We are a national bank. An executive officer of our bank has a loan with our bank exceeding $100,000 secured by a first mortgage on their primary residence. The officer also has another loan of less than $100,000 secured by a first mortgage on an investment property; we sold the loan to Fannie Mae and still service the loan. The officer would like a loan to purchase another non-owner occupied investment property, secured by a first mortgage on the property. The loan for the new investment property would exceed $100,000. Would Regulation O (or any other regulation) prevent us from keeping this loan on our books rather than selling it? Also, does the term “readily marketable collateral” refer to real estate?

Yes, we believe Regulation O’s $100,000 lending limit on loans to executive officers would prevent you from making this loan — even if you intend to sell it.

Regulation O generally prohibits banks from making loans to executive officers exceeding $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is lower). There are exceptions to this rule — for example, there are exceptions for loans made to finance the purchase of an executive officer’s residence and for loans “secured by unconditional takeout commitments or guarantees of . . . any corporation wholly owned directly or indirectly by the United States.”

However, it does not appear that any of these exceptions would apply to this loan. The exception for loans financing the purchase of an executive officer’s residence would not apply to a loan financing the purchase of a non-owner occupied investment property. Additionally, the government takeout exception would not apply to loans sold to Fannie Mae, which is not wholly owned by the federal government. As the OCC noted in an interpretive letter with respect to Freddie Mac, “loans secured by an unconditional takeout commitment of Freddie Mac do not qualify for the government takeout exception” since the “federal government does not wholly own [Freddie Mac] directly or indirectly.” Similarly, the federal government does not wholly own Fannie Mae directly or indirectly (even after the 2008 financial crisis, when Fannie and Freddie were placed under federal conservatorship but not federal government ownership).

Regulation O’s general lending limit for insider loans is 15% of a bank’s unimpaired capital and unimpaired surplus, with a higher 25% limit applying to loans fully secured by “readily marketable collateral.” The term “readily marketable collateral” does not refer to real estate — as defined in the OCC’s lending limit regulations, this term means “means financial instruments and bullion,” such as stocks or bonds, meeting certain conditions. Additionally, executive officers are subject to the more stringent limitation of $100,000 (or 2.5% of the bank’s unimpaired capital and unimpaired surplus, if that amount is lower), regardless of whether a loan is secured by readily marketable collateral.

Consequently, we believe you are prohibited from making a loan exceeding $100,000 to an executive officer when the loan is not subject to one of Regulation O’s exceptions, whether or not you intend to sell the loan.

For resources related to our guidance, please see:

OCC Rules, 12 CFR 31.2(a) (“National banks, Federal savings associations, and their insiders shall comply with the provisions contained in 12 CFR part 215 (Regulation O).”)

Regulation O, 12 CFR 215.5(a) (“No member bank may extend credit to any of its executive officers, and no executive officer of a member bank shall borrow from or otherwise become indebted to the bank, except in the amounts, for the purposes, and upon the conditions specified in paragraphs (c) and (d) of this section.”)

Regulation O, 12 CFR 215.3(a) (“An extension of credit is a making or renewal of any loan, a granting of a line of credit, or an extending of credit in any manner whatsoever . . . .”)

Regulation O, 12 CFR 215.5(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 . . .

(3) In any amount, if the extension of credit is secured in a manner described in § 215.4(d)(3)(i)(A) through (d)(3)(i)(C) of this part; and

(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.”)

Regulation O, 12 CFR 215.4(d)(3)(i) (“The general limit specified in paragraph (d)(1) of this section does not apply to the following: (A) Extensions of credit secured by a perfected security interest in bonds, notes, certificates of indebtedness, or Treasury bills of the United States or in other such obligations fully guaranteed as to principal and interest by the United States; (B) Extensions of credit to or secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission or establishment of the United States or any corporation wholly owned directly or indirectly by the United States; (C) Extensions of credit secured by a perfected security interest in a segregated deposit account in the lending bank . . .”)

Federal Housing Finance Agency, About Fannie Mae & Freddie Mac (“Fannie Mae was first chartered by the U.S. government in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country. Today it is a shareholder-owned company that operates under a congressional charter.”)

OCC Interpretive Letter #1009 (August 12, 2004) (“Your letter notes that the limit in section 215.5(c)(4) is also subject to an exception for loans secured by unconditional takeout commitments or guarantees of any department, agency, bureau, board, commission or establishment of the United States or any corporation wholly owned directly or indirectly by the United States. Freddie Mac is not such an entity. While Freddie Mac is a government-sponsored corporation, the federal government does not wholly own it directly or indirectly. Thus loans secured by an unconditional takeout commitment of Freddie Mac do not qualify for the government takeout exception.”)

FHFA, Strategic Plan for Fannie Mae and Freddie Mac Conservatorships (February 21, 2012) (“The Housing and Economic Recovery Act of 2008 (HERA), which created the Federal Housing Finance Agency (FHFA), granted the Director of FHFA discretionary authority to appoint FHFA conservator or receiver of the Enterprises ‘for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.’ On September 6, 2008, well over three years ago, FHFA exercised that authority, placing the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (together, the Enterprises) into conservatorships.”)

Regulation O, 12 CFR 215.2(i) (“Lending limit. The lending limit for a member bank is an amount equal to . . . 15 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank’s unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan. . . .”)

Regulation O, 12 CFR 215.2(h) (“Insider means an executive officer, director, or principal shareholder, and includes any related interest of such a person.”)

OCC Lending Limit Rules, 12 CFR 32.2(v) (“Readily marketable collateral means financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.”)

OCC Lending Limit Rules, 12 CFR 32.2(p) (“Financial instrument means stocks, notes, bonds, and debentures traded on a national securities exchange, OTC margin stocks as defined in Regulation U, 12 CFR part 221, commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in money market and mutual funds of the type that issue shares in which national banks or savings associations may perfect a security interest. Financial instruments may be denominated in foreign currencies that are freely convertible to U.S. dollars. The term “financial instrument” does not include mortgages.”)