93-5
MODIFICATION
12 CFR §215.5 now specifically exempts loans for the purpose of refinancing the loan on a principal residence.
August 31, 1993
Re: Refinancing of Loans to Executive Officers — Financial Code Section 3370 and Section 215.5(c)(2) of Regulation O
Dear ________ :
This is in reference to your letter of September 4, 1992.
As we understand it, based on your letter, (” “) is considering a program to offer residential loans to its employees. You indicated to me by telephone on February 3, 1993 that most of the refinancing would be to refinance loans originally made by third party lenders and not by the .
The questions you raise are whether the refinancing for an executive officer of the bank of an existing residential loan secured by a first trust deed on real property (“Refinancing Loan”) qualifies as a “purpose loan” presumably under Section 215.5(c)(2) of Regulation O as incorporated into the Banking Law by Financial Code Section 3372 (“Regulation O”) and whether such a Refinancing Loan requires prior approval by a majority of the board of directors if the Refinancing Loan amount is under $500,000 or whether the Refinancing Loan need only be reported to the board.
Financial Code Section 3370 expresses the intent of the legislature that the provisions of Regulation O that were incorporated into the Banking Law by Section 3372 should be interpreted to conform to “any interpretation issued by an official or employee of the Federal Reserve System duly authorized to issue the interpretation.”
In this letter, “residential loan” is defined to mean a loan made to finance the purchase, construction, maintenance, or improvement of a residence of the executive officer if 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, as defined in Section 215.5(c)(2) of Regulation O. The refinancing, as we understand it, would involve the ________ making a Refinancing Loan with new terms the proceeds of which would be used to pay off the original residential loan previously made to or assumed by the executive officer (“Original Residential Loan”). The staff of the Federal Reserve (“Staff”) has advised us that the term, “extension of credit”, should be interpreted to include refinancing by the ________of a residential loan originally made either by a third party lender or by the ________ itself. The Staff also interprets Section 215.5(c)(2) to cover such refinances of residential loans by the ________ whether the Original Residential Loan was made by the ________ or by a third party lender provided that the proceeds of the Refinancing Loan are only used to pay off the Original Residential Loan. If the proceeds are used for any purpose other than to pay off the Original Residential Loan, the extension of credit would be subject to the limits contained in Section 215.5(c)(3). Additionally, the Staff interprets Section 215.4(b), including but not limited to the prior board approval requirements as set forth in Section 215.4(b)(1), to apply to such Refinancing Loans as well as the applicable single borrower lending limits, and reporting requirements as set forth in Section 215.5(d).
Based on the foregoing reasons, our opinion is that a Refinancing Loan, whether the Original Residential Loan was made by the ________ or by a third party lender, is an extension of credit under Regulation O and is covered by Section 215.5(c)(2) of Regulation O provided that the Refinancing Loan proceeds are used only to pay off the Original Residential Loan. If any of the proceeds are not used to pay off the Original Residential Loan but are used for other purposes, the amount of such extension of credit used for other purposes would be subject to the limits contained in Section 215.5(c)(3).
Additionally, in response to your inquiry, such Refinancing Loans would be subject to Section 215.4(b) of Regulation O, including but not limited to the prior board approval requirements set forth in Section 215.4(b)(1), even if the Refinancing Loan is under $500,000 in amount, as well as being subject to the applicable single borrower lending limits, and reporting requirements as set forth in Section 215.5(d) of Regulation O.
We express no opinion, however, regarding any federal laws or regulations that may be applicable to loans to executive officers of state banks. Compliance with California Financial Code Sections 3370 et seq. may not in all cases constitute compliance with Regulation O of the Board of Governors of the Federal Reserve System.
Thank you for your courtesy and patience in this matter. Please contact us if you have any further questions.
Very truly yours,
JAMES E. GILLERAN
Superintendent of Banks
By
DIANA H. NISHIURA
Senior Counsel
DHN:lc
cc: J. F. Carrig, San Francisco
P. A. Van Hoecke, San Francisco
W. G. Thompson, San Francisco
T. M. Loughran, San Francisco