Violation of Reg O Executive Officer Mortgage Prop

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Question:

Regulation O-we have an executive officer who has a first lien mortgage on his primary residence. He thought this residence was sold, and purchased another property which he mortgaged with us. The first property sale fell through so currently both properties are on the bank's books. I assume we are in violation but would like some verification.

Answer:

Answer by Randy Carey: The EO is allowed one such loan. The second loan would have to be $100,000 or less to be under the other loan purpose category in order to avoid a violation.

Answer:

Answer by John Burnett: The bank's Insider Lending policy and procedures should have prevented the second loan from being approved unless it fit into the very restrictive limits in section 215.5(c) of Regulation O (which it clearly could not). The executive officer's belief that his current home would be sold doesn't make that first mortgage loan go away. As Randy confirms, you have a violation. Both your board and your prudential regulator should be informed, and the executive officer should be required to refinance the loan on whichever property is not now his residence with another lender as promptly as possible.

Answer:

Answer by Kathleen Blanchard: Banks will sometimes try to sell such a loan to another bank, to resolve the problem more quickly.

First published on BankersOnline.com 4/15/13