $15,000 to $60,000;
• For the amount of indebtedness arising from certain interest-bearing overdrafts associated with preauthorized credit plans that are exempt from the definition of “extension of credit,” from $5,000 to $20,000;
• For the exception from the prohibition against paying an overdraft to an executive officer or director for certain inadvertent overdrafts, from $1,000 to $4,000;
• For the “other purpose” exception for unsecured lending to executive officers, from $100,000 to $400,000;
• For the size of an extension of credit that requires prior approval by a bank’s board of directors, from $500,000 to $2 million; and
• For the threshold for public disclosure of loans to executive officers and principal shareholders, from $500,000 to $2 million.

Portfolio Companies of Fund Complexes

Under current Regulation O, when a fund complex becomes a “principal shareholder” of a bank (by holding more than 10% of any class of voting securities), a rebuttable presumption arises that the fund complex “controls” all its portfolio companies. This presumption brings each portfolio company within the definition of “related interest” of the fund complex, subjecting thousands of companies to Regulation O’s insider lending restrictions (even where the fund complex exercises no actual control over those companies).

According to the Board, as of the fourth quarter of 2025, fund complexes are principal shareholders of approximately 66 banks and are presumed to control approximately 2,047 portfolio companies, each of which is technically treated as an “insider” of those banks for Regulation O purposes. Since 2019, the banking agencies have addressed this concern through a series of temporary joint interagency statements providing relief, but these statements require periodic renewal and do not offer permanent certainty.

In light of these considerations, the Proposal would modify the presumption of control in Regulation O in a narrow way to exclude certain portfolio companies of a fund group from beingconsidered an insider under Regulation O. In particular, the presumption of control would not apply to determine whether a portfolio company is a related interest of a fund complex that is a principal shareholder of a bank if:

1. The fund complex is not (and is not affiliated with) a depository institution or holding company supervised and regulated by the Board, FDIC, or OCC (regulated company);
2. No individual investment fund in the fund complex owns or controls more than 10 percent of any class of voting securities of a regulated company;
3. Investment funds in the fund complex that are not index funds do not in the aggregate own or control more than 10 percent of any class of voting securities of a regulated company; and
4. The fund complex does not meet any of the conditions that would give rise to a rebuttable presumption of control under the Board's Regulation Y control rule with respect to a regulated company.

Under the Proposal, any portfolio company of a qualifying fund complex would continue to be a related interest of the fund complex if the complex directly, indirectly, or acting in concert owns or controls, or has the power to vote, 25 percent or more of any class of the portfolio company's voting securities, controls in any manner the election of a majority of the portfolio company's directors, or has the power to exercise a controlling influence over the management or policies of the portfolio company.

New Requirements from the Dodd-Frank Act

The Dodd-Frank Act amended sections 22(g) and 22(h) of the Federal Reserve Act so that extensions of credit subject to Regulation O include “credit exposures” arising from derivatives and securities financing transactions between a bank and its insiders. The Proposal would establish methodologies to determine the amount of these credit exposures. Under the Proposal, the credit exposure from a derivative transaction and securities financing transaction generally would be the exposure amount for the transaction calculated using the risk-based capital rule of the bank’s appropriate federal banking agency.

The Dodd-Frank Act also introduced requirements for asset purchases and sales between a bank and its insiders. Such transactions must be on market terms and, when sufficiently large, approved in advance by a majority of a bank’s board of directors. The Proposal would codify these requirements and specify that a transaction is on market terms if the terms and circumstances of the transaction are substantially the same as those offered to third parties. The Proposal would also incorporate into Regulation O other existing statutory requirements relating to bank insider lending, such as correspondent bank restrictions, that are not currently reflected in the regulation.

Valuation Principles for Extensions of Credit

To provide clarity on how banks should value extensions of credit under Regulation O, the Proposal would establish valuation principles for various types of extensions of credit and purchases and sales of assets. In order to minimize compliance burdens, the Proposal would rely on valuation principles currently in the Board’s Regulation W, which governs transactions with affiliates. For extensions of credit originated by a bank, the Proposal generally would value the transaction at the greater of: (i) the principal amount of the extension of credit; (ii) the amount owed by the insider to the bank; or (iii) the sum of the amount provided by the bank to, or on behalf of, the insider plus any additional amount the bank could be required to provide. For extensions of credit acquired by a bank from a third party, the Proposal would value the transaction at the price paid by the bank plus any additional amount the bank could be required to provide under the terms of the agreement. For a bank’s purchase of or investment in a debt security of an insider, the Proposal would value the extension at the greater of the bank’s purchase price or the carrying value of the debt securities (determined in accordance with GAAP), with a floor at the consideration originally paid by the bank.

Under the valuation principles, a $300 revolving credit facility would be valued as a $300 extension of credit regardless of the amount drawn, a guarantee backstopping a $500 debt issuance by an insider would be a $500 extension of credit, and a line of credit would be valued at the total commitment amount (including undrawn amounts). According to the Board, these methodologies are designed to ensure that the value of an extension of credit equals the full amount of the bank’s exposure to the insider and would be consistent with similar approaches in Regulation W, enabling banks to rely on existing compliance systems.

Revisions to the Definition of “Extension of Credit”

The Proposal would expand the non-exhaustive list of transactions that constitute “extensions of credit” under Regulation O. Specifically, the Proposal would add: (1) a lease that is the functional equivalent of an extension of credit (including full-payout net leases), codifying an existing interpretation and aligning with Regulation W; (2) an investment in debt securities of an insider, on the basis that such investments give rise to an obligation by the insider to pay funds to the bank and thus create credit exposure; and (3) an increase in the amount of, extension of maturity of, or adjustment to the interest rate term or other material term of, an existing extension of credit, clarifying that significant modifications economically amount to a new extension of credit that must comply with Regulation O. This last addition uses language from Regulation W and is intended to address situations where an insider and bank could approve a compliant extension of credit only to later revise it in a manner inconsistent with the regulation.

The Proposal also would expand the list of guarantee-type transactions that are extensions of credit. Currently, Regulation O specifies that standby letters of credit and ineligible acceptances are extensions of credit. The Proposal would add the issuance of a guarantee, acceptance, or letter of credit (including an endorsement on behalf of an insider) and a confirmation of a letter of credit issued by an insider, using language from Regulation W’s definition of “covered transaction.” The Proposal would also clarify that credit derivatives in which a bank provides credit protection to a third party with respect to an obligation of an insider constitute a guarantee by the bank on behalf of the insider for Regulation O purposes.

In addition, the Proposal would eliminate the exception for inadvertent overdrafts from the definition of “extension of credit” while retaining the broader exception for interest-bearing overdraft credit plans. The Board noted that banking practices with respect to overdrafts have changed since the inadvertent overdraft exception was adopted in 1968, as banks are now more likely to have overdraft protection plans. However, the Proposal would retain the separate exception for inadvertent overdrafts with respect to the prohibition against paying overdrafts to executive officers and directors, with the threshold increased to $4,000 as noted above. The Proposal would also codify the Board’s longstanding practice of treating extensions of credit to the spouse of an insider (or the related interest of a spouse) as having been made to the insider, unless the spouse is independently creditworthy and repayment is not predicated on the insider’s income.

Modernizing the Definition of “Executive Officer”

The Proposal would modernize the definition of “executive officer” by revising the list of titles that presumptively render a person an executive officer. Specifically, the Proposal would remove “every vice president,” “the cashier,” and “the secretary” from this list, and would add the chief executive officer, chief financial officer, chief lending officer, and chief investment officer. The Board noted that these changes reflect the evolution of banking practices since the list was first adopted in 1935. The title of vice president has become widely used, particularly at large banking organizations, to cover a range of officials with limited policymaking responsibilities. These revisions are intended to reduce regulatory burden by decreasing the number of individuals covered by the title presumption while adding titles that identify persons who typically participate in a bank’s policymaking decisions. The functional analysis portion of the definition, capturing anyone who in practice participates in major policymaking functions, would remain unchanged.

Lending Limit and Collateralization Requirements for Undrawn Lines of Credit

Under current Regulation O, the entire amount of a line of credit (both drawn and undrawn portions) counts toward the individual lending limit, and a bank must collect collateral for the entire amount (including the undrawn portion) when extensions of credit to an insider exceed 15% of the bank’s unimpaired capital and surplus. The Proposal would provide a new exception: a bank would not be required to collect collateral from an insider for the unused portion of a line of credit if the bank has no legal obligation to advance funds until the insider has posted the required collateral. The unused portion would continue to count toward the lending limits. This change is intended to reduce burden while preserving the bank’s protection, as the insider would be unable to draw funds without first posting collateral.

C. Conclusion

The Board believes these proposed changes will modernize Regulation O, reduce compliance burden for banks, and provide greater clarity regarding insider lending restrictions, advancing the purposes of sections 22(g) and 22(h) of the Federal Reserve Act and implementing provisions of the Dodd-Frank Act that have not yet been codified through rulemaking.

However, institutions would still be required to comply with the core substantive requirements of Regulation O, including the prohibition on preferential lending terms to insiders, the individual and aggregate lending limits, and the prior board-of-directors approval requirements for extensions of credit above the applicable threshold. The requirement that insider loans be made on substantially the same terms as comparable transactions with non-insiders would remain unchanged, and the functional analysis for determining executive officer status continues to capture anyone who participates in major policymaking functions regardless of title

This advisory is a general overview of the Proposal and is not intended as legal advice. If you have any questions about the Proposal or Regulation O in general, please feel free to contact Joseph D. Simon at (516) 357-3710 or via email at jsimon@cullenllp.com, Elizabeth A. Murphy at (516) 296-9154, or via email at emurphy@cullenllp.com, David Curatolo at (516) 357-3773 or via email at dcuratolo@cullenllp.com, or Gabriela Morales at (516) 357-3850 or via email at gmorales@cullenllp.com.