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#1934592 - 06/20/14 07:31 PM Reg O $100,000 Limit to Executive Officers
Kelsey D Offline
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Joined: Aug 2006
Posts: 516
Ohio
Here's my scenario. At the time a $160,000 loan was made to an executive officer, it was a first lien mortgage on his residence, so it was excluded from the $100,000 limit. However, a year later, the EO purchased a new residence and obtained a first mortgage from Their Bank and a second mortgage from Our Bank. The $100,000 second mortgage clearly counts towards the limit. EO still owns the other property and has the original loan, and now 10 years later, he's selling it on land contract. The balance is still over $100,000. My question is, even though the loan was originally excluded from the $100,000 limit when it was booked because it was his residence, do we now have to include it when we make new loans since it is no longer his residence?
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#1934612 - 06/20/14 07:46 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Dan Persfull Offline
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Dan Persfull
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Bloomington, IN
The loan is still his obligation so how do you propose to exclude it?
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#1934658 - 06/20/14 08:51 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Kelsey D Offline
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Posts: 516
Ohio
It was excludable when it was booked, and the loan has not been touched since. My fear is that it should be included now, and the EO is well over $100,000.
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#1934697 - 06/23/14 12:32 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Kelsey D Offline
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Joined: Aug 2006
Posts: 516
Ohio
So where did we go wrong? Were we okay to leave the original loan alone since it was excludable when it was booked? Did the problem start when we continued to make loans to the EO causing the aggregate to go higher and higher above the $100,000 limit? We shouldn't have made the second mortgage on his new residence or the auto loan several years later.
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#1934699 - 06/23/14 01:01 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Kelsey D Offline
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Joined: Aug 2006
Posts: 516
Ohio
Does the fact that he was not an EO when the original loan was made matter? He was an EO when the he bought the new residence and got the second mortgage from us.
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#1935043 - 06/24/14 02:25 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Combustible Offline
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Posts: 1,268
I'm not a guru, but prior to his becoming an EO, his debt should have been reviewed and taken under consideration at that time. We just had a board member become the CEO and ran across a situation that was not reviewed prior to his election. He closed a credit card account so his aggregate debt would not be an issue.

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#1935047 - 06/24/14 02:38 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,277
Was he an EO or not when the first loan was made? You say he was and then that he wasn't. If he was, you had a problem when he purchased a new residence.

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#1935065 - 06/24/14 03:09 PM Re: Reg O $100,000 Limit to Executive Officers Kelsey D
Kelsey D Offline
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Joined: Aug 2006
Posts: 516
Ohio
I apologize for the confusion. After starting my question, I found out that he became an EO about a month after the original loan was made.

When he became an EO, the loan was included in the unlimited amount as a 1st lien on his residence. Even if it had been an "other purpose" loan and over $100,000, I understand that this would not be a violation since it was made before he became an EO. However, no new loans could be made or existing loans renewed except in compliance with Reg O.

My question is, when he bought a new residence a year later, did this original loan move from the "unlimited" bucket to the "other purpose" bucket?

My hunch is yes. If the original dwelling became a second home, I'd be okay with leaving it in the "unlimited" bucket because it was still his residence and we were not using that exception for the other residence (we don't have the 1st). However, he's selling it on land contract. It is no longer his residence. I'm thinking that we shouldn't have made the $100,000 2nd lien loan the following year, knowing that his original loan, still over $100,000 was jumping buckets. And we certainly should not have made the $12,000 auto loan a decade later when his current outstanding debt included $120,000 on a dwelling that is no longer his residence, and a $70,000 junior lien on his residence.

IMO, we've got a Reg O violation. The violation is not the original loan that was made before he was an EO. IMO, the violation is the subsequent loans that put him even further over $100,000. However, a compliance consultant assured me all is well. I want to agree but don't, and I can't find any guidance or interpretive letters that address this situation. There was one FDIC letter about an EO getting a loan for a new primary residence and not paying the orignal mortgage because of its inability to sell. However, that advisory opinion had more to do with the loans being made prior to 1991 when FDIC banks had to comply with 22(g) of the Federal Reserve Act.
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