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4000 - Advisory Opinions
Loan To Executive Officer for New Primary Residence Where First
Mortgage Has Not Yet Been Paid Due to Inability to Sell Property Does
Not Violate Regulation O Under Amendments to FDIC's Regulations
Required by Section 306 of FDICIA
FDIC-92-23
April 14, 1992
Pamela E.F. LeCren, Counsel
The following is in response to your March 24, 1992 letter to
Alfred J.T. Byrne, General Counsel, FDIC requesting clarification of
the application of section 22(g)(2) of the Federal Reserve Act (12
U.S.C. 375a(2)) and section 215.5(c)(2) of the Federal Reserve Board
Regulation O (12 C.F.R. 215.5(c)(2)) to ***, an insured nonmember bank.
As your letter indicates, you are aware that section 22(g) of the
Federal Reserve Act was recently made applicable to insured nonmember
banks to the same extent as though such banks are members of the
Federal Reserve System. (See section 306 of the Federal
Deposit Insurance Corporation Improvement Act of 1991, "FDICIA",
Pub. L. No. 102-242, 105 Stat. 2236). With the exception of paragraph
(4), the Federal Reserve Board was given the statutory authority to
adopt regulations implementing section 22(g). Sections 215.5, 215.8 and
215.9 of Federal Reserve Board Regulation O were adopted by the federal
Reserve Board to implement the provisions of section 22(g) over which
that agency has rulemaking authority.
The statutory change making section 22(g) applicable to insured
nonmember banks necessitated a change to the FDIC regulations so as to
conform them to law. That change, which was published in the
Federal Register on March 4, 1992 (57 Fed. Reg. 7647),
provides, among other things, that insured nonmember banks shall be
subject to section 215.5(c)(2) of Federal Reserve Board Regulation O.
The statutory and regulatory change takes effect on May 18, 1992.
Section 22(g)(1) of the Federal Reserve Act provides that no member
bank may extend credit in any manner to any of its executive officers
except as authorized elsewhere in the section. Paragraph (2) of section
22(g), "Mortgage Loans", provides that with the specific prior
approval of the bank's board of directors, a member bank may make a
loan to an executive officer of the bank if at the time the loan is
made it is secured by a first lien on a dwelling which is expected
after the making of the loan to be owned by the executive officer and
used as the officer's residence and no other loan to the
officer under authority of paragraph (2) is outstanding [emphasis
added]. Section 215.5(c)(2) of Regulation O modifies section 22(g)(2)
slightly by indicating that the loan secured by a first lien on the
officer's residence may be for the purpose of purchasing the residence,
constructing the residence, maintaining the residence, or improving the
residence.
{{6-30-92 p.4625}}
The Federal Reserve Board recently proposed amending section
215.5(c)(2) by inserting the word "primary" in the section so as
to make it applicable only to a mortgage loan made in connection with a
primary residence. (See 57 Fed. Reg. 6077, February 20,
1992). The Federal Register notice indicated that this change would
merely conform the language of the regulation to the manner in which it
has been construed and applied in the past by the Federal Reserve
Board. (The Federal Reserve Board's proposed amendments would make
other changes as well, none of which are relevant for the purposes of
this discussion. The proposal would also renumber some of the existing
provisions of Regulation O. It does not appear that section 215.5(c)(2)
would be renumbered.)
According to your letter, *** made a first mortgage loan to its
President and Chief Executive Officer on June 2, 1989 for his personal
residence. The balance on that loan is approximately $127,323.18. On
July 9, 1990 the bank made another loan to the same executive officer
to enable the officer to acquire a new primary residence on which the
bank took a first lien. The current balance on the second mortgage loan
is $197, 835. It had been the officer's intent to sell the original
property, however, after trying unsuccessfully to sell the property for
11 months the officer decided to rent the property for a year beginning
on June 15, 1991. The property is currently occupied by the tenants but
it was recently listed for sale. It is anticipated that the property
may sell more quickly now given the decline in long term mortgage
interest rates. Your letter concludes by asking what action if any the
bank is required to take with respect to these loans given the change
in the law concerning loans to executive officers of insured nonmember
banks.
Section 306 of FDICIA which made section 22(g) applicable to insured
nonmember banks provides that any extension of credit made prior to
December 19, 1991 continues to be valid. Under our reading of this
provision, the above described loans are not in violation of section
22(g) or the FDIC's regulation making section 215.5(c)(2) applicable to
insured nonmember banks. These loans may be carried by the bank and
paid down according to their terms. The officer in question, however,
will not be able to rely upon the exception in section 215.5(c)(2) to
obtain any additional mortgage loans until the outstanding loans are
either paid off or moved out of the bank. This does not necessarily
mean that the officer cannot obtain a mortgage loan until then, nor
that neither loan can be renewed while the other is still outstanding.
If the officer wishes to do so, however, the loan will be considered an
"other purpose" loan and subject to whatever limit is applicable
for such loans. 1
I hope that this is responsive to your request. If you have any
further questions, please do not hesitate to contact me at (202)
898-3730.
1The FDIC was given the authority by section 22(g)(4) to
authorize insured nonmember banks to make loans to executive officers
for purposes other than the financing of a residence or the education
of the officer's children, i.e., "other purpose"
loans. On March 4, 1992 the FDIC proposed to amend its regulations to
establish a ceiling on "other purpose" loans to executive
officers of insured nonmember banks. (57 Fed. Reg. 7669). The limit as
proposed is the higher of 2.5 percent of capital and unimpaired surplus
or $25,000 but in no event higher than $100,000. Go Back to Text
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