Insider Lending Limits & Mortgages

by Mary Beth Guard, BOL Guru

Question: One of our Executive Officers currently has a first lien residential mortgage on his residence (outstanding balance of $60,000) and also has a Home Equity LOC (max line $100,000) in a second lien position on that residence. He is now purchasing a vacation home (owner-occupied). The question - can he have a first mortgage on that second residence in excess of $100,000? Section 22 of the Federal Reserve Act states there can only be one mortgage loan, Regulation O is silent as to how many. Please advise.

Answer: The insider lending restrictions place strict limits on the amount an executive officer can borrow, but allow greater latitude on certain dwelling-related loans. Section 215.5(c) provides, in pertinent part:
(c) A member bank is authorized to extend credit to any executive officer of the bank:
(1) In any amount to finance the education of the executive officer's children;
(2) In any amount to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer, provided:
(i) The extension of credit is secured by a first lien on the residence and the residence is owned (or expected to be owned after the extension of credit) by the executive officer; * * *

(4) For any other purpose not specified in paragraphs (c)(1) through (c)(3) of this section, if the aggregate amount of extensions of credit to that executive officer under this paragraph does not exceed at any one time the higher of 2.5 per cent of the bank's unimpaired capital and unimpaired surplus or $25,000, but in no event more than $100,000.

In order for a loan to qualify for the special higher limits on a home-related loan, three requirements must be met. The three requirements relate to l) lien status; 2) type of collateral; and 3) loan purpose.

• The bank must obtain a first lien.
• The collateral must consist of a residence of the executive officer.
• The purpose of the loan must be to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer.

For purposes of the more liberal limits on these housing-related loans, only one residence of the executive officer is eligible. By using the phrase "a residence of the executive officer", rather than "THE residence of the executive officer", the Reg permits the residence that is used to be a second home. They don't limit this provision to the executive officer's primary residence. At the same time, however, they do limit the benefit of this provision to a single residence. Not all loans secured by a dwelling of an executive officer are eligible for the higher limit.

In your example scenario, you'd look at the purpose of the original loan. If it was not to purchase, construct or maintain the residence, it would be subject to the $100,000 limit for "other" loans. If it was for one of those purposes, it would fall into the residence loan category under Section 215.5(c)(2). The home equity loan would definitely fall into the "other loans" category, subject to the overall limit of $100,000 for that category. The loan to purchase the vacation home, if secured by a first lien, would qualify for the more liberal financing for certain residence loans, but only if the original loan on the executive officer's principal residence had not already been used under this section.

The original version appeared in the January/February 2003 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 6/9/03