I am a CEO of a Bank and interested in financing through our bank a second home for vacations, etc. The second home is located outside of our lending area.

We own our current home with no debt against it. We want to use both our current home and second home as collateral for the loan.

We will be financing approximately $250,000.

Preliminary research indicates that I can consider the second home as a primary residence under reg o and avoid the $100,000 limit on Reg o loans and classify the new loan as a residential loan. Essentially I can have one residence loan at our bank.

Questions:


1. Are there restrictions in reg o on renting the second vacation home on an intermittent basis when we are not utilizing it?
2. Under reg o can I use collateral in my current home as collateral for the second vacation home?
3. Any other comments appreciated.

Thanks

I am not sure that either of your first two questions are addressed in any staff opinions.

I would be placing a call to my EIC and discussing it with them to make sure whatever you do, they have already reviewed it, since it falls into sort of a grey area.

I don't think you have to declare the second home your primary residence but I do think if you secure the loan with both residences then you may be subjecting the loan to the $100,000 limit. As Randy suggests you should discuss this with your EIC.

4000 - Advisory Opinions

Loan for Executive Officer's Second Home is Subject to "Other Purpose" Limit Imposed by 12 C.F.R. § 337.3(c) if First Home was Financed Through Same Bank; Home Equity Loan Secured by First Lien May Be Made in Any Amount Under 12 C.F.R. § 215.5(c)(2) if Bank Did Not Make Prior Loan on Residence and Loan is Used for Maintenance/Improvement of Residence

FDIC-92-43

June 23, 1992

Mark A. Mellon, Attorney

This is in response to your letter of May 29, 1992 pertaining to Federal Reserve Board Regulation O, 12 C.F.R. Part 215 ("Reg O"). In your letter you ask two questions:

a) Is an extension of credit to finance the purchase, construction, maintenance or improvement of a second home of an executive officer which is secured by a first lien authorized under Reg O?

b) Is a first lien home equity loan (revolving credit) secured by the executive officer's residence authorized under Reg O?

Section 22(g) of the Federal Reserve Act (12 U.S.C. § 375a) imposes limits and conditions on loans by member banks to their executive officers, directors and principal shareholders. This provision of the Federal Reserve Act was made applicable to non-member banks by the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"). See section 18(j)(2) of the Federal Deposit Insurance Act, 12 U.S.C. § 1828(j)(2), as amended by section 306(k) of FDICIA. As the regulation which implements section 22(g), Reg O must therefore be applied to state chartered non-member banks by the FDIC, the federal agency responsible for their supervision.

Reg O provides that a bank is authorized to extend credit to an executive officer in any amount to finance the education of the officer's children or to finance the purchase, construction, maintenance or improvement of a residence of the officer if the residence is secured by a first lien and is owned by the executive officer. 12 C.F.R. § 215.5(c)(1) and (2). If credit is extended to an executive officer for any "other purpose,'' the aggregate amount of credit must not exceed $25,000 or 2.5 percent of the bank's capital and unimpaired surplus, whichever is higher, with the proviso that the amount of credit in any event may not exceed $100,000. 12 C.F.R. § 215.5(c)(3). (For purposes of compliance with the "other purpose'' loan limit, non-member banks look to section 337.3(c) of the FDIC's regulations. 12 C.F.R. § 337.3(c)).

With regard to your first question, the extension of credit would be authorized under Reg O for any amount pursuant to 12 C.F.R. § 215.5(c)(2) if the second home is the only residence of the executive officer which the bank has financed and secured by a first lien. If the executive officer has already financed a first home through the bank, the loan for the second home would be subject to the "other purpose" limits of 12 C.F.R. § 337.3(c).

As far as the second question is concerned, a home equity loan secured by a first lien could be made in any amount pursuant to 12 C.F.R. § 215.5(c)(2) as long as a prior loan on the residence has not been made by the bank and the home equity loan is used for the purposes specified in that subsection, that is, the maintenance or improvement of the officer's residence. If the home equity loan is used for any other purpose, it is then subject to the limits imposed by 12 C.F.R. § 337.3(c).

I hope that this answer is responsive to your inquiry. Please do not hesitate to contact me if you should have any questions about this or any other matter.

I think the following shoots down using equity in one residence to purchase another residence:

(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; and

In my opinion using the equity in one residence to purchase another residence would not meet the "refinance the purchase" test in (c)(2).

While you probably don't want to contact your EIC about this, I agree with Randy and Dan that this is probably the best option as your first two questions are not clearly addressed in any guidance I have seen. You should be okay to finance the second home using the second home as collateral if you don't rent it out, but the questions you have (which are perfectly logical) unfortunately aren't addressed by the rules. Therefore, proactively contacting your examiners would potentially make things much easier in the future.

The second home is located outside of our lending area.

Would your bank make this type of loan to any customer with a similar risk score?

I am looking at this at different level as the answers to your questions have been addresses above,