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

**Interpretive Letter #1050**

**February 2006**

**12 CFR 32.7**

January 25, 2006

Subject: Applicability of Special Lending Limit for Residential Real
Estate Loans

Dear **\[ \]**:

I am writing in response to your request for an opinion as to the
applicability of the special limit for residential real estate loans in
the lending limit pilot program, 12 C.F.R. § 32.7, to two loans made by
**\[ \]** (Bank) to the same borrower that are secured respectively by
first-lien and second-lien security interests in the same residential
real estate. For the reasons explained below, I believe that the special
limit for residential real estate loans applies to both loans.

#### Facts

The Bank was approved to participate in the lending limit pilot program
in October 2001. Thereafter, the Bank made two loans to a borrower each
secured by a lien in the same 1-4 family residential real estate. The
combined amount of the loans exceeded 15 percent of the Bank's capital
and surplus. The amount of the first loan and the amount of the combined
loans were no greater than 80 percent of the appraised value of the
collateral at the time each loan was made. The first loan was a mortgage
loan secured by a perfected first-lien security interest. The second
loan was a home equity loan secured by a perfected security interest
second only to the Bank's own first-lien security interest. The loans
conformed with the quantitative restrictions imposed on pilot program
loans. The Bank subsequently sold a participation in the mortgage loan
to reduce its exposure to the borrower to no more than 15 percent of its
capital and surplus. The Bank may be interested in repurchasing the
participation and in making other loans under the pilot program in
similar circumstances to those described above.

#### Analysis

The lending limit pilot program, 12 C.F.R. § 32.7, permits approved
national banks to make certain types of loans under special limits that
apply in addition to the Bank's basic lending limit of 15 percent of
capital and surplus, 12 U.S.C. § 84 and 12 C.F.R. § 32. The program's
special limit for residential real estate loans applies to loans and
extensions of credit secured by a perfected first-lien security interest
in 1-4 family residential real estate in an amount that does not exceed
80 percent of the appraised value of the collateral (LTV Limit) at the
time the loan or extension of credit is made.

The collateral for both of the Bank's loans is 1-4 family residential
real estate and the mortgage loan and the two loans combined conformed
with the LTV Limit at the time the loans were made. Further, the
combined loans conformed with the quantitative restrictions in the pilot
program.[^1] The sole interpretive question therefore is whether the
security interest for the home equity loan that is second to no other
lien holder satisfies the "first-lien security interest" requirement for
purposes of this lending limit pilot program. I find that it does and
that both loans are eligible for the special limit in the pilot program
for residential real estate loans. There is no supervisory purpose in
requiring the Bank to incur the expense of rewriting the loans as a
single secured credit.[^2] To hold otherwise would elevate form over
substance and impose unnecessary regulatory burden and expense on the
Bank without improving the Bank's security. Accordingly, within the
restrictions set forth in the pilot program, the Bank may repurchase the
participation[^3] and make other loans in similar circumstances to those
described here.

I trust the foregoing is responsive to your inquiry. If you have any
questions, please contact me at (202) 874-5300.

Sincerely,

/s/ Jonathan Fink

Jonathan Fink

Counsel, Bank Activities & Structure

\(202\) 874-5300

[^1]: *See* 12 C.F.R. § 32.7(a)(1), (4) and (5).

[^2]: Moreover, in a situation in which one of the two extensions of
    credit were a revolving line of credit, a requirement that the loan
    and the revolving line of credit be rewritten as a single secured
    exposure could be difficult to comply with.

[^3]: The combined exposure to the borrower must comply with the LTV
    Limit at the time of the repurchase.