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FED ER A L RESERVE BANK
O F NEW YORK

R E G U L A T IO N X
R E A L E S T A T E CR ED IT

Interpretations of Regulation X
Issued by the Board of Governors
of the Federal Reserve System
through December 31, 1951

I
”

Circular No. 3804
January 2, 1952

I (Supersedes Circular No. 3677)

Federal
of

R
N

eserve

ew

B

ank

York

January 2, 1952

To all Persons Engaged in the Business o f Extending Leal Estate Credit
in the Second Federal Beserve D istrict:

This circular contains the interpretations of Regulation X
which have been issued through December 31, 1951 by the Board
of Governors of the Federal Reserve System.

It includes those

contained in our Circular No. 3677, dated March 15, 1951, which
this circular supersedes. Also included are questions relating to
the regulation submitted to the Board of Governors by the American
Bankers Association, and the Board’s answers. The circular has
been printed in a form similar to that of the regulation so that you
may keep both together.
Additional copies of this circular will be furnished upon
request.




A lla n

S pro u l,

President.

NOTE
To reflect a revision of the regulation made after the issuance
of an interpretation or answer, the language of the interpretation
or answer has been changed without altering the principle as origi­
nally stated. New matter so added appears in italics. Interpreta­
tions incorporated in subsequent revisions of the regulation have
been omitted. The interpretations and questions and answers are
arranged in the same order as the sections of the regulation to which
they relate (see -page 27 f o r table o f con tents).
The section number of the regulation to which each interpreta­
tion principally pertains has been added after the catch line indica­
tive of its subject matter; the section number of the regulation has
also been added after the catch line preceding each question and
its answer. Each interpretation that has been published is followed
by an editorial note containing cross references to the Federal
Register (F .R .), the Federal Reserve Bulletin, and circular, if any,
of this Bank.
The interpretations and answers should be used only as aids in
studying the application of the regulation.

Since certain facts

involved in the interpretations and answers have been assumed,
there can be no assurance that the facts in new situations will be
identical with those assumed. Therefore, caution should be exer­
cised against reaching a conclusion in a given case solely on the
basis of similarity to the facts in any one of the interpretations
or answers.




R E G U L A T IO N X
R E A L E S T A T E C R E D IT
Interpretations

Real Estate Brokers— Sec. 1

An inquiry has been received by the Board of Governors regarding
the status under Regulation X of real estate brokers: When are they Regis­
trants and, in cases where they are, does this affect sales of real property
by non-Registrants, when the broker acts as the vendor’s sales agent 1
The second paragraph of section 1 of the regulation provides that the
regulation applies to any person who is engaged in the business of extend­
ing certain real estate credit, “ including any person who acts as agent in
arranging for such credit.” The quoted phrase means that the regulation
applies to persons who are engaged in the business of arranging for such
credit as agents for lenders, not as agents for borrowers.
In a typical sale of real estate, where the real estate broker acts as
sales agent for the vendor, the broker may also arrange the financing for
the sale. In such cases, if the broker receives a fee from a lender for his
services in arranging the financing, whether the lender is the vendor or a
third party, the broker ordinarily would be considered an agent for the
lender. However, if the broker does not receive such a fee, but merely con­
tacts or otherwise negotiates with the lender on behalf of the vendor or
vendee, he ordinarily would not be considered an agent for the lender.
It is the opinion of the Board that a real estate broker would be a
Registrant under Regulation X if, in his own right or as agent for a lender
or as a fiduciary, he either (1) extends or has extended such real estate
credit more than three different times during the current calendar year or
during the preceding calendar year, or (2) extends or has extended such
real estate credit in an amount or amounts aggregating more than $50,000
during the current calendar year or during the preceding calendar year.
For this purpose, a transaction in which a real estate broker acts as agent
of the lender in arranging the financing as described above is to be con­
sidered an extension of credit by him.
The mere fact, however, that a real estate broker acting as sales agent
in a sale of real property may be a Registrant does not affect a sale by a
non-Registrant, unless the real estate broker extends or arranges as agent for
an extension of real estate construction credit in connection with the sale.
Under section 4 (a )(6 ) of Regulation X , a sale in which the vendee
assumes, or takes the property subject to, a mortgage is not permissible if
the amount of outstanding credit (extended after October 12, 1950, or
January 12, 1951, or F ebru ary 15, 1951, as the case may be) exceeds the
maximum loan value. However, this restriction is applicable only to a




1

2

Registrant who is acting as principal and, therefore, does not apply to a
real estate broker who is acting as agent in connection either with the sale
or the financing which may be involved. Of course, if additional real
estate construction credit over and above the maximum loan value of the
property were extended in connection with the sale, the other provisions
of section 4 would apply to a real estate broker who acted as agent in arrang­
ing for the extension of such additional credit in the manner described
above.
[1 6

F .R .

1 5 9 3 ; F e d er al R e ser ve B u l l e t in , F e b .

1951, p.

1 6 2 .]

Church Unit Extending Credits— Sec. 1

A church organized on a nationwide basis has a central organization
which, in turn, has boards and agencies. The church also has regional
organizations which, in turn, have a number of congregations and missions.
Each such unit of the church is a corporate entity. Credit sometimes is
extended by such units in connection with new construction being purchased
or constructed by other units of the church. The question has been raised
whether the credit is subject to the provisions of Regulation X .
The credit is not subject to the regulation if the new construction is
a church because section 2 (r) (3) of the regulation excludes churches from
the definition of “ nonresidential structure.” However, credit extended to
finance the purchase or construction of new construction covered by the
regulation is subject to the regulation when the unit of the church extend­
ing the credit is a Registrant, that is, if the unit has made sufficient exten­
sions of credit to be deemed to be engaged in the business of extending real
estate credit. So long as such units are corporate entities, the funds bor­
rowed must be considered as funds of the units lending them rather than
funds of the over-all church organization.
It may be noted, however, that the regulation does not affect in any
way the purchase or construction of new construction by a unit of the church
in possession of the necessary funds, or its participation on an equity basis
in the construction or purchase of new construction by another unit of the
church.
[1 6

F .R .

4981;

F ederal

R eserve

B u l l e t in , J u n e

1951,

p.

6 4 7 .]

Commodity Credit Corporation Loans— Sec. 2 (e )

An inquiry has been received concerning the application of Regulation
X to loans which are made by banks and other lending agencies pursuant to
commodity loan programs of the Commodity Credit Corporation and which
the Commodity Credit Corporation is committed to purchase. It is the
Board’s view that such loans should be regarded for this purpose as loans
guaranteed by a wholly owned Government corporation and that, therefore,
they do not constitute real estate construction credit as defined in section
2(e) of Regulation X and are not subject to Regulation X .
[1 6

F .R .

495;




F ederal

R eserve

B u l l e t in ,

Jan . 1951, p. 3 3 .]

3

Participating Share in Cooperative Development— Sec. 2 (e )

An inquiry has been received asking whether borrowing by a prospective
tenant in a cooperative development is subject to Regulation X if the loan
is for the purpose of purchasing a participating share in the cooperative
development which will entitle the owner thereof to acquire or use a family
unit in the cooperative development.
Cooperative developments ordinarily are built and operated by a non­
profit corporation organized for that specific purpose. Credit secured by a
blanket mortgage covering the development is extended to the corporation.
The corporation’s equity or capital investment is raised by the sale of shares
of capital stock to the individual cooperators. Ownership of a share carries
with it the right to acquire a long term lease upon a family unit in the
cooperative development.
It is the opinion of the Board that borrowing is subject to Regulation X
when it is for the purpose of purchasing a share in a cooperative develop­
ment. The total amounts borrowed by the corporation and the individual
shareholders may not exceed the maximum loan value of the cooperative
development.
[ 1 6 F .R . 2 9 6 9 ;
A p r il 27, 195 1.]

F ederal

R eserve

B u l l e t in ,

A p r il 1951, p. 3 9 0 ; F R B N Y C ircu la r N o . 3695,

Painting, Reroofing, and Repairs as “ Major Improvement”— Sec. 2(g)

It is the Board’s view that painting, reroofing, and repairs constitute
a “ major improvement” , within the meaning of section 2(g ) of Regula­
tion X , if their cost exceeds amount prescribed in section 2 ( g ) . (S ee R egu­
lation W o f the Board o f Governors o f the F ederal R eserve System regulat­
ing instalment credits not exceeding $2,500 with respect to residential
repairs, alterations, or im provem ents and item s o f household equipm ent.)
[1 5

F .R .

7383;

F ederal

R eser ve

B u l l e t in ,

N o v . 1950, p . 147 4.]

Allowance for Labor— Sec. 2 (i)

Inquiries have been received under section 2 ( i ) ( 2 ) ( B ) of Regulation X
where the facts are these: A prospective borrower owns a vacant lot on
which he, with the help of his family and friends, will perform the necessary
labor to build a residence. He applies to a Registrant for credit to be secured
by a mortgage upon the residential property, the proceeds of the loan to
be used to pay for materials used in the new construction. The question i s :
How does a Registrant determine the “ value” of the residential property?
I f the entire cost of the property has been incurred by the prospective
borrower not more than 12 months prior to the extension of credit or is
to be incurred by him after such extension of credit, the “ value” is the
bona fide cost of the property to the borrower, including a bona fide
estimate of the cost of completing the new construction. It is the view of



4

the Board that a reasonable bona fide estimate of the value of the labor
to be performed by the prospective borrower, his family, and friends may
be included in the “ bona fide estimate of the cost of completing new
construction.”
I f the lot has been purchased or any other part of the cost of the
property has been incurred by the prospective borrower more than 12
months prior to the extension of credit, or if any part of such property
has been acquired by gift, exchange, or inheritance, the “ value” shall be
the appraised value as determined in good faith by the Registrant.
[IS

F .R .

7383;

F ederal

R eserve

B u l l e t in ,

N ov.

1950, p. 147 5.]

Allowance for Builder’s Profit and Costs of Sale— Sec. 2 (i)

Section 2 (i) provides that, in certain circumstances, the “ value” of
residential property shall be “ the bona fide cost of the property to the
borrower, including a bona fide estimate of the cost of completing new
construction on such property when the extension of credit is for the
purpose of financing such new construction.” Questions have been raised
concerning the inclusion of builder’s profit and sales cost in determining
“ value” in cases where, in lieu of obtaining short-term construction credit
which would be refinanced upon the sales of the houses, a builder con­
structing houses for sale seeks long-term mortgage loans for the purpose
of financing the construction of the houses and with the expectation that
the houses will be sold subject to such indebtedness.
It is the Board’s view that in such cases a reasonable builder’s profit
and a reasonable estimate of the cost of selling the houses may be included
as a part of the cost to the borrower (builder) for the purposes of determin­
ing “ value” under the above-mentioned provision of Regulation X .
However, in connection with the sale of the houses, consideration must
be given to the provisions of section 4 (a )(6 ) of Regulation X relating to
the sale of property by a Registrant subject to indebtedness which exceeds,
or as a result of such sale would exceed, the applicable maximum loan
value of such property.
[1 5

F .R . 8 7 1 3 ;

F ederal

R eserve

B u l l e t in ,

D ec.

1950,

p.

1 6 2 2 .]

Appraised Value of Improved Real Property— Sec. 2 (i)

Several inquiries have been received by the Board regarding the deter­
mination under Regulation X of “ appraised value as determined in good
faith” where there is to be construction on improved real property. The
inquiries have related particularly to cases where there is an existing struc­
ture on the property such as a residence, servants’ quarters, garage, or
garage-apartment, but similar inquiries should be answered in accordance
with the principles of this interpretation. In such cases, should the Regis­



5

trant, in making his appraisal in good faith, appraise only the land or
should he appraise the land and improvements?
In cases where the existing structure and the proposed construction
are to be so located on the property that the possibility of separation in
the case of resale would be remote and unlikely, it is the opinion of the
Board that the Registrant may appraise the land and improvements. How­
ever, any outstanding credit secured by the improved real property neces­
sarily would have to be taken into consideration in determining the amount
of credit the Registrant could extend.
For example, if a prospective borrower desires to build a new residence
at a cost of $20,000, on improved real property having a “ value” of $10,000,
the Registrant’s appraised value may be $30,000, and the maximum
loan value $15,000. However, if there were outstanding credit secured by
the improved real property in an amount of, say, $5,000, the Registrant
could not extend additional credit in an amount exceeding $10,000.
In cases where the existing structure and the proposed construction
are to be so located that separation in the case of resale would not only
be possible, but would be likely, it is the opinion of the Board that the
Registrant should appraise only the land area on which the new construc­
tion is to be located.
For example, if the prospective borrower owns a tract of land consist­
ing of several adjoining lots, some of which are improved with existing
structures, and the borrower proposes to build a new structure on one of
the vacant lots, the Registrant should appraise only the vacant lot.
[1 6 F .R . 2 5 5 2 ;

F ederal

R eserve

B u l l e t in ,

M a r c h 1951, p. 2 7 2 .]

Appraised Value of Lot and Residence— Sec. 2 (i)

Where a residence is to be constructed on a lot acquired more than
twelve months ago, the “ value” of the residential property, in accordance
with the provisions of section 2 (i) (2) (B ) (ii) of Regulation X , is the
appraised value of both the lot and residence.
[1 6

F .R .

5320;

F ederal

R eserve

B u l l e t in ,

J u n e 1951, p. 6 4 7 .]

Determination of Value of Residential Property— Sec. 2 (i)

Inquiries have been received concerning the application of section
2 ( i ) ( 2 ) ( B ) of Regulation X to a case where, through unforeseen delays,
credit is extended more than one year after the acquisition of property.
A typical example might be as follows: On June 5, 1950, an individual
purchased a lot. On December 5, 1950, a Registrant committed himself to
provide permanent financing to the extent of the maximum loan value com­
puted on the basis of bona fide estimated cost. Because of unforeseen delays,
however, construction will not be completed until July 1951. The question
raised is whether the Registrant must now base the maximum loan value




6

on his appraisal rather than the estimated cost, or whether the commitment
to extend credit may be considered an extension of credit.
The Board has ruled in other cases in the past that a commitment to
extend credit cannot be considered an extension of credit. Therefore, it will
be necessary in such cases for the Registrant to base his loan on an appraisal
rather than on estimated cost.
[ 1 6 F .R . 5 9 5 0 ; F

ederal

R eserve

B u l l e t in ,

J u ly 1951, p. 8 1 3 .]

House Trailers— Sec. 2 (k )

The question has been raised whether Regulation X applies to extensions
of credit in connection with sales of house trailers. It is the view of the
Board that such extensions of credit are subject to the regulation where
the trailers have kitchen facilities or space designed fo r kitchen facilities,
and are to be used for dwelling purposes, and the wheel assemblies are
to be detached and the trailer placed on a foundation constructed on real
property.
[1 5

F .R .

7798;

F ederal

R eser ve

B u l l e t in ,

D ec.

1950,

p.

1 6 2 1 .]

Warehouses and Office Buildings Used in Processing Goods— Sec. 2 (r )

The Board has received several inquiries as to whether warehouses and
office buildings used in connection with a manufacturing business are sub­
ject to Regulation X . As indicated in footnote 11 on page 6 of the regula­
tion, office buildings and warehouses, as well as other buildings, are ordi­
narily subject to the regulation. They are not subject to the regulation,
however, if they fall within one of the exclusions from the definition of
‘ ‘ nonresidential structure ’ ’, namely, structures exclusively used or designed
for use by a public utility or by any Government or political subdivision,
or structures more than 80 per cent of the floor space of which is used or
designed for use (i) in processing materials, goods, or articles into finished
or partly finished manufactured products, (ii) in mining or otherwise
extracting raw materials, or (iii) on farm property in the production,
shelter, or storage incidental thereto, of crops, livestock or other agricul­
tural commodities. It is the opinion of the Board that space in such struc­
tures as office buildings and warehouses is used or designed for use in
processing materials, goods, or articles into finished or partly finished
manufactured products where such office building or warehouse is essential
to and an integral part of the operations involved in the processing of such
materials, goods, or articles. Unless the office building or warehouse, how­
ever, is essential to the processing operation and an integral part thereof,
it is subject to the regulation.
[1 6 F . R . 2 5 5 1 ; F




ederal

R eserve

B u l l e t in ,

M a rch 1951, p . 2 7 2 .]

7

Newspaper Printing Plant— Sec. 2 (r)

It is the opinion of the Board that a newspaper is a “ manufactured
product” within the meaning of section 2 ( r ) ( 5 ) ( i ) of Regulation X .
Accordingly, the definition of “ nonresidential structure” in section 2(r)
does not include a structure more than 80 per cent of the floor space of which
is used or designed for use in the printing of newspapers and, therefore,
credit for the financing of such construction is not subject to Regulation X .
[ 1 6 F .R . 4 3 4 0 ;

F ederal

R eser ve

B u l l e t in ,

M a y 1951, p. 5 0 9 .]

Dining Cars as Nonresidential Structures— Sec. 2 (r)

The question has been raised whether Regulation X applies to exten­
sions of credit in connection with sales of what are commonly known as
“ dining cars” to be used as restaurants.
It is the view of the Board that when a “ dining car” is placed on a
foundation constructed on real property, and the utility connections neces­
sary for its operation as a restaurant are installed, it becomes a “ nonresi­
dential structure” within the meaning of section 2 (r) of Regulation X ;
accordingly, in such cases, an extension of credit in connection with the
sale of the dining car is subject to Regulation X .
[1 6

F .R .

7460;

F ederal

R eser ve

B u l l e t in ,

A u g u s t 1951, p. 9 5 9 .]

Medical Centers and Clinics as Hospitals— Sec. 2 (r)

Individual groups of medical doctors who are associated in organiza­
tions variously known as “ medical centers” and “ medical clinics” have
from time to time contended to different Federal Reserve Banks that struc­
tures used by them are “ hospitals” within the meaning of section 2 (r) of
Regulation X . Such medical groups are organized to provide medical
services and often have extensive facilities, including radiological depart­
ments, laboratories, dispensaries, physical therapy and BMR (basal
metabolism rate tests) and EK G (electrocardiogram facilities, as well as
facilities for minor surgery. These medical centers and clinics sometimes
provide “ out-patient” diagnostic and treatment services which often are
accessory to services contributed by hospitals, and which may be provided
only through the employment of most extensive physical facilities.
Heretofore, in order for an institution to be considered as a “ hospital”
under section 2 (r) of Regulation X , it has been our view that it must include
as a minimum requirement “ in-patient” facilities coupled with extensive
medical services normally provided by hospitals. It seems apparent, how­
ever, that the medical services made available by some medical centers and
clinics are an equally essential and indispensable part of the public health
facilities of some communities, and for that reason we believe that medical
centers, clinics, and individual doctors’ offices which offer reasonably com­
plete medical services for diagnosis and treatment should be considered



“ hospitals” within the meaning of Regulation X , even though they do not
have “ in-patient” facilities.
[ 1 6 F .R . 1 2 2 2 5 ;

F ederal

R eser ve

B u l l e t in ,

D e ce m b e r 1951, p. 152 9.]

Radio and Television Broadcasting Companies Not Public Utilities—
Sec. 2 (s)

In answer to inquiries received it is the opinion of the Board that radio
and television broadcasting companies are not public utilities within the
meaning of section 2(s) of Regulation X . Accordingly, structures exclu­
sively used or designed for use by such companies are nonresidential struc­
tures within the meaning of section 2 (r) of the regulation.
[1 6 F .R . 2 5 5 2 ;

F ederal

R eser ve

B u l l e t in ,

M a r c h 1951, p . 2 7 3 .]

Interstate Trucking Companies as Public Utilities— Sec. 2(s)

Inquiries have been received by the Board asking whether companies
engaged in an interstate trucking business are public utilities within the
meaning of section 2(s) of Regulation X .
The Interstate Commerce Commission has authority to regulate three
types of interstate motor carriers. They are “ common carrier by motor
vehicle” , “ contract carrier by motor vehicle” and “ private carrier of
property by motor vehicle.” The degree of regulation and supervision
exercised by the Commission differs with respect to the three types of
carriers. Common carriers are required to obtain certificates of convenience
and necessity outlining the extent of their proposed service, the routes over
which they propose to operate, and other requirements deemed necessary by
the Commission. Contract carriers must obtain a permit outlining the
territory over which they propose to operate, the type of business, and any
other conditions or limitations deemed necessary by the Commission in the
public interest. Private carriers require neither certificates nor permits
to operate.
Not only does the degree of regulation and supervision differ with
respect to the three classes of carriers, but also the extent of their operations
“ for the convenience, service or accommodation of the public.” Common
carriers undertake for hire to transport from place to pla'ee the goods of
anyone who chooses to employ them. Contract carriers transport for a
limited number of shippers under special contracts designed to meet their
particular needs. Private carriers need not transport for compensation, but
may be the owner, lessee, or bailee of the goods transported.
For the above reasons, it is the opinion of the Board that, in the absence
of other pertinent facts, only those companies engaged in an interstate
trucking business as a “ common carrier by motor vehicle” are public
utilities within the meaning of section 2(s) of Regulation X .
[1 6

F .R .

2552;




F ederal

R eserve

B u l l e t in ,

M arch

1951,

p.

2 7 3 .]

Privately-Owned Public Warehouse Not a Public Utility— Sec. 2 (s)

A privately-owned public warehouse used for the storage of grain and
other foodstuffs is not a “ public utility” within the meaning of section 2(s)
of Regulation X , and hence is not excluded from the definition of “ non­
residential structure” by section 2 (r) (4) (i) of the regulation, even though
the operations of the warehouse are supervised by a Federal or State agency.
It is the Board’s opinion that a warehouse is not similar to a transportation
company, electric light or power company, or other similar companies
specifically mentioned in section 2 (s).
[1 6

F .R .

4980;

F ederal

R eserve

B u l l e t in , J u n e

1951,

p.

6 4 7 .]

Instruments Evidencing Exempt Credit— Sec. 4 (a ) (5)

The prohibitions of section 4 (a )(5 ) of Regulation X with respect to
a Registrant purchasing, discounting, or lending on credit instruments
evidencing real estate construction credit apply only to credit instruments
evidencing credit which is subject to and not exempt from Regulation X .
Under section 6(b) of the regulation, credit extended pursuant to firm
commitments made prior to the effective date of the regulation is exempt.
Accordingly, there is no prohibition with respect to purchasing, discounting,
or lending on credit instruments evidencing such credit.
[1 5

F .R .

7179;

F ederal

R eserve

B u l l e t in ,

N ov.

1950,

p.

1 4 7 3 .]

Sale of New Residence Subject to Pre-effective Date Indebtedness—
Sec. 4 (a ) (6)

Inquiries have been received regarding the application of Regula­
tion X to a sale of 1-2 fam ily unit residence on which there is new construc­
tion, where the vendee assumes, or takes the property subject to, indebted­
ness secured by a mortgage on the property and such indebtedness exceeds
the maximum loan value of the property but evidences credit extended prior
to October 12, 1950, the effective date of the regulation with respect to
1-2 fam ily unit residence.
Regulation X does not prohibit such a sale or require that the indebted­
ness be reduced to the maximum loan value of the property. Under the
definition contained in section 2(d) of Regulation X , such a sale consti­
tutes an extension of credit by the vendor of the property; but, even though
the vendor may be a Registrant, the sale is not prohibited by Regulation X
because the provisions of section 4 (a )(6 ) of the regulation, which deal
specifically with such transactions, prohibit a sale only if the amount of
outstanding credit (including any credit exempt from, or not subject to
the prohibitions of, this regulation) which was extended after the effective
date of the regulation with respect to the property exceeds, or as a result
of such sale or transfer would exceed, the applicable maximum loan value
of such property, or if any outstanding real estate construction credit



10

(subject to and not exempt from this regulation) with respect to such
property does not conform with the provisions of this regulation and the
Supplement thereto. However, any additional extension of credit by a
Registrant (including the vendor if he is a Registrant) in connection with
such a sale would be prohibited by section 4(a) (1) of Regulation X .
For example, in a sale of a 1-2 fam ily unit residence on which there is
new construction where the bona fide sale price is $12,000, and the vendee
pays $2,000 for the equity of redemption and assumes, or takes such prop­
erty subject to, a $10,000 mortgage which evidences credit extended prior to
October 12, it is not necessary that the $10,000 mortgage be rewritten to
conform with Regulation X . However, no part of the $2,000 paid by the
vendee for the equity of redemption may be borrowed from a Registrant
because the amount of credit outstanding with respect to the property
already exceeds the maximum loan value of the property.
[IS

F .R .

7383;

F ederal

R eserve

B u l l e t in , N o v .

1950, p.

1 4 7 4 .]

Necessity for Statement of Borrower for Nonregulated Credit— Sec. 4 (c )

A Registrant makes an unsecured loan to a mortgage company, the
proceeds of which are to be used by the mortgage company to make real
estate loans, including some subject to Regulation X . Must the Registrant
obtain any Statement of the Borrower ?
As described, the loan by the Registrant to the mortgage company is
not an extension of real estate construction credit or a loan on credit instru­
ments evidencing real estate construction credit. The Registrant is required
only to be satisfied, and maintain records which reasonably demonstrate
on their face, that the loan to the mortgage company is not real estate
construction credit. This requirement may be met by the execution by the
mortgage company of a Statement of the Borrower of the kind described
in the last sentence of section 4(c) of Regulation X and the acceptance of
the statement by the Registrant in good faith. Section 4 ( c ) as amended
'prescribes other methods o f m eeting the requirem ent and relieving Regis­
trant in certain circum stances from d uty to ascertain nature o f the credit.
[1 5

F .R .

7179;

F ederal

R eser ve

B u l l e t in , N ov.

1950,

p.

1 4 7 3 .]

Statement of Borrower W here Credit Secured by Mortgage
Collateral— Sec. 4 (d )

A Registrant makes a loan to a mortgage company on a note secured
by a pledge of collateral consisting of real estate mortgages, including
some subject to Regulation X . May the Registrant rely upon a statement
by the mortgage company that all of the pledged mortgages which are
subject to Regulation X conform with the requirements of the regulation ?
Must the Registrant procure a copy of the Statement of the Borrower which
the mortgagor signed, pursuant to section 4 (d ) of Regulation X , with respect
to each pledged mortgage which is subject to Regulation X ?



11

Section 4(a ) (5) of Regulation X provides that no Registrant shall lend
on any credit instrument evidencing real estate construction credit which
is subject to and not exempt from the regulation, unless the terms of such
credit conformed with the provisions of the Supplement to the regulation
when such credit was originally extended, or conform at the time of such
loan. In the case described, the Registrant may not rely upon the statement
by the mortgage company to establish that the pledged mortgages which
are subject to Regulation X conform with the requirements of the regulation.
The Registrant, however, may rely upon a signed statement accepted in
good faith in which the mortgage company states which of the pledged
mortgages do, and which do not, evidence real estate construction credit
subject to Regulation X ; and in determining whether a mortgage which
is subject to Regulation X conforms with the regulation, the Registrant
may rely upon the facts stated in a copy of the Statement of the Borrower
signed by the mortgagor and which the Registrant accepts in good faith.
[IS

F .R .

7179;

F ederal

R eserve

B u l l e t in ,

N ov. 1950,

p.

1 4 7 3 .]

Short-Term Residential Construction Credits— Sec. 5(b)
In answer to questions that have been raised concerning the exemption
in the first sentence of section 5(b) of Regulation X for short-term con­
struction credits having a maturity of not more than 18 months, it is the
opinion of the Board (1) that a demand note complies with the 18 months’
maturity limitation if it is understood by the parties that payment will be
demanded within a reasonable time and in any event within 18 months from
the date the credit is extended; and (2) that a note having a maturity of
less than 18 months may be renewed pending completion of construction if
the date of maturity of the renewal is not more than 18 months after the
date the credit originally was extended.
[1 5

F .R .

7799;

F ederal

R eserve

B u l l e t in ,

D e c. 1950, p. 162 1.]

Section 5(b ) of Regulation X exempts from the prohibitions of Regu­
lation X certain construction loans having a maturity of not more than
18 months. The Board, in the preceding interpretation, stated that a note
evidencing such a construction loan which has a maturity of less than 18
months may be renewed pending completion of construction if the date of
maturity of the renewal is not more than 18 months after the date the
credit originally was extended.
It is the opinion of the Board, however, that such a note having a
maturity of less than 18 months may not be renewed after the construction
has been completed, even if the date of maturity of the renewal is not more
than 18 months after the date the credit originally was extended.
[16

F .R .

5320;

F ederal




R eser ve

B u l l e t in ,

J u n e 1951, p . 6 4 7 .]

12

Casualty Exemption for Tenants— Sec. 5 (e )

In answer to an inquiry concerning section 5(e) of Regulation X , it is
tlie opinion of the Board that the applicability of the exemption extends to
tenants as well as owners of structures destroyed or substantially damaged
by flood, fire, or other similar casualties.
[1 6 F .R . 8 0 4 8 ;

F ederal

R eserve

B u l l e t in ,

A u g u s t 1951,

p.

9 6 0 .]

Exemptions for Contemplated Construction— Sec. 5 (g )

It is the view of the Board that exemptions under section 5 (g ) of
Regulation X should not be granted unless there is a clear showing of
substantial hardship. The mere fact that a builder or other person may have
made substantial commitments or undertakings before August 3, 1950 is
not sufficient basis for the granting of an exemption unless he is also able
to show that he will suffer substantial hardship if he has to comply with
Regulation X in obtaining credit rather than obtaining it on the basis
previously contemplated by him and the Registrant. The builder or other
person must also be able to show that he had contacts or negotiations with
a Registrant prior to August 3, 1950, with a view to possible subsequent
agreement for extension of credit to such builder or other person. Section
5(g ) relates only to the credit to finance new construction which is extended
to the builder or other person who made substantial commitments or under­
takings before August 3, 1950 and the provision does not apply to credit
involved in a subsequent sale of the property by such builder or other person.
[ 1 5 F .R . 8 0 7 5 ;
N o v . 9, 1 9 5 0 .]

F ederal

R eserve

B u l l e t in ,

D e c . 1950, p . 1 6 2 2 ; F R B N Y C ir c u la r N o . 361 1,

Unavoidable Delay in Credit Extension— Sec. 5 (k )

Section 5(k) of Regulation X provides that the regulation does not
apply to real estate construction credit extended prior to 32 days after
certain new construction is completed. Credit extended after the 32-day
period is exempt, however, in cases where the extension of credit is neces­
sarily delayed by title difficulties, pending litigation with respect to the
property, or comparable circumstances.
[1 6

F .R .

8048;

F ederal

R eserve

B u l l e t in ,

A u gust

1951,

p.

9 5 9 .]

Firm Commitment Prior to Effective Date— Sec. 6 (b )
(H erein “ effective date” means October 12, 1950 where 1-2 fam ily unit
residence; January 12, 1951 where 8-4 fam ily or multi-unit residence;
February 15, 1951 where nonresidential property.)

Section 6(b) of Regulation X provides that the -prohibitions o f sub­
sections ( a ) and ( b ) o f section 4 of the regulation shall not apply to or
affect any credit extended pursuant to any firm commitment to extend credit
made prior to the effective date of the regulation. Inquiries have been
received concerning the application of this section to agreements entered




13

into by a Registrant and a builder prior to the effective date of the
regulation under which the Registrant agreed to lend a stated amount on
stated terms to any purchaser of particular residences built or to be built by
the builder if the purchaser has a credit standing satisfactory to the
Registrant and if the residence has been constructed according to prescribed
plans and specifications.
Section 6(b) defines a firm commitment as either (1) a written agree­
ment under which the Registrant is required without option or discretion
on his part to extend credit upon demand by the borrower or upon compli­
ance by the borrower with one or more conditions referred to in such
agreement; or (2) any other agreement to extend credit which has been
entered into in good faith by the parties and in reliance upon which the
prospective borrower has taken specific action prior to the effective date of
the regulation, if the Registrant prior to January 1,1951 (w here 1-2 fam ily
unit residence) or p rior to M arch 15, 1951 ( w here 3-4 fam ily or multi-unit
residence) shall have sent to the Federal Reserve Bank of the district in
which he does business a letter or other statement reciting the facts with
respect to such agreement and the specific action taken by the prospective
borrower prior to the effective date of the regulation.
I f an agreement of the kind described above is in writing, it constitutes
a firm commitment within the meaning of clause (1) of the definition of that
term and the fact that the borrower (purchaser) must have a credit standing
satisfactory to the Registrant is merely one of the conditions with which
the borrower must comply.
If such an agreement is not in writing (on nonresidential prop erty
there is an exem ption only i f the firm com mitment is in writing and made
p rior to F ebru ary 15, 1951), it constitutes a firm commitment within the
meaning of clause (2) of the definition if the builder has taken specific
action in reliance upon the agreement prior to the effective date of the regu­
lation and the Registrant furnishes the required information to the appro­
priate Federal Reserve Bank p rior to prescribed date. For this purpose,
the term “ prospective borrower” in clause (2) of the definition is deemed
to include the builder to whom the commitment was made.
[1 5

F .R .

7180;

F ederal R eserve

B u l l e t in ,

N ov. 1950, p.

1 4 7 4 .]

Modification of Pre-effective Date Firm Commitment— Sec. 6 (b )
(Herein “ effective date” means October 12, 1950 where 1-2 fam ily unit
residence; January 12, 1951 where S-4 fam ily or multi-unit residence;
February 15, 1951 where nonresidential property.)

Section 6(b) of Regulation X provides that the prohibitions o f sub­
sections (a ) and (b ) o f section 4 of the regulation shall not apply to or affect
any credit extended pursuant to any firm commitment to extend credit made
prior to the effective date of the regulation. Questions have been raised
concerning the application of this provision where firm commitments made
prior to the effective date of the regulation are modified subsequent to that




14

date by (1) substituting a new borrower for the one named in the commit­
ment, (2) increasing the amount which the Registrant is committed to lend
in order to cover increases in construction costs, or (3) extending the time
within which the Registrant is committed to make the loan. It is the Board’s
opinion that credit extended pursuant to such a modification of a prior
commitment is not exempt from Regulation X except in the case of reason­
able extensions of time in accordance with customary practices where the
closing of loans is delayed by title difficulties, unforeseen delays in the
completion of construction, or comparable circumstances.
[IS

F .R .

8 076;

F ederal

R eser ve

B u l l e t in ,

D e c.

19S0,

p.

1 6 2 2 .]

Extension of Credit for Mixed Purposes— Sec. 6 (h )

Inquiries have been received regarding the application of Regulation
X to extensions of credit for mixed purposes. For example, a prospective
borrower applies to a Registrant for a loan to be secured by a mortgage
on residential property on which there is no new construction. A part of
the loan is for the purpose of financing a major addition to the residence
which will cost $8,000, and $2,000 of the loan will be used (A ) to retire
an existing mortgage on the property, or (B ) to retire outstanding indebt­
edness not secured by a mortgage on the property, or (C) for some other
purpose which would not make the loan subject to Regulation X . The
question is: How much credit can the Registrant extend and on what terms?
It is the view of the Board that in such cases Regulation X requires
that the amount and terms of the loan shall be such as would result if the
loan were divided into two or more parts on the basis of the purposes of
the loan and each part were treated as if it stood alone; and the amount
and terms of the loan would comply with Regulation X if they satisfied
the requirements of the regulation applicable to that part which is subject
to Regulation X .
By way of illustration, in each of the examples set forth above, the
maximum amount of credit permitted by Regulation X would be $8,800,
that is, $6,800 (the maximum loan value of the $8,000 major addition)
plus $2,000. The maturity and amortization of that part ($6,800) which
is subject to Regulation X would have to conform with the provisions of
the Supplement; or, in other words, the payments on the loan would have
to be such as to repay $6,800 of the loan within the time and at the rate
required by the Supplement.
The same principles apply in the case of a loan secured by a mortgage
on farm property where part of the loan is for the purpose of financing
the construction of a residence on such property and the remainder of the
loan is for purposes which would not make the loan subject to Regulation X .
[IS

F .R . 7 3 8 4 ; F e d e r a l




R e s e r v e B u l l e t i n , N o v . 1 9 S 0 , p . 1 4 7 5 .]

15

Maximum Maturity— Sec. 6 (i)

The maturity provision in the Supplement to Regulation X provides
for a maximum maturity of 20 years (or 25 years, in some cases) “ from the
date such credit is extended.” In trade practice, provision often is made
for the payment of the first instalment of an amortized loan on the first day
of the second calendar month after the month in which the credit is extended.
In order to permit this practice, the Board, in a ruling which appeared on
page 1621 o f the Federal R eserve B ulletin fo r D ecem ber 1950, stated:
“ * * * in calculating the maximum maturity of credit subject to the regu­
lation, a Registrant may, at his option, use any date not more than 32 days
subsequent to the date such credit is extended.”
Regulation X , as amended, provides in section 6(») that “ In calculat­
ing the maximum maturity of credit subject to this regulation, a Registrant
may use, at his option, as ‘ the date such credit is extended’, any date not
more than 32 days subsequent to the actual date such credit is extended.”
Section 6 (i) o f the regulation does not mean that the first instalment of
an amortized loan must be paid within 32 days after the date the credit is
extended. I t does mean, in effect, that the maximum maturity of credit
subject to Regulation X may be 20 years and 32 days (or, in some cases,
25 years and 32 days) from the actual date such credit is extended.
For example, if a 20-year loan payable monthly were closed on January
1, 1951, and the first payment is made on March 1, 1951, the last payment
would be made on February 1, 1971. Here the Registrant would be using
February 1, 1951, which is 31 days subsequent to the actual date such credit
is extended, as “ the date such credit is extended” , and the loan would
mature 20 years from such date. The loan, in effect, would have a maturity
of 20 years and 31 days from January 1, 1951, the actual date such credit
was extended.
The principle of section 6(t) of the regulation is not limited to monthly
payment loans. The amortization provision in the Supplement to Regula­
tion X permits repayment through substantially equal monthly, quarterly,
semiannual, or annual payments. As a further illustration, in the case of a
20-year loan payable annually in 20 instalments, where the loan is closed on
February 1,1951, the first payment could be made on March 1, 1952, because
the last payment would be made and the loan would mature on March 1,
1971. Here the Registrant would be using March 1, 1951, which is 28 days
subsequent to the actual date such credit is extended, as “ the date such
credit is extended” , and the loan would mature 20 years from such date.
[1 6

F .R .

1593,

F ederal

R eser ve

B u l l e t in ,

F eb .

1951,

p.

1 6 1 .]

Actual Date Credit is Extended— Sec. 6 (i)

Inquiries have been received by the Board concerning the meaning
of the phrase “ actual date such credit is extended” as used in section 6(i)
of Regulation X .



16

Many types of credit extensions are subject to Regulation X and it
is administratively impossible to prescribe a specific rule which would be
fairly applicable to all types of financing arrangements affected by the
regulation. However, for the purposes of Regulation X the general rule
to be followed in most extensions of credit affected by the regulation is
that the “ actual date such credit is extended” is that date which is (1) the
date on which the lender first disburses funds to, or makes funds available
to the account of, the borrower, or (2) the date of execution of the note or
other credit instrument evidencing the credit extended, whichever shall
last occur.
[1 6

F .R .

2SS1;

F ederal

R eserve

B u l l e t in ,

M arch

1951,

p.

2 7 2 .]

Compliance with Amortization Provisions— Supplement

Clause (2) of the amortization provision in Schedule I and the
amortization provision in Schedule III of the Supplement to Regulation X
provide for amortization payments which ‘ ‘ will fully liquidate the original
principal amount of such credit not later than the date of the maturity of
the credit . . . ”
In cases where the maturity of credit subject to the regulation is less
than the maximum permitted by the regulation, it is the opinion of the
Board that the amortization provisions referred to above will be complied
with if amortization payments are made until the maturity of the credit
which, had they been continued until the maximum permissible maturity,
would have fully liquidated the original principal amount of such credit by
the date of such maximum permissible maturity.
For example, if the maximum maturity is 20 years, and the credit has a
maturity of 10 years, the amortization provisions would be complied with
if amortization payments are made during the 10 years which, had they been
continued for 20 years, would have fully liquidated the original principal
amount of such credit within 20 years.
[1 6

F .R .

2551;




F ederal

R eserve

B u l l e t in ,

M arch

1951,

p.

2 7 2 .]

R E G U L A T IO N X
R E A L E S T A T E C R E D IT
Q u estion s and Answers
Real Estate Construction Credit— Sec. 2 (e )

Q.

To what extent, if any, is existing construction subject to the controls
of Regulation X , or is it limited solely to new construction?

A.

Regulation X applies only to new construction, that is, any structure,
or any major addition or major improvement to a structure, begun
after August 3, 1950.
*

*

*

Q.

A two-family house has been converted and is being occupied by three
families (3 baths, 3 kitchens, etc.). This change was made in violation
of city code. W ill the sale of the property under GI or F H A loan
come under Regulation X ?

A.

It would not be subject to Regulation X if sale is entirely financed by
a GI or F H A loan.
#

•

*

Q.

A builder has commitments given during July of 1950, for the con­
struction of ten new homes to be financed by conventional loans. The
applications were not processed and the buildings were not started
prior to August 3, 1950. The houses are built and financed by sixmonth conventional loans and then offered for sale with F H A or GI
financing. Are such sales subject to Regulation X ?

A.

If purchases of such houses, although “ new construction” , are financed
entirely through F H A or GI financing, such financing is not subject to
Regulation X , as issued by the Board of Governors.
*

#

#

Q.

A man owns a one-fam ily house ten years of age. Subsequent to
August 3, 1950, he expends $3,000 of his own money on remodeling and
improvement, which is thus a “ major alteration or improvement.”
Subsequently, he desires to sell the house. Is the financing in connection
with this sale regulated in whole or in part?

A.

Under section 2(e) of Regulation X , real estate construction credit
includes any credit extended on ‘ ‘ new construction on real property or
real property on which there is new construction, if such new construc­
tion is a residence or a major addition or major improvement to a
residence.” Consequently, financing in connection with the sale of an




17

18

old house to which a major addition is made after August 3, 1950,
would be subject in its entirety to Regulation X .
•

•

*

New Construction— Sec. 2 (f)

Q.

Define what exactly constitutes the start of new construction for pur­
poses of the new regulations. Would a placement of a portion of the
needed materials on a proposed building site be sufficient?

A.

Under the regulation, construction is considered as having been begun
when any essential materials which are to be an integral part of the
structure have been affixed to or incorporated on the site in a permanent
form. The placement of a portion of the needed materials, such as the
stacking of lumber, on the proposed site would not be sufficient. For
example, pouring of footings would be considered as evidence of com­
mencement of construction.
#

#

*

Q. , A borrower excavated the ground for the cellars of ten homes prior to
August 3, 1950. No actual construction work, other than the excavation,
was started prior to that date. Would these ten contemplated homes
be considered construction begun prior to August 3, 1950?
A.

Pursuant to the provisions of section 2 (f) of the regulation, mere
excavation would not constitute the beginning of new construction.
#

*

*

Q.

Construction of a home was started in April of 1950. It is a self-built
home and while work has been done continuously, completion has lagged.
The building is now 70% completed, and the owner applies for a $5,000
loan to cover the cost of the completion. Is this considered a major
improvement, and subject to Regulation X , or is it exempt by way of
construction having been started prior to August 3, 1950?

A.

Since work has been done continuously, although construction has
lagged, this structure is exempt from Regulation X because the con­
struction was begun prior to August 3, 1950.
#

#

*

Maximum Loan Value— Sec. 2 (i)

Q.

Please amplify the term “ maximum loan value” where the entire cost
of the property to the borrower has been incurred by him not more
than 12 months prior to the extension of credit (section 2, subsection i).

A.

The provision of the regulation in question refers to the method of
computing the total value of the property and the maximum loan value




19

is computed on the basis of this total value as prescribed in the Supple­
ment to the regulation. If the entire cost of the property is incurred
not more than 12 months prior to the extension of credit the “ value”
is the bona fide cost of the property to the borrower, including a bona
fide estimate of the cost of completing the new construction. Also,
where a builder constructing houses for sale seeks long-term mortgage
loans for the purpose of financing construction with the expectation
that the houses will be sold subject to such indebtedness, a reasonable
builder’s profit and reasonable estimate of the cost of selling the houses
may be included as a part of the cost to the borrower (builder) for pur­
poses of determining “ value.” In the rare case in which the prospective
borrower is to perform the labor on the new house, a bona fide estimate
of the value of the labor may be included in the “ bona fide estimate of
the cost of completing new construction.”
*

#

#

Real Estate Construction Credit to Build New Residence— Sec. 4 (a ) (1)

Q.

A customer has asked for a $10,000 loan upon stock collateral. He
intends to lend this money to his son, who will build a new home to
cost $10,000. Informal discussions suggest that this loan is not regu­
lated, as the father can properly sign a statement that the proceeds
of the loan that he is getting from us on the stock is not for “ new
construction.” What is your opinion?

A.

While the father could, of course, sign such a statement, nevertheless,
the loan by the bank to the father is in fact an indirect extension of
credit to the son and if it is for the purpose of circumventing the regula­
tion, the son would be the real borrower and the extension of credit
would violate the regulation.
#

Q.

#

*

An individual contemplates building a one-fam ily residence on a lot
which cost him $1,500 and under a contract in the amount of $16,000,
so that his ultimate investment or transaction price will be $17,500. As
a national bank and under Section 24, the maximum loan we could
extend would be $10,500 or 60% of the cost, whereas under Regulation
X , the loan could be $11,300.
To obtain the necessary funds to build, the applicant proposes to borrow
the sum of $3,900 on life insurance policies, which under the regulation
is an exempt transaction. The applicant is presently the owner of a
property, clear of encumbrance, valued at $12,000. Under Section 24
we could make a 50% loan, or $6,000, where the loan had a maturity
of less than five years. He proposes to further borrow the sum of $6,100




20

on a construction mortgage having a six months’ maturity, which under
Section 24 we would be permitted to make provided the advances under
the construction mortgage do not at any time exceed 60% of the value
of work done.
This question assumes that for appraisal purposes, valuation as indi­
cated above will be supported. As we see the picture, this particular
case involves four loan transactions. The question is, are each of them
considered separate transactions and, therefore, will Regulation X pre­
vail, and on which of the transactions, and what type of statement
should be obtained from the borrower?
A.

In lending on real estate a national bank must conform with the
requirements of Regulation X or Section 24 of the Federal Reserve Act
whichever is the stricter.
The “ value” of the residential property would be $17,500 and the
maximum loan value would be $11,300. Assuming that all four loans
are to be made at the same time or that the Registrant knows or has
reason to know that all four loans are contemplated by the borrower,
the total amount of credit that may be extended, exclusive of the amount
which is fully secured by the cash surrender value of the life insurance
policy, cannot exceed $11,300, or in this particular case, where the sum
of $3,900 is to be borrowed on a life insurance policy, the total amount
of credit that can be extended is $15,200.
In a case of this kind the statement required to be obtained from the
borrower should conform to section 4(d ) of the regulation.
•

•

•

Q.

A man builds a house that comes under Regulation X , but borrows on
a mortgage on an existing house he presently owns free of encumbrance.
It is pretty clear that if he then wants to borrow on the new construc­
tion, the amount he can borrow on it is reduced by the amount of the
loan on the existing structure. I wonder if this situation does not
change with respect to the amount of money to be borrowed on the new
house if either the new or the old house is sold.

A.

I f the old house is sold and the seller continues to be liable on the
existing mortgage with respect to that house, the sale has no effect upon
the amount of credit which may be outstanding with respect to the new
construction; the mortgage on the old house would still be included. If
the new house is sold, the outstanding mortgage on the old house would
not be relevant to the amount of credit which could be extended to the
purchaser of the new house. The purchaser would be entitled to borrow
up to the maximum loan value of the new house although, of course,
the amount of the mortgage on the new house would have to be con­




21

sidered in determining the maximum amount which he might borrow
if the purchaser assumes the mortgage or takes the property subject
to it. The subsequent sale of the old house is not subject to Regulation
X even though the mortgage placed on the old house was security for
the credit extended to build a new house.

Real Estate Construction Credit to Finance M ajor Addition
or Major Improvement— Sec. 4 (a ) (2)

Q.

A borrower applies for a $3,600 first mortgage on a single-fam ily
residence. Out of the proceeds, there are “ prior obligations” bomprising either:
(a) a first mortgage
(b) an F H A Title I loan
(c) consumer credit obligations or a combination thereof aggregating
in total $1,900 to be paid. Balance of the proceeds to be applied to
the payment of repairs, improvements or alterations to the property.
Is the application for a mortgage of $3,600 eligible for processing under
Regulation X or would Regulation W control because of the fact that
the $1,900 prior obligation would be excluded and consideration given
only to the repairs and improvements of which 90% could be loaned
under Regulation X , resulting in a credit for the repairs and improve­
ments of less than $2,500 ?

A.

I f a pre-existing credit with respect to an old house is consolidated
with a $1,900 loan for consumer credit obligations and the total credit
exceeds $2,500, the loan is outside the provisions of Regulation W
unless automobile credit is involved. I f the credit to be applied to the
payments for repairs, improvements or alterations, exceeds $2,500, it
must conform with the provisions of Regulation X .
Assuming that the balance devoted to the payment of repairs, improve­
ments, or alterations does not exceed $2,500 and the consolidated loan
exceeds $2,500, Regulation TV would not apply; and Regulation X
would not apply because that portion for improvements is less than
the minimum amount subject to the regulation. (S ee sec. 5 (a ).)
•

•

*

Ascertaining Nature of Credit— Sec. 4 (c )

Q.

Is it necessary (or advisable) to get a Statement of Borrower on all
extensions of credit, particularly loans under $2,500, loans with matu­
rities of less than 18 months, or loans to corporations who have main­
tained an open line of credit with the bank for some time?




22

A.

In the case of any extension of credit by a Registrant, it is required
by section 4(c) of the regulation that the Registrant shall be satisfied,
and shall maintain records which reasonably demonstrate on their face,
whether such credit is or is not real estate construction credit; and a
statement by the borrower is one of the means by which this require­
ment may be met. Under certain circumstances specified in section 4 (c ),
the requirem ents o f that section do not apply and the Registrant is
relieved from the duty to ascertain the nature o f the credit. F o r exam-'
pie, where the R egistrant does not have actual knowledge that the credit
is real estate construction credit, the requirem ents o f section 4 ( c ) do
not apply to any extension o f credit in the ordinary course o f business
fo r a commercial, agricultural, or business purpose w here the R egis­
trant, because o f a previous course o f dealings or correspondence
betw een him self and the borrow er has no reason to believe that the
credit is or will be real estate construction credit. If the credit is in
fact real estate construction credit, whether or not exempt from the
regulation, the Registrant must obtain a Statement of the Borrower in
accordance with section 4 (d ). A form of Borrower’s Statement for this
purpose is available at the Federal Reserve Bank, and it will be observed
that in the case of an exempt credit only the first two questions need be
answered.
•

•

*

Statement of the Borrower— Sec. 4 (d )

Q.

Would a short-form Statement of Borrower, rubber stamped on credit
application forms, meet the requirements of the regulation? I f so,
would you suggest an abbreviated statement, practical for such use?

A.

A form of statement rubber stamped upon the credit instrument or
upon any other papers in connection with the credit and signed by the
Registrant stating that he is satisfied that the credit in question is not
real estate construction credit would be sufficient. However, if the
credit advanced is “ real estate construction credit” , it might be diffi­
cult to consolidate the facts necessary to be stated to fit a short form
suitable for a rubber stamp application.
•

*

•

Q.

May the lender rely on a written statement of the builder that con­
struction was started prior to August 3, 1950, or does he have a respon­
sibility to make some kind of an investigation?

A.

The Registrant may accept in good faith the signed statement of a
builder or borrower as to the date on which construction was begun.




*

*

*

23

Q.

The Federal Reserve Board issued an interpretation (see page 10 o f
this circular) having to do with statements required from a mortgage
company when a loan is made to that mortgage company secured by a
pledge of other mortgages. I understand that this interpretation
requires a statement from the mortgagor of each pledged mortgage
which is subject to the regulation, setting forth the required informa­
tion, but that the lender may rely upon a signed statement from the
mortgage company as to which of the pledged mortgages do and which
do not involve “ real estate construction credit.” In an instance of
this kind, is it necessary to take another statement from the mortgage
company in which they certify that the proceeds of the loan made to
the mortgage company will not be used for “ new construction” ?

A.

W ith respect to the bank’s loan to the mortgage company the bank must
comply with the requirements of section 4(c) of the regulation, that
is, the Registrant must be satisfied, and maintain records which rea­
sonably demonstrate on their face, whether the credit is or is not real
estate construction credit and may accept a Statement of the Borrower
for this purpose. In addition, as required by section 4 (a )(5 ) of the
regulation the mortgages securing the loan by the bank must conform
to the requirements of the regulation and the bank should take steps,
as indicated in the interpretation of the Board referred to in the ques­
tion, to satisfy itself that such mortgages do in fact conform.
*

*

*

Minimum Amount— Sec. 5(a )

Q.

A man owns a one-family house valued at $16,000 on which there is a
conventional loan— original amount $11,500— present balance $10,000.
He wishes to have a new roof put on which will cost $1,500.
I f the mortgage is an open-end instrument, can the lender advance
$1,500, less 10% cash down payment (Regulation W ) so that the
present balance would become $11,350, or does he have to make a special
36-month loan for $1,350?
If it is not an open-end mortgage and the lender and owner wish to
recast the older mortgage, can they arrange a new loan of $11,350
($10,000 plus $1,500, less 1 0% ) payable over a 15-year period (original
maturity) ?
If the above is not permitted, what action would you suggest where the
house requires a new roof and the owner cannot meet his regular
monthly payment on the original mortgage and the additional payment
on a 36-month modernization loan ?

A.

In neither case would the eredit be controlled by Regulation X because
it would be a mixed-purpose loan (see sec. 6 ( h ) ) and the portion subject
to the regulation would not exceed $2,500. Regardless of the type of




24

security, the advance for the new roof properly may be made without
restriction if consolidated with the outstanding indebtedness of $10,000
on the old house since Regulation W , except in the case of an automobile
credit, does not apply to credit in a principal amount of over $2,500.
On the other hand, if the advance for the new roof is handled as a
separate obligation, then under Regulation W the 90 per cent maximum
loan value requirement would apply and the maximum maturity could
not exceed 36 months.
•

Q.

#

*

A man makes home improvements and repairs costing $2,000. He
applies to the bank for a mortgage of $2,000 to be repaid over a 20-year
period. He has no existing mortgage.
(a) Is this transaction within Regulation W ?
(b) Assume that he has a presently existing mortgage of $2,500 and
applies for a $4,500 loan to refinance as well as to pay for repairs.
Is this within Regulation X ? W ?
(c) Assume in (b) the existing mortgage is $3,500, making the com­
bined mortgage $5,500.

A.

(a) The transaction would violate Regulation W since the improve­
ment and repairs are in connection with an existing structure as speci­
fied in Part 1, Group D of the Supplement to Regulation W .
(b) Unless it is made to finance purchase of an automobile, the con­
solidated loan, if represented by a single obligation, would not be sub­
ject to Regulation W because the desired loan plus the outstanding
credit with respect to the old property exceeds $2,500. Regulation X
would not apply because the portion for improvements would not
exceed $2,500.
(c) Same as (b) without the qualification as to automobile credit.

Q.

A borrower applies for a mortgage loan of $1,200 against a one-fam ily
residence on which there is an existing mortgage loan of $6,200 with
which it is proposed the additional loan be consolidated, creating a
single lien of $7,400. The proceeds of the additional loan will be used
for the construction of a garage.
Is the loan eligible for processing under the provisions of Regulation X ?

A.

Assuming that the existing mortgage relates to realty on which there
is an old house, only that portion of the loan which may be subject to
Regulation X need be considered. If the garage is to be attached to
the residence, the portion of the credit for the garage would not con­
stitute credit for a major addition or improvement since it is less than




25

$2,500; if the garage is to be detached the portion for the garage would
not be subject to the regulation.
*

*

•

Short-Term Residential Construction Credits— Sec. 5 (b )

Q.

I f work has not been completed under an 18-month construction loan,
can the loan be extended?

A.

I f the loan has an 18-month maturity, it may not be extended unless,
as provided in section 6(e) of the regulation, the loan is in default and
is the subject of a bona fide collection effort by the Registrant. If the
loan has a maturity of less than 18 months, it may be renewed if the
date of the maturity of the renewal is not more than 18 months after
the date the credit was originally extended.
#

#

#

Q.

A man builds a house that comes under Regulation X , borrows the full
amount permitted in a first mortgage, and then wishes to borrow a
$1,000 instalment loan and pay it off within one year. Does the instal­
ment loan come under the exemptions as defined by “ short-term
residential construction credits” ? This additional credit is “ for the
purpose of financing the construction of a residence.”
A man is building a new home at a cost of $20,000, and the real estate
loan which we have granted upon the property has been computed in
accordance with Regulation X . He asked for a temporary commercial
loan on stock collateral above the amount allowed by the regulation,
which loan would be due in one year and would be repaid from a bonus
he will receive from his employer. Is this supplementary loan on the
stock collateral regulated, as it falls within the 18-month maturity
exemption on temporary loans for “ new construction.”

A.

The situation in both cases is much the same. Assuming that construc­
tion of the house has not been completed, the short-term loan, if for the
purpose of financing the construction of the residence, would be exempt;
but the long-term mortgage loan would have violated the regulation
if at that time the Registrant knew or had reason to know that the
short-term loan was contemplated by the borrower. (S ee sec. 4 ( b ) .)
m

m

m

Contracts to Sell— Sec. 5 (f)

Q.

The exemption provided in Regulation X for contracts is not too clear.
Does this exemption contemplate only agreements which are actually
in purpose a deposit or option? Are contracts for sale, wherein a
buyer agrees to make periodic payments for the purchase of property,
and later receives deed to it, subject to the regulation?




26

A.

The only purpose of the exemption contained in section 5 (f) is to pro­
vide that the execution of a simple contract to sell real estate, with
merely a deposit of earnest money, would not violate the regulation if
the contract is of the kind described in section 5 ( f ) . However, the
exemption has no application to an extension of credit in connection
with the subsequent settlement and transfer of title pursuant to a
sales contract.
#

#

*

Extension of Credit for Mixed Purposes— Sec. 6(h)

Q.

A man owns a home valued at $10,000. He has an existing mortgage
of $3,000. He desires to make a major addition to his residence costing
$5,000 and combine the original mortgage with the money needed for
the repairs. What is the largest amount of loan which he can secure
under Regulation X ?

A.

In such cases, assuming the house itself is not new construction,
Regulation X requires that the amount and terms of the loan shall be
such as would result if the loan were divided into two or more parts on
the basis of the purposes of the loan and each part were treated as if
it stood alone; and the amount and terms of the loan would comply with
Regulation X if they satisfied the requirements of the regulation
applicable to that part which is subject to Regulation X . The largest
amount of loan that could be secured under the facts given in this
problem would be $7,500, $4,500 of which must conform to the amortiza­
tion and maturity provisions prescribed by the Supplement to this
regulation.




*

•

*

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CO NTENTS

Section

S u bject o f In terpreta tion

1
1
2 (e )
2 (e )
2 (g )
2 (i )
2 (i )
2 (i )
2 (i)
2 (i )
2 (k )
2 (r )
2 (r )
2 (r )
2 (r )
2 (s )

Real Estate Brokers ............................................................................
Church Unit Extending Credits............................................................
Commodity Credit Corporation Loans...............................................
Participating Share in Cooperative Development..........................
Painting, Reroofing, and Repairs as “ M ajor Improvement” . . .
Allowance for Labor ..........................................................................
Allowance for Builder’s Profit and Costs o f Sale..........................
Appraised Value o f Improved Real Property................................
Appraised Value o f Lot and Residence...........................................
Determination o f Value o f Residential Property..........................
House Trailers .......................................................................................
Warehouses and Office Buildings used in Processing G ood s.___
Newspaper Printing Plant ................................................................
Dining Cars as Nonresidential Structures.......................................
Medical Centers and Clinics as Hospitals.......................................
Radio and Television Broadcasting Companies Not
Public Utilities ...............................................................................
2 (s )
Interstate Trucking Companies as Public Utilities.......................
2 (s )
Privately-Owned Public Warehouse Not a Public U tility............
4 ( a ) ( 5 ) Instruments Evidencing Exempt Credit...........................................
4 ( a ) ( 6 ) Sale o f New Residence Subject to Pre-effective Date
Indebtedness .....................................................................................
4 (c )
Necessity for Statement o f Borrower fo r Nonregulated Credit.
4 (d )
Statement o f Borrower Where Credit Secured by Mortgage
Collateral ..........................................................................................
5 (b )
Short-Term Residential Construction Credits.................................
5 (e )
Casualty Exemption for Tenants........................................................
5 (g )
Exemptions for Contemplated Construction...................................
5 (k )
Unavoidable Delay in Credit Extension...........................................
6 (b )
Firm Commitment Prior to Effective D ate.....................................
6 (b )
Modification o f Pre-effective Date Firm Commitment................
6 (h )
Extension o f Credit for Mixed Purposes.........................................
6 (i)
Maximum Maturity .............................................................................
6 (i)
Actual Date Credit is Extended........................................................
Supplement Compliance with Amortization Provisions.......................................

Page
1
2
2
3
3
3
4
4
5
5
6
6
7
7
7
8
8
9
9
9
10
10
11
12
12
12
12
13
14
15
15
16

Questions and Answers
2 (e )
2 (f)
2 (i)
4 (a )(1 )
4 (a ) (2 )
4 (c )
4 (d )
5 (a )
5 (b )
5 (f)
6 (h )

Real Estate Construction Credit.........................................................
New Construction ................................................................................
Maximum Loan Value ........................................................................
Real Estate Construction Credit to Build New Residence............
Real Estate Construction Credit to Finance M ajor Addition or
Major Improvement .......................................................................
Ascertaining Nature o f Credit............................................................
Statement o f the Borrower..................................................................
Minimum Amount .................................................................................
Short-Term Residential Construction Credits.................................
Contracts to Sell ...................................................................................
Extension o f Credit for Mixed Purposes.........................................




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18
18
19
21
21
22
23
25
25
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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102