|December 6, 1996|
Dear [name deleted] :
This is in response to your letter concerning the exemption in section 215.3(b)(5)(ii) of Regulation O (12 C.F.R. 215.3(b)(5)(ii)) from the definition of "extension of credit" for indebtedness of $15,000 or less arising by reason of any general arrangement by which a bank makes payments or on behalf of participants in a bank credit card plan, check credit plan, or similar open-end credit plan. Specifically, you asked whether some types of open-end credit plans would not qualify because of the method of access to the approved line of credit that they employed or because the approved line of credit was collateralized. For example, you asked whether an open-end credit plan accessible by check or secured by an insider's residence would not be exempt.
The exemption contains no limitations with respect to the manner of access to the approved line of credit or the collateralization of the approved line of credit. The proper characterization of an arrangement as an exempt open-end credit plan, however, requires an examination of the particular contractual and operational features of the plan. For example, a personal check typically is drawn on the maker's own funds. If an insider's check was payable from the maker's own funds and would be covered by the bank's funds only when other available funds were insufficient, then the arrangement would be an overdraft credit plan, subject to the $5,000 limit and other restrictions of section 215.3(b)(6) of Regulation O (12 C.F.R. 215.3(b)(6)). Similarly, if a bank required collateral in order to approve an insider's line of credit, and the collateral was not of the kind ordinarily used by the bank for this purpose or a security interest in collateral of the kind offered could not be readily obtained, then the line of credit might no longer be a standardized extension of credit, which is a characteristic of exempt open-end credit plans.1
I hope this information is useful to you. If you have any further questions concerning this matter, please do not hesitate to contact Gordon Miller of my staff at (202) 452-2534.
(signed) J. Virgil Mattingly
J. Virgil Mattingly
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