Regulation U - broker account

Posted By: isaidno

Regulation U - broker account - 03/02/11 10:13 PM

We have a person applying for a consumer purpose open-end line of credit. They will be securing it with stock in a Brokerage Account that is not at our bank. I was advised to mark Regulation U when setting the loan up, but when I spoke to the officer setting up the transaction in LaserPro, they said it wasn't that type of loan and said they didn't need it.

Does Reg. U cover stock in a brokerage account? Exactly when is this disclosure needed?
Posted By: rlcarey

Re: Regulation U - broker account - 03/02/11 10:29 PM
Posted By: Kathleen O. Blanchard

Re: Regulation U - broker account - 03/02/11 11:00 PM

Review the definition of indirectly secured. The brokerage account is being pledged and it contains stock and the customers rights to sell/pledge/dispose of said stock are affected.


Reg U

Indirectly secured.
(1) Includes any arrangement with the customer under which:
(i) The customer’s right or ability to sell, pledge, or otherwise dispose of margin stock owned by the customer is in any way restricted while the credit remains outstanding; or
(ii) The exercise of such right is or may be cause for accelerating the maturity of the credit.
(2) Does not include such an arrangement if:
(i) After applying the proceeds of the credit, not more than 25 percent of the value (as determined by any reasonable method) of the assets subject to the arrangement is represented by margin stock;
(ii) It is a lending arrangement that permits accelerating the maturity of the credit as a result of a default or renegotiation of another credit to the customer by another lender that is not an affiliate of the lender;
(iii) The lender holds the margin stock only in the capacity of custodian, depositary, or trustee, or under similar circumstances, and, in good faith, has not relied upon the margin stock as collateral; or
(iv) The lender, in good faith, has not relied upon the margin stock as collateral in extending or maintaining the particular credit.
Posted By: isaidno

Re: Regulation U - broker account - 03/02/11 11:04 PM

Thank you. This helps.
Posted By: Dog Lady

Re: Regulation U - broker account - 06/15/18 04:26 PM

Reviving this old thread for a quick question:

It seems like this means the form should also be required for loans secured by variable cash value life insurance policies. Did I interpret that correctly? (Understanding how those policies work fully is not my expertise so I am not confident in my thoughts.)
Posted By: Rocky P

Re: Regulation U - broker account - 06/15/18 05:01 PM

From an old Kirchman manual

Regulation U is one of the few regulations whose purpose is neither the protection of the safety and soundness of banks nor the protection of a bank‘s customers. Its purpose is to limit the amount of credit available to the securities market and thereby reduce the increased market volatility which it causes. Regulation U was promulgated pursuant to the Securities Exchange Act of 1934; it limits the amount a bank may lend upon the collateral of equity securities where the purpose of the loan is to acquire or carry the securities.

General Requirements
No bank or any affiliate of a bank (including a bank holding company or a bank subsidiary) may extend any purpose credit, secured directly or indirectly by margin stock, in an amount that exceeds the maximum loan value of the collateral securing the credit. If a bank is extending a new credit, the credit will be secured by margin stock and the purpose of the credit is either to purchase the margin stock or to refinance a loan that was originally made to purchase the margin stock, the loan may not exceed 50% of the stock‘s current value.

§221.7(a) To fall under the restrictions of Regulation U a loan must pass the following tests:
-o-The stock involved must be margin stock. Lending on the collateral of nonmargin stock, such as the stock of a closely held corporation is not restricted.
-o-The loan must be secured directly or indirectly by the margin stock. A loan is indirectly secured by stock if the borrower‘s right to sell, pledge, or dispose of the stock is restricted; or if the exercise of such a right gives the bank the right to accelerate the maturity of the credit.
-o-The purpose of the loan must be to purchase or carry margin stock.
Posted By: Rocky P

Re: Regulation U - broker account - 06/15/18 05:03 PM

Margin stock. A margin stock is:
Any equity security registered or having unlisted trading privileges on a national securities exchange such as the New York or American Stock Exchanges, or NASDAQ.

Any debt security convertible into margin stock or carrying a warrant or right to subscribe to or purchase margin stock.

Any warrant or right to subscribe to or purchase a margin stock. Certain securities issued by an investment company registered under
Section 8 of the Investment Company Act of 1940.