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
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.
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