The following question appeared in the Q&A section of Banking Spectrum's January 2014 Report Bulletin.
Compare your answer to the correct answer provided below.
Q: We want to make a loan to a customer for $300,000 to buy property; but we do not want to take a mortgage on the real estate. Rather, we wish to secure our loan with the borrower’s brokerage account, which contains securities. The loan to value ratio for this loan is 70% but we are concerned about Regulation U, the Federal Reserve Board’s margin stock Regulation. Under Regulation U, a lender may not loan more than 50% against the value of the securities. If Regulation U applies to this transaction, we would need additional collateral to secure our loan. Since the borrower is not using the loan to buy securities, does the Regulation U limits apply to us here?
A: Yes. The regulation applies to lenders who extend credit for the purpose of buying or carrying margin stock. Here the borrower would be carrying margin stock for the purpose of securing the loan. There are some Federal Reserve Board Interpretations (Regulation U, Section 221.101.101) that support this view.