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4000 - Advisory Opinions
Regulation O: Proceeds of Loan to Refinance Executive Officer's
Home May Not Be Used for Personal Investment and Still Qualify as Home
Mortgage Purpose Loan
FDIC--95--11
July 31, 1995
Sandra Comenetz, Counsel
This responds to your letter to Michael Jenkins concerning
compliance with Regulation O.
{{2-29-96 p.4924}}
You state that X Trust Company ("X") is considering lending
its president/__CEO/ chairman ("president") $225,000 for a first
mortgage on the president's residence. The proceeds will be used to
refinance an existing first mortgage which was for $60,000, and has a
balance of $55,700. That loan will be rewritten back to $60,000. The
refinanced mortgage also will consolidate an existing home equity line
of credit which has a balance of $47,000 and currently conforms with
Regulation O, but as a result of refinancing will not so conform. The
remainder of the proceeds will be used for a personal investment. You
state that to avoid exceeding the $100,000 limit on other purpose
loans, X is taking as collateral $100,000 of U.S. Treasury obligations.
Because some of the proceeds of the refinanced first mortgage are
intended to be used for a personal investment, the proposed loan would
run afoul of the Regulation O provision authorizing an extension of
credit in any amount for certain executive residence-related purposes
found in 12 CFR § 215.5(c) (2). This is so because the proposed loan,
being used, in part, for a personal investment, would be used to pay
for something other than the original extension of credit, closing
costs of the refinancing, and other costs associated with the
executive's residence. See
12 CFR 215.5(c) (2) (ii).
A loan to "finance or refinance the purchase, construction,
maintenance, or improvement of a residence of the executive
officer," that is secured by a first lien on the residence pursuant
to § 215.5 (c) (2) (i), should be separately documented, and not
combined with a loan for another purpose. This increases the likelihood
that, in case of default, collateral will be available to cover the
loss. If a loan for an executive's residence is combined with an
extension of credit for another purpose, the collateral is available
pari passu to other creditors, reducing the likelihood of
recovery by the bank.
Since you mention taking as collateral $100,000 in Treasury
obligations, we note that if X provides a separate loan to the
president for a personal investment and the loan is secured by Treasury
obligations, the $100,000 other purpose loan limit is inapplicable to
the loan. See, 12 CFR
§ 337.3 (2) (i).
As a separate matter, you refer to a residential mortgage loan which
was approved by the board after the failure to receive prior approval
for the loan was disclosed. You state that $90,000 of the $148,000
mortgage would have been exempt under 12 CFR § 215.5 (c), and inquire
whether "that amount now exempt.'' You provide too little
information on this issue for us to be certain of your question. If you
are asking whether the $90,000 will be exempt from the executive
officer loan limit, the answer is that it is possible that it would not
be exempt if it was combined with a loan unrelated to an executive's
residence as articulated in 12 CFR § 215.5 (c) (2) for the reasons
described above.
Thank you for writing to the
FDIC.
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