# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

##### Interpretive Letter #1009

August 12, 2004 **October 2004**

###### 12 CFR 215

Subject: Residential mortgage loans under Federal Reserve Board
Regulation O

Dear **\[ \]**:

This is in response to your letter to National Bank Examiner **\[ \]**.
Your letter notes that in a recent review by compliance staff at **\[
\]** (Bank or **\[ \]**), staff cited a potential violation of
Regulation O, 12 C.F.R. part 215. Your letter requests the OCC to review
the loan at issue and opine as to whether there was a violation. Based
on our review and as described more fully below, we agree with the
Bank's compliance staff that the loan violated Regulation O.

#### Facts

The Bank made a residential mortgage loan to an executive officer and
held it for a short time prior to sale to the Federal Home Loan Mortgage
Corporation (Freddie Mac) pursuant to an arrangement described
immediately below. At the time it made the loan, the Bank had on its
books another residential mortgage loan to the same officer secured by a
different residence. Each of the loans exceeded \$100,000. The Bank has
a "preauthorized" sale/purchase arrangement with Freddie Mac under which
Freddie Mac has agreed to purchase loans that are consonant with
criteria established by Freddie Mac. The Bank makes loans and holds them
for sale temporarily until there are sufficient loans to sell to Freddie
Mac as one package. The Bank is under no contractual obligation to sell
a specific loan, but merely has the privilege to offer conforming loans
to Freddie Mac as part of a loan package.

#### Legal Analysis

Absent an exception, a bank may only lend to an executive officer in an
amount that does not exceed the quantitative limit in 12 C.F.R.
§ 215.5(c)(4). Section 215.5(c)(4) provides that this limit is the
higher of 2.5 percent of a bank's capital and surplus or \$25,000, but
in no event more than \$100,000. Based on the Bank's capital and
surplus, the effective limit for **\[ \]** is \$100,000.

An exception that is potentially available under the facts described
above is the exception in 12 C.F.R. § 215.5(c)(2) which provides that a
bank may extend credit to an executive officer in any amount to finance
or refinance the purchase, construction, maintenance, or improvement of
a residence of the executive officer, subject to certain conditions. As
you note in your letter, however, it is well established that this
exception can only apply to a single loan secured by a first lien on one
residence.[^1] Thus, when the Bank made the second loan it violated the
limit in section 215.5(c)(4) absent another exception, just as the
Bank's compliance staff noted.

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.[^2] Freddie Mac is not such
an entity.[^3] While Freddie Mac is a government-sponsored corporation,
the federal government does not wholly own it directly or
indirectly.[^4] Thus loans secured by an unconditional takeout
commitment of Freddie Mac do not qualify for the government takeout
exception.[^5]

As your letter also notes, section 215.3(e) provides that a
participation without recourse is considered to be an extension of
credit by the participating bank, not by the originating bank. You
suggest that the purchase commitment by Freddie Mac may be viewed as a
participation at the time of the origination of the second loan. I
disagree. It is not possible to view the commitment as a participation.
The Bank simply has a contract for the sale of conforming loans which
sale is to be consummated in the future. There is no participation in
the ordinary meaning of that term in section 215.3(e). The expectation
of selling a package of loans in the future is unlike a loan
participation because a participation involves a sale of an interest in
a loan, not merely an expectation of a sale. Further, unlike a
participation that involves a specific loan, the arrangement with
Freddie Mac pertains to a package of conforming loans and the Bank is
under no obligation to sell a specific loan.

As there are no other exceptions to the limit in section 215.5(c)(4)
available under the facts described above, I conclude that when the bank
made the second loan it violated Regulation O.

I trust this has been responsive to your inquiry.

Sincerely yours,

/s/ Jonathan Fink

Jonathan Fink

Senior Attorney

Bank Activities & Structure

[^1]: *See* 12 U.S.C. § 375a(2). *See also* H.R. Rep. No. 262, 90^th^
    Cong., 1^st^ Sess., reprinted in 1967 U.S. Code Cong. & Ad. News
    1373, 1374 ("\[an\] officer could not borrow ... for a year-round
    residence and ... for a vacation residence."). *See also* letter of
    J. Virgil Mattingly, Jr., General Counsel, Board of Governors of the
    Federal Reserve System, 1992 WL 693697 (F.R.B.) (Oct. 15, 1992).

[^2]: 12 C.F.R. §§ 215.5(c)(3), 215.4(d)(3)(i)(B).

[^3]: *Cf*. letter of Christopher C. Manthey, Senior Attorney (Jul. 13,
    1989) (unpublished).

[^4]: ^?^ Further indications that Freddie Mac is not the type of
    corporation required by the exception are that its obligations are
    not guaranteed by the full faith and credit of the United States
    (*see* 12 U.S.C. § 1455(h)) and the fact that it is not included in
    the list of government corporations in 31 U.S.C. § 9101.

[^5]: In light of this fact, it is not necessary to consider whether the
    arrangement with Freddie Mac described above would constitute an
    unconditional takeout commitment or guarantee.