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Does the 50% loan value limitation under Regulation U apply to loans secured by margin stock for a purpose other than purchasing the stock? – IBA Compliance Connection

IBA Compliance Connection

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Does the 50% loan value limitation under Regulation U apply to loans secured by margin stock for a purpose other than purchasing the stock?

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Yes, Regulation U’s loan value limitation applies to credit secured by margin stock for the purpose of carrying margin stock. 

The rule’s restrictions apply to lenders that “extend credit for the purpose of buying or carrying margin stock.” In the context of Regulation U, “carrying” margin stock means that the proceeds of the loan are used to pay off a debt previously incurred to purchase margin stock. Consequently, you must confirm whether the loan will be used for the purpose of carrying margin stock. If not, then the 50% loan value limitation in Regulation U would not apply to the transaction.

We also note that if the loan secured by margin stock is over $100,000, you are required to use Form FR U-1 to determine the loan’s purpose, which we have linked to in our resources section below.

For resources related to our guidance, please see:

  • Regulation U, 12 CFR 221.1 (“This part imposes credit restrictions upon persons other than brokers or dealers (hereinafter lenders) that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by margin stock.”)

  • Regulation U, 12 CFR 221.2 (“Carrying credit is credit that enables a customer to maintain, reduce, or retire indebtedness originally incurred to purchase a security that is currently a margin stock.”)
  • Regulation U, 12 CFR 221.3(c) (“Purpose statement—(1) General rule—(i) Banks. Except for credit extended under paragraph (c)(2) of this section, whenever a bank extends credit secured directly or indirectly by any margin stock, in an amount exceeding $100,000, the bank shall require its customer to execute Form FR U-1 (OMB No. 7100-0115), which shall be signed and accepted by a duly authorized officer of the bank acting in good faith.”)

  • Federal Reserve Board Form FR U-1