CRCM Exam Question
Question
First National Bank has made three loans to Mrs. Elmwood. Two of the loans are regulated credits (they are for the purpose of purchasing margin stock and secured by margin stock). The third loan is for the purpose of purchasing margin and nonmargin stock, and the loan is secured by real estate and margin stock.
Can the bank avoid having the third loan combined with the other two for Regulation U purposes?
Answers
Explanations
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A. B. C. D.B
Regulation U is a Federal Reserve Board regulation that governs loans made by banks and other lenders for the purpose of purchasing or carrying margin stock, which is stock purchased with borrowed money. The purpose of the regulation is to limit the amount of credit that can be extended for the purchase of margin stock and to prevent excessive speculation in the stock market.
In this case, First National Bank has made three loans to Mrs. Elmwood. Two of the loans are regulated credits because they are for the purpose of purchasing margin stock and are secured by margin stock. The third loan is for the purpose of purchasing margin and nonmargin stock, and it is secured by real estate and margin stock.
The question is whether the bank can avoid having the third loan combined with the other two for Regulation U purposes. The answer to this question is B: No. At least the part of the loan attributable to the security of margin stock must be treated as a regulated credit and combined with the other two loans.
This is because Regulation U requires that any loan that is secured by margin stock must be considered a regulated credit, regardless of whether the loan is used to purchase margin stock or not. Therefore, the portion of the third loan that is secured by margin stock must be treated as a regulated credit and combined with the other two loans.
However, the portion of the third loan that is secured by real estate and nonmargin stock may not be subject to Regulation U if it does not meet the definition of a regulated credit. The value of the real estate must be considered in determining whether the loan is a regulated credit or not. If the value of the real estate is sufficient to cover the loan amount, then the loan may not be a regulated credit. However, if the value of the real estate is not sufficient to cover the loan amount, then the loan may still be subject to Regulation U.
It is important to note that even if a loan is not subject to Regulation U, it may still be subject to other regulatory requirements and restrictions. Therefore, lenders must carefully consider all applicable regulations when making loans, especially those that involve margin stock or other securities.
