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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.

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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