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FE D E R A L RESERVE B A N K
OF NEW YORK

REGULATION X
R E A L E STA TE C R E D IT

Interpretations o f Regulation X
Issued b y the B oard o f Governors
o f the Federal Reserve System
through M arch 15, 1951

Circular No. 3677
M arch 16, 1951

F

e d e r a l
o f

R
N

eserve

ew

Y

B

ank

o r k

March 16, 1951

To all Persons E ngaged in the Business o f E xtend in g Beal E state Credit
in the Second F ederal R eserve D istrict:

This circular contains the interpretations o f Regulation X
by the B oard o f Governors o f the Federal Reserve System which
have been issued through March 15, 1951. In addition, it contains
questions relating to the regulation submitted to the B oard o f
Governors by the A m erican Bankers Association, and the B oa rd ’s
answers thereto. The circular has been printed in a form to fa cili­
tate you r keeping it with you r copy o f the regulation.
A dditional copies o f this circular w ill be furnished upon
request.




A

llan

S proul,

President.

NOTE
To reflect a revision o f the regulation made after the issuance
o f an interpretation or answer, the language o f 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 o f the regulation have
been omitted. The interpretations and questions and answers are
arranged in the same order as the sections o f the regulation to which
they relate.
The section number o f the regulation to which each interpreta­
tion principally pertains has been added after the catch line indica­
tive o f its subject m atter; the section number o f 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,
o f this Bank.
The interpretations and answers should be used only as aids in
studying the application o f 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 w ill be
identical with those assumed. Therefore, caution should be exer­
cised against reaching a conclusion in a given case solely on the
basis o f similarity to any one o f the interpretations or answers.




REGULATION X
REAL ESTATE CRED IT
Interpretations

Real Estate Brokers— Sec. 1
A n inquiry has been received by the B oard o f Governors regarding
the status under Regulation X o f real estate brokers: W hen are they Regis­
trants and, in cases where they are, does this affect sales o f real property
by non-Registrants, when the broker acts as the ven d or’s sales agent?
The second paragraph o f section 1 o f the regulation provides that the
regulation applies to any person who is engaged in the business o f extend­
ing certain real estate credit, “ including any person who acts as agent in
arranging for such cred it.” The quoted phrase means that the regulation
applies to persons who are engaged in the business o f arranging for such
credit as agents fo r lenders, not as agents fo r borrowers.
In a typical sale o f real estate, where the real estate broker acts as
sales agent fo r the vendor, the broker may also arrange the financing for
the sale. In such cases, if the broker receives a fee from a lender fo r his
services in arranging the financing, whether the lender is the vendor or a
third party, the broker ordinarily would be considered an agent fo r the
lender. However, if the broker does not receive such a fee, but merely con­
tacts o r otherwise negotiates with the lender on behalf o f the vendor or
vendee, he ordinarily would not be considered an agent for the lender.
It is the opinion o f the B oard 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.
F o r this purpose, a transaction in which a real estate broker acts as agent
o f the lender in arranging the financing as described above is to be con­
sidered an extension o f credit by him.
The mere fact, however, that a real estate broker acting as sales agent
in a sale o f real property may be a Registrant does not affect a sale b y a
non-Registrant, unless the real estate broker extends or arranges as agent fo r
an extension o f real estate construction credit in connection with the sale.
Under section 4 ( a ) ( 6 ) o f Regulation X , a sale in which the vendee
assumes, or takes the property subject to, a mortgage is not permissible if
the amount o f outstanding credit (extended after October 12, 1950, or
January 12, 1951, or F ebruary 15, 1951, as the case may be) exceeds the
maximum loan value. However, this restriction is applicable only to a




1

Registrant who is acting as principal and, therefore, does n ot apply to a
real estate broker who is acting as agent in connection either with the sale
or the financing which may be involved. O f course, if additional real
estate construction credit over and above the maximum loan value o f the
property were extended in connection with the sale, the other provisions
o f section 4 would apply to a real estate broker who acted as agent in arrang­
ing fo r the extension o f such additional credit in the manner described
above.
[ 1 6 F.R. 1 5 9 3 ; F e deral R e serve B u l l e t i n , Feb. 1951, p. 162 .]

C om m odity Credit C orporation Loans— Sec. 2 (e )
A n inquiry has been received concerning the application o f Regulation
X to loans which are made by banks and other lending agencies pursuant to
com m odity loan programs o f the Com m odity C redit Corporation and which
the Commodity Credit Corporation is committed to purchase. It is the
B o a rd ’s view that such loans should be regarded fo r this purpose as loans
guaranteed by a w holly owned Government corporation and that, therefore,
they do not constitute real estate construction credit as defined in section
2 (e ) o f Regulation X and are not subject to Regulation X .
[ 1 6 F.R. 4 9 5 ; F e deral R eserve B o l l e t i n , J a n . 1951, p . 3 3 .]

Painting, R eroofing, and Repairs as “ M ajor Im provem ent” — Sec. 2 (g )
It is the B oa rd ’s view that painting, reroofing, and repairs constitute
a “ m ajor im provem ent” , within the meaning o f section 2 (g ) o f Regula­
tion X , if their cost exceeds amount prescribed in section 2 ( g ) . ( See R egu ­
lation W o f the Board o f Governors o f the Federal 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 . 7 3 8 3 ; F ederal R eserve B u l l e t i n , N o v . 1950, p. 147 4.]

A llow ance fo r L abor— Sec. 2 (i)
Inquiries have been received under section 2 (i) (2 ) (b ) o f Regulation X
where the facts are these: A prospective borrow er owns a vacant lot on
which he, with the help o f his fam ily and friends, will perform the necessary
labor to build a residence. He applies to a Registrant fo r credit to be secured
by a mortgage upon the residential property, the proceeds o f the loan to
be used to pay fo r materials used in the new construction. The question i s :
H ow does a Registrant determine the “ valu e” o f the residential p roperty?
I f the entire cost o f the property has been incurred by the prospective
borrow er not more than 12 months p rior to the extension o f credit o r is
to be incurred by him after such extension o f credit, the “ valu e” is the
bona fide cost o f the property to the borrower, including a bona fide




2

estimate o f the cost o f com pleting the new construction. It is the view o f
the B oard that a reasonable bona fide estimate o f the value o f the labor
to be perform ed by the prospective borrower, his fam ily, and friends may
be included in the “ bona fide estimate o f the cost o f com pleting new
construction. ’ ’
I f the lot has been purchased or any other part o f the cost o f the
p roperty has been incurred by the prospective borrow er more than 12
months prior to the extension o f credit, or if any part o f such property
has been acquired by gift, exchange, or inheritance, the “ va lu e” shall be
the appraised value as determined in good faith b y the Registrant.
[15 F . R . 7 3 8 3 ; F ederal R eserve B u l l e t i n , N o v . 1950, p. 147 5.]

A llow ance fo r B u ilder’s P rofit and Costs o f Sale— Sec. 2 (i)
Section 2 ( i ) provides that, in certain circumstances, the “ valu e” o f
residential property shall be “ the bona fide cost o f the property to the
borrower, including a bona fide estimate o f the cost o f com pleting new
construction on such property when the extension o f credit is for the
purpose o f financing such new construction.” Questions have been raised
concerning the inclusion o f b u ild er’s profit and sales cost in determining
‘ ‘ value ’ ’ in cases where, in lieu o f obtaining short-term construction credit
which would be refinanced upon the sales o f the houses, a builder con­
structing houses fo r sale seeks long-term mortgage loans fo r the purpose
o f financing the construction o f the houses and with the expectation that
the houses will be sold subject to such indebtedness.
It is the B oa rd ’s view that in such cases a reasonable b u ild er’s profit
and a reasonable estimate o f the cost o f selling the houses may be included
as a part o f the cost to the borrow er (bu ilder) fo r the purposes o f determin­
ing “ value” under the above-mentioned provision o f Regulation X .
H owever, in connection with the sale o f the houses, consideration must
be given to the provisions o f section 4 (a ) ( 6) o f Regulation X relating to
the sale o f property by a Registrant subject to indebtedness which exceeds,
or as a result o f such sale would exceed, the applicable maximum loan
value o f such property.
[1 5 F .R . 8 7 1 3 ; F e deral R eserve B u l l e t i n , D e c . 1950, p. 162 2.]

Property to be Considered in Determ ining V alue— Sec. 2 (i)
Several inquiries have been received by the B oard regarding the deter­
mination under Regulation X o f “ appraised value as determined in good
fa ith ” where there is to be construction on im proved real property. The
inquiries have related particularly to cases where there is an existing struc­
ture on the p roperty such as a residence, servants’ quarters, garage, or
garage-apartment, but similar inquiries should be answered in accordance
with the principles o f this interpretation. In such cases, should the Regis­




3

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 o f separation in
the case o f resale would be remote and unlikely, it is the opinion o f the
B oard that the Registrant may appraise the land and improvements. H ow ­
ever, any outstanding credit secured by the im proved real property neces­
sarily w ould have to be taken into consideration in determ ining the amount
o f credit the Registrant could extend.
F o r example, i f a prospective borrower desires to build a new residence
at a cost o f $ 20 ,000, on im proved real p roperty having a “ valu e” o f $ 10 ,000,
the R egistrant’s appraised value may be $30,00Q, and the maximum
loan value $15,000. However, i f there were outstanding credit secured by
the im proved 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 o f resale w ould not only
be possible, but would be likely, it is the opinion o f the B oard that the
Registrant should appraise only the land area on which the new construc­
tion is to be located.
F o r example, if the prospective borrow er owns a tract o f land consist­
ing o f several adjoining lots, some o f which are im proved with existing
structures, and the borrow er proposes to build a new structure on one of
the vacant lots, the Registrant should appraise only the vacant lot.
House Trailers— Sec. 2 (k )
The question has been raised whether Regulation X applies to extensions
o f credit in connection with sales o f house trailers. It is the view o f the
B oard that such extensions o f credit are subject to the regulation where
the trailers have kitchen facilities or space designed fo r kitchen facilities,
and are to be used fo r dwelling purposes, and the wheel assemblies are
to be detached and the trailer placed on a foundation constructed on real
property.
[ I S F .R . 7 7 9 8 ; F e deral R eserve B u l l e t i n , D e c. 1950, p . 162 1.]

Office B uilding o r W arehouse Space W here Essential to and
Integral Part o f Processing Operation— Sec. 2 (r )
The B oard has received several inquiries as to whether warehouses and
office buildings us.ed in connection with a m anufacturing business are sub­
je c t to Regulation X . A s indicated in footnote 11 on page 6 o f the regula­
tion, office buildings and warehouses, as well as other buildings, are ordi­
narily su bject to the regulation.' They are not subject to the regulation,
however, if they fa ll within one o f the exclusions from the definition o f
‘ ‘ nonresidential structure ’ namely, structures exclusively used or designed




4

fo r use by a public utility or b y any Government or political subdivision,
or structures more than 80 per cent o f the floor space o f which is used or
designed fo r use (i) in processing materials, goods, or articles into finished
or partly finished m anufactured products, (ii) in m ining or otherwise
extracting raw materials, or (iii) on farm p roperty in the production,
shelter, or storage incidental thereto, o f crops, livestock or other agricul­
tural commodities. I t is the opinion o f the B oard that space in such struc­
tures as office buildings and warehouses is used or designed fo r 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 o f the operations involved in the processing o f 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.

R adio and Television Broadcasting Companies N ot P u blic Utilities—
Sec. 2 (s)
In answer to inquiries received it is the opinion o f the B oard that radio
and television broadcasting companies are n ot public utilities within the
meaning o f section 2 (s ) o f Regulation X . A ccordingly, structures exclu­
sively used or designed fo r use b y such companies are nonresidential struc­
tures within the meaning o f section 2 (r ) o f the regulation.

C om m on Carrier by M otor V eh icle as P ublic U tility— Sec. 2 (s)
Inquiries have been received b y the B oard asking whether companies
engaged in an interstate trucking business are public utilities within the
meaning o f section 2 (s ) o f Regulation X .
The Interstate Commerce Commission has authority to regulate three
types o f interstate motor carriers. They are “ common carrier by motor
vehicle” , “ contract carrier by m otor vehicle” and “ private carrier o f
property by m otor vehicle” . The degree o f regulation and supervision
exercised b y the Commission differs with respect to the three types o f
carriers. Common carriers are required to obtain certificates o f convenience
and necessity outlining the extent o f their proposed service, the routes over
which they propose to operate, and other requirements deemed necessary by
the Commission. Contract carriers must obtain a perm it outlining the
territory over which they propose to operate, the type o f 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.
N ot only does the degree o f regulation and supervision differ with
respect to the three classes o f carriers, but also the extent o f their operations




“ fo r the convenience, service or accommodation o f the p u b lic” . Common
carriers undertake fo r hire to transport from place to place the goods of
anyone who chooses to em ploy them. Contract carriers transport fo r a
limited number o f shippers under special contracts designed to meet their
particular needs. Private carriers need not transport fo r compensation, but
may be the owner, lessee, or bailee o f the goods transported.
F o r the above reasons, it is the opinion o f the B oard that, in the absence
o f other pertinent facts, only those companies engaged in an interstate
trucking business as a “ common carrier by m otor veh icle” are public
utilities within the meaning o f section 2 (s ) o f Regulation X .
M ixed-Purpose Loans— Sec. 4 (a ) (2)
Inquiries have been received regarding the application o f Regulation
X to extensions o f credit fo r mixed purposes. F o r example, a prospective
borrow er applies to a Registrant fo r a loan to be secured by a m ortgage
on residential property on which there is no new construction. A part o f
the loan is fo r the purpose o f financing a m ajor addition to the residence
which will cost $8,000, and $2,000 o f 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 ) fo r some other
purpose which would not make the loan subject to Regulation X . The
question i s : H ow much credit can the Registrant extend and on what terms ?
I t is the view o f the B oard that in such cases Regulation X requires
that the am ount and terms o f the loan shall be such as would result i f the
loan were divided into two or more parts on the basis o f the purposes o f
the loan and each part were treated as i f it stood alone; and the amount
and terms o f the loan would com ply with Regulation X i f they satisfied
the requirements o f the regulation applicable to that part which is subject
to Regulation X . ( See section 6 ( h ) . )
B y w ay o f illustration, in each o f the examples set forth above, the
maximum amount o f credit permitted by Regulation X would be $8,450,
that is, $6,450 (the maximum loan value o f the $8,000 m ajor addition)
plus $2,000. The m aturity and amortization o f that part ($6,450) which
is subject to Regulation X would have to conform with the provisions o f
the Supplem ent; or, in other words, the payments on the loan would have
to be such as to repay $6,450 o f the loan within the time and at the rate
required by the Supplement.
The same principles apply in the case o f a loan secured b y a mortgage
on farm p roperty where part o f the loan is fo r the purpose o f financing
the construction o f a residence on such p roperty and the rem ainder o f the
loan is fo r purposes which would not make the loan subject to Regulation X .
[ I S F.R. 7 3 8 4 ; F e deral R ese rv e B u l l e t i n , N o v . 1950, p . 1475.]




6

Instruments Evidencing Exem pt Credit— Sec. 4 (a ) (5)
The prohibitions o f section 4 ( a ) ( 5 ) o f Regulation X with respect to
a Registrant purchasing, discounting, or lending on credit instruments
evidencing real estate construction credit apply on ly to credit instruments
evidencing credit which is subject to and not exempt from Regulation X .
Under section 6 (b ) o f the regulation, credit extended pursuant to firm
commitments made p rior to the effective date o f the regulation is exempt.
A ccordin gly, there is no prohibition with respect to purchasing, discounting,
or lending on credit instruments evidencing such credit.
[ I S F .R . 7 1 7 9 ; F e deral R eserve B u l l e t i n , N ov . 1950, p. 1 4 7 3 .]

Sale o f New Residence Subject to Pre-effective Date Indebtedness—
Sec. 4 (a ) ( 6 )
Inquiries have been received regarding the application o f Regula­
tion X to a sale o f 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 o f the property but evidences credit extended prior
to October 12, 1950, the effective date o f 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 o f the property. Under the
definition contained in section 2 (d ) o f Regulation X , such a sale consti­
tutes an extension o f credit by the vendor o f the p ro p e rty ; but, even though
the vendor may be a Registrant, the sale is not prohibited b y Regulation X
because the provisions o f section 4 ( a ) ( 6 ) o f the regulation, which deal
specifically with such transactions, prohibit a sale only “ if the amount o f
outstanding credit (including any credit exempt from , or not subject to
the prohibitions of, this regulation) which was extended after the effective
date o f the regulation with respect to the p roperty exceeds, or as a result
o f such sale or transfer would exceed, the applicable maximum loan value
o f such property, or if any outstanding real estate construction credit
(subject to and not exempt from this regulation) with respect to such
property does not conform with the provisions o f this regulation and the
Supplement thereto.” However, any additional extension o f credit b y a
Registrant (including the vendor if he is a Registrant) in connection with
such a sale would be prohibited by section 4 ( a ) ( 1 ) o f Regulation X .
F o r example, in a sale o f 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 fo r the equity o f redemption and assumes, or takes such p rop ­
erty subject to, a $ 10,000 m ortgage which evidences credit extended p rior to
October 12, it is not necessary that the $10,000 m ortgage be rewritten to
conform with Regulation X . However, no part o f the $2,000 paid b y the




vendee fo r the equity o f redemption may be borrowed from a Registrant
because the amount o f credit outstanding with respect to the property
already exceeds the maximum loan value o f the property.
[1 5 F .R . 7 3 8 3 ; F ederal R eserve B u l l e t i n , N o v . 1950, p. 147 4.]

Necessity for Statement of Borrower for Nonregulated Credit— Sec. 4(c)
A Registrant makes an unsecured loan to a mortgage com pany, the
proceeds o f which are to be used by the mortgage com pany to make real
estate loans, including some subject to Regulation X . M ust the Registrant
obtain any Statement o f the B orrow er ?
A s described, the loan b y the Registrant to the m ortgage com pany is
not an extension o f 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 com pany is not real estate
construction credit. This requirement may be met by the execution by the
m ortgage com pany o f a Statement o f the Borrower o f the kind described
in the last sentence o f section 4 ( c ) o f Regulation X and the acceptance o f
the statement by the Registrant in good faith. Section 4 ( c ) as amended
'prescribes other methods o f meeting the requirem ent and relieving R egis­
trant in certain circumstances from d uty to ascertain nature o f the credit.
[1 5 F .R . 7 1 7 9 ; F e deral R eserve B u l l e t i n , N o v . 1950, p. 1 4 7 3 .]

Statement of Borrower Where Credit Secured by Mortgage
Collateral— Sec. 4(d)
A Registrant makes a loan to a mortgage com pany on a note secured
b y a pledge o f collateral consisting o f real estate mortgages, including
some subject to Regulation X . M ay the Registrant rely upon a statement
by the m ortgage com pany that all o f the pledged mortgages which are
subject to Regulation X conform with the requirements o f the regulation?
M ust the Registrant procure a copy o f the Statement o f the B orrow er which
the m ortgagor signed, pursuant to section 4 (d ) o f Regulation X , with respect
to each pledged m ortgage which is subject to Regulation X ?
Section 4 (a ) (5 ) o f 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 o f such
credit conform ed with the provisions o f the Supplem ent to the regulation
when such credit was originally extended, or conform at the time o f such
loan. In the case described, the Registrant may not rely upon the statement
by the m ortgage com pany to establish that the pledged mortgages which
are subject to Regulation X conform with the requirements o f the regulation.
The Registrant, however, m ay rely upon a signed statement accepted in
good faith in which the m ortgage com pany states which o f 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 conform s with the regulation, the Registrant
may rely upon the facts stated in a copy o f the Statement o f the Borrower
signed b y the m ortgagor and which the Registrant accepts in good faith.
[ I S F .R . 7 1 7 9 ; F e deral R eserve B u l l e t i n , N o v . 1950, p. 1 4 7 3 .]

Short-Term Construction Credit— Sec. 5(b)
In answer to questions that have been raised concerning the exemption
in the first sentence o f section 5 (b ) o f Regulation X fo r short-term con­
struction credits having a m aturity o f not more than 18 months, it is the
opinion o f the B oard (1 ) that a demand note complies with the 18 m onths’
m aturity limitation if it is understood b y 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 m aturity o f
less than 18 months may be renewed pending com pletion o f construction if
the date o f m aturity o f the renewal is not more than 18 months after the
date the credit originally was extended.
[15 F .R . 7 7 9 9 ; F ederal R ese rv e B u l l e t i n , D e c . 1950, p. 1621.]

Exemptions for Contemplated Construction— Sec. 5(g)
It is the view o f the B oard that exemptions under section 5 (g ) o f
Regulation X should not be granted unless there is a clear showing o f
substantial hardship. The mere fa ct that a builder or other person m ay have
made substantial commitments or undertakings before A ugust 3, 1950 is
not sufficient basis fo r the granting o f an exemption unless he is also able
to show that he w ill suffer substantial hardship if he has to com ply 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 p rior to A ugust 3, 1950, with a view to possible subsequent
agreement fo r extension o f 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 A ugust 3, 1950 and the provision does not apply to credit
involved in a subsequent sale o f the property b y such builder or other person.
[1 5 F .R . 8 0 7 5 ; F e d e r a l R eserve B u l l e t i n , D e c . 1950, p. 1 6 2 2 ; F R B N Y C ir c u la r N o . 3611,
N o v . 9, 195 0.]

Firm Commitment Prior to Effective Date— Sec. 6(b)
(Herein “ effective date” means October 12, 1950 where 1-2 fam ily unit
residence; January 12, 1951 where 3-4 fam ily or multi-unit residence;
February 15, 1951 where nonresidential property.)

Section 6 (b ) o f Regulation X provides that the 'prohibitions o f sub­
sections (a ) and ( b ) o f section 4 o f the regulation shall not apply to or
affect any credit extended pursuant to any firm commitment to extend credit




9

made p rior to the effective date o f the regulation. Inquiries have been
received concerning the application o f this section to agreements entered
into by a Registrant and a builder p rior to the effective date o f the
regulation under which the Registrant agreed to lend a stated amount on
stated terms to any purchaser o f particular residences built or to be built by
the builder if the purchaser has a credit standing satisfactory to the
Registrant and i f the residence has been constructed according to prescribed
plans and specifications.
Section 6 (b ) defines a firm commitment as “ either (1 ) a w ritten agree­
ment under which the Registrant is required without option or discretion
on his part to extend credit upon demand by the borrow er o r upon com pli­
ance by the borrow er with one or more conditions referred to in such
agreem ent; 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 borrow er has taken specific action p rior to the effective date o f
the regulation, if the Registrant p rior to January 1, 1951 ( where 1-2 fa m ily
unit resid en ce) or p rior to M arch 15, 1951 (w h ere 3-4 fam ily or multi-unit
resid ence) shall have sent to the Federal Reserve Bank o f 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 b y the prospective
borrow er p rior to the effective date o f the regulation.”
I f an agreement o f the kind described above is in w riting, it constitutes
a firm commitment within the meaning o f clause ( 1 ) o f the definition o f that
term and the fact that the borrow er (purchaser) must have a credit standing
satisfactory to the Registrant is m erely one o f the conditions w ith which
the borrow er must com ply.
I f such an agreement is not in w riting (o n nonresidential p rop erty
there is an exem ption only i f the firm commitment is in writing and made
p rior to F ebru ary 15, 1951), it constitutes a firm commitment within the
meaning o f clause ( 2 ) o f the definition if the builder has taken specific
action in reliance upon the agreement prior to the effective date o f the regu­
lation and the Registrant furnishes the required inform ation to the appro­
priate Federal Reserve Bank prior to prescribed date. F or this purpose,
the term “ prospective borrow er” in clause ( 2 ) o f the definition is deemed
to include the builder to whom the commitment was made.
[IS F .R . 7 1 8 0 ; F e deral R eserve B u l l e t i n , N o v . 1950, p. 1474.]

M odification o f Pre-effective Date Firm Commitment— Sec. 6 (b )
(S erein “ effective date” means October 12, 1950 where 1-2 fam ily unit
residence; January 12, 1951 where 3-4 family or multi-unit residence;
February 1.5, 1951 where nonresidential property.)

Section 6 (b ) o f Regulation X provides that the prohibitions o f sub­
sections (a ) and ( b ) o f section 4 o f the regulation shall not apply to or affect
any credit extended pursuant to any firm commitment to extend credit made
p rior to the effective date o f the regulation. Questions have been raised




10

concerning the application o f this provision where firm commitments made
p rior to the effective date o f the regulation are modified subsequent to that
date by ( 1 ) substituting a new borrow er fo r the one named in the com mit­
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 B o a rd ’s
opinion that credit extended pursuant to such a modification o f a prior
commitment is not exempt from Regulation X except in the case o f reason­
able extensions o f time in accordance with customary practices where the
closing o f loans is delayed by title difficulties, unforeseen delays in the
com pletion o f construction, or comparable circumstances.
[ I S F .R . 8 0 7 6 ; F ederal R eserve B u l l e t i n , D e c . 1950, p. 1 6 2 2 .]

Maximum Maturity— Sec. 6(i)
The m aturity provision in the Supplement to Regulation X provides
fo r a maximum m aturity o f 20 years (o r 25 years, in some cases) “ from the
date such credit is extended” . In trade practice, provision often is made
fo r the paym ent o f the first instalment o f an amortized loan on the first day
o f the second calendar month after the month in which the credit is extended.
In order to perm it this practice, the Board, in a ruling which appeared on
page 1621 o f the F ederal R eserve B ulletin f o r D ecem ber 1950, stated:
“ * * * in calculating the maximum m aturity o f 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 (i) that “ In calculat­
ing the maximum maturity o f 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 o f
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 m aturity o f 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.
F o r example, if a 20-year loan payable m’onthly 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
F ebruary 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
o f 20 years and 31 days from January 1, 1951, the actual date such credit
was extended.
The principle o f section 6 (i) o f the regulation is not limited to monthly
paym ent loans. The amortization provision in the Supplement to Regula­
tion X permits repayment through substantially equal monthly, quarterly,




11

semiannual, or annual payments. A s a further illustration, in the case o f a
20 -year loan payable annually in 20 instalments, where the loan is closed on
F ebruary 1,1951, the first payment could be made on March 1,1952, because
the last payment w ould be made and the loan would mature on M arch 1,
1971. H ere the Registrant would be using M arch 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 e d e ra l R eserve B u l l e t i n , F eb . 1951, p. 161 .]

Actual Date Credit is Extended— Sec. 6(i)
Inquiries have been received b y the B oard concerning the meaning
o f the phrase “ actual date such credit is extended” as used in section 6 (i)
o f Regulation X .
M any types o f credit extensions are subject to Regulation X and it
is adm inistratively impossible to prescribe a specific rule which would be
fa irly applicable to all types o f financing arrangements affected b y the
regulation. However, fo r the purposes o f Regulation X the general rule
to be follow ed in most extensions o f 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, o r makes funds available
to the account of, the borrower, or ( 2 ) the date o f execution o f the note or
other credit instrument evidencing the credit extended, whichever shall
last occur.
Amortization— Supplement
Clause (2 ) o f the amortization provision in Schedule I and the
amortization provision in Schedule I I I o f the Supplement to Regulation X
provide fo r amortization payments which “ will fu lly liquidate the original
principal amount o f such credit not later than the date o f the m aturity o f
the credit . . . ”
In cases where the m aturity o f credit subject to the regulation is less
than the maximum perm itted b y the regulation, it is the opinion o f the
B oard that the amortization provisions referred to above w ill be com plied
with i f amortization payments are made until the m aturity o f the credit
which, had they been continued until the maximum permissible maturity,
w ould have fu lly liquidated the original principal amount o f such credit by
the date o f such maximum permissible maturity.
F o r example, if the maximum m aturity is 20 years, and the credit has a
m aturity o f 10 years, the amortization provisions would be com plied with
i f amortization payments are made during the 10 years which, had they been
continued fo r 20 years, would have fu lly liquidated the original principal
amount o f such credit within 20 years.




12

REGULATION X
REAL ESTATE CREDIT
Q uestions an d Answers
Real Estate Construction Credit— Sec. 2(e)
Q.

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

A.

Regulation X applies only to new construction, that is, any structure,
or any m ajor addition or m ajor improvement to a structure, begun
a fter A u gust 3, 1950.
*

*

#

Q.

A tw o-fam ily house has been converted and is being occupied b y three
families (3 baths, 3 kitchens, e tc.). This change was made in violation
o f city code. W ill the sale o f the property under G I or F H A loan
come under R egulation X ?

A.

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

Q.

A builder has commitments given during J u ly o f 1950, fo r the con­
struction o f ten new homes to be financed by conventional loans. The
applications were not processed and the buildings were not started
p rior to A ugust 3, 1950. The houses are built and financed b y sixmonth conventional loans and then offered fo r sale with F H A or GI
financing. A re such sales subject to Regulation X ?

A.

I f purchases o f such houses, although “ new construction” , are financed
entirely through F H A or G I financing, such financing is not subject to
Regulation X , as issued by the B oard o f Governors.
•

*

#

Q.

A man owns a one or two-fam ily house ten years o f age. Subsequent to
A u gust 3, he expends $3,000 o f his own money on rem odeling and
improvement, which is thus a “ m ajor alteration or im provem ent.”
Subsequently, he desires to sell the house. Is the financing in connection
with this sale regulated in whole or in part?

A.

U nder section 2 (e ) o f 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 m ajor addition or m ajor im provement to a
residence” . Consequently, financing in connection with the sale o f an
old house to which a m ajor addition is made after A ugust 3 would be-




subject in its entirety to Regulation X , except as provided in sec­
tion 5 (k ) .
*

*

*

New Construction— Sec. 2 (f )
Q.

Define what exactly constitutes the start o f new construction fo r p u r­
poses o f the new regulations. W ou ld a placement o f a portion o f 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 o f the
structure have been affixed to or incorporated on the site in a permanent
form . The placement o f a portion o f the needed materials, such as the
stacking o f lumber, on the proposed site would not be sufficient. F or
example, pouring o f footings would be considered as evidence o f com ­
mencement o f construction.
*

*

*

Q.

A borrow er excavated the ground fo r the cellars o f ten homes p rior to
A u gust 3,1950. No actual construction work, other than the excavation,
was started p rior to that date. W ou ld these ten contemplated homes
be considered construction begun p rior to A ugust 3, 1950 ?

A.

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

*

*

Q.

Construction o f a home was started in A p r il o f 1950. It is a self-built
home and while work has been done continuously, com pletion has lagged.
The building is now 7 0% com pleted, and the owner applies fo r a $5,000
loan to cover the cost o f the completion. Is this considered a m ajor
improvement, and subject to Regulation X , o r is it exempt b y way o f
construction having been started p rior to A ugust 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 A u gust 3, 1950.
*

*

*

M aximum Loan Value— Sec. 2 (i)
Q.

Please am plify the term “ maximum loan valu e” where the entire cost
o f the property to the borrower has been incurred by him not more
than 12 months p rior to the extension o f credit (section 2 , subsection i ) .

A.

The provision o f the regulation in question refers to the method of
com puting the total value o f the property and the maximum loan value




14

is com puted on the basis o f this total value as prescribed in the Supple­
ment to the regulation. I f the entire cost o f the property is incurred
not more than 12 months p rior to the extension o f credit the “ va lu e”
is the bona fide cost o f the property to the borrower, including a bona
fide estimate o f the cost o f com pleting the new construction. Also,
where a builder constructing houses fo r sale seeks long-term mortgage
loans fo r the purpose o f financing construction with the expectation
that the houses will be sold subject to such indebtedness, a reasonable
b u ild er’s profit and reasonable estimate o f the cost o f selling the houses
may be included as a part o f the cost to the borrow er (builder) fo r p u r­
poses o f determining “ va lu e” . In the rare case in which the prospective
borrower is to perform the labor on the new house, a bona fide estimate
o f the value o f the labor may be included in the “ bona fide estimate o f
the cost o f com pleting new construction” .
*

*

-*

R eal Estate Construction Credit to B uild N ew Residence— Sec. 4 (a ) (1)
Q.

A customer has asked fo r a $10,000 loan upon stock collateral. He
intends to lend this money to his son, who w ill build a new home to
cost $10,000. Inform al discussions suggest that this loan is not regu­
lated, as the father can properly sign a statement that the proceeds
o f the loan that he is getting from us on the stock is not for “ new
construction.” W h at is you r opinion?

A.

W hile the father could, o f course, sign such a statement, nevertheless,
the loan b y the bank to the father is in fact an indirect extension o f
credit to the son and if it is fo r the purpose o f circum venting the regula­
tion, the son would be the real borrow er and the extension o f credit
w ould violate the regulation.
*

Q.

*

*

A n individual contemplates building a residence on a lot which cost
him $1,500 and under a contract in the amount o f $16,000, so that his
ultimate investment or transaction price will be $17,500. A s a national
bank and under Section 24, the maximum loan we could extend would
be $10,500 or 60% o f the cost, whereas under Regulation X , the loan
could be $ 1 1 ,200 .
To obtain the necessary funds to build, the applicant proposes to borrow
the sum o f $3,900 on life insurance policies, which under the regulation
is an exempt transaction. The applicant is presently the owner o f a
property, clear o f encumbrance, valued at $12,000. U nder Section 24
we could make a 5 0% loan, or $ 6,000 where the loan had a m aturity
o f less than five years. He proposes to further borrow the sum o f $6,100
on a construction m ortgage having a six months ’ maturity, which under
Section 24 we would be permitted to make provided the advances under




15

r
the construction m ortgage do not at any time exceed 60 % o f the value
o f work done.
This question assumes that fo r appraisal purposes, valuation as indi­
cated above will be supported. A s we see the picture, this particular
case involves fou r loan transactions. The question is, are each o f them
considered separate transactions and, therefore, will Regulation X p re­
vail, and on which o f the transactions, and what type o f statement
should be obtained from the borrow er?
A.

In lending on real estate a national bank must conform with the
requirements o f Regulation X or Section 24 o f the Federal Reserve A ct
whichever is the stricter.
The “ valu e” o f the residential property would be $17,500 and the
maximum loan value would be $11,200. Assuming that all fo u r loans
are to be made at the same time or that the Registrant knows or has
reason to know that all fou r loans are contemplated by the borrower,
the total amount o f credit that may be extended, exclusive o f the amount
which is fu lly secured by the cash surrender value o f the life insurance
policy, cannot exceed $ 1 1 ,200, or in this particular case, where the sum
o f $3,900 is to be borrowed on a life insurance policy, the total amount
o f credit that can be extended is $15,100.
In a case o f this kind the statement required to be obtained from the
borrow er should conform to section 4 ( d ) o f the regulation.
•

•

»

Q.

A man builds a house that comes under Regulation X , but borrow s on
a m ortgage on an existing house he presently owns free o f 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 b y the amount o f the
loan on the existing structure. I w onder if this situation does not
change with respect to the amount o f money to be borrow ed 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 o f credit which may be outstanding with respect to the new
con struction ; the m ortgage on the old house w ould still be included. I f
the new house is sold, the outstanding m ortgage on the old house would
not be relevant to the amount o f credit which could be extended to the
purchaser o f the new house. The purchaser would be entitled to borrow
up to the maximum loan value o f the new house although, o f course,
the amount o f the mortgage on the new house w ould have to be con­
sidered in determining the maximum amount which he m ight borrow
i f the purchaser assumes the m ortgage or takes the property subject
to it. The subsequent sale o f the old house is not subject to Regulation




16

X even though the m ortgage placed on the old house was security fo r
the credit extended to build a new house.
*

*

*

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

A man owns a home valued at $10,000. H e has an existing mortgage
o f $3,000. H e desires to make a m ajor addition to his residence costing
$5,000 and combine the original m ortgage with the money needed fo r
the repairs. W hat is the largest amount o f 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 o f the loan shall be
such as would result if the loan were divided into two or more parts on
the basis of the purposes o f the loan and each part were treated as if
it stood a lon e; and the amount and terms o f the loan would com ply with
Regulation X if they satisfied the requirements o f the regulation
applicable to that part which is subject to Regulation X . The largest
amount o f loan that could be secured under the facts given in this
problem w ould be $7,500, $4,500 o f which must conform to the amortiza­
tion and m aturity provisions prescribed b y the Supplement to this
regulation. (S ee also sec. 6 ( h ) . )
*

Q.

*

*

A borrow er applies fo r a $3,600 first mortgage on a single-family
residence. Out o f the proceeds, there are “ p rior obligations” com pris­
ing eith er:
(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 o f the proceeds to be applied to
the payment o f repairs, improvements or alterations to the property.
Is the application fo r a m ortgage o f $3,600 eligible fo r processing under
Regulation X or would Regulation W control because o f the fact that
the $1,900 p rior obligation w ould be excluded and consideration given
only to the repairs and improvements o f which 9 0% could be loaned
under Regulation X , resulting in a credit fo r the repairs and im prove­
ments o f less than $2,500 ?

A.

I f a pre-existing credit with respect to an old house is consolidated
with a $1,900 loan fo r consumer credit obligations and the total credit
exceeds $2,500, the loan is outside the provisions o f Regulation W




17

unless automobile credit is involved. I f the credit to be applied to the
payments fo r repairs, improvements or alterations, exceeds $2,500, it
must conform with the provisions o f Regulation X .
Assum ing that the balance devoted to the paym ent o f repairs, im prove­
ments, or alterations does not exceed $2,500 and the consolidated loan
exceeds $2,500, Regulation W would not a p p ly ; and Regulation X
would not apply because that portion fo r 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 o f B orrow er on all
extensions o f credit, particularly loans under $2,500, loans with matu­
rities o f less than 18 months, or loans to corporations who have main­
tained an open line o f credit with the bank fo r some tim e?

A.

In the case o f any extension o f credit by a Registrant, it is required
by section 4 ( c ) o f 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 cred it; and a
statement b y the borrow er is one o f the means by which this require­
ment may be met. I f the credit is in fact real estate construction
credit, whether or not exempt from the regulation, the Registrant
must obtain a Statement o f the B orrow er in accordance with section 4 (d ) .
A form o f B orrow er’s Statement fo r this purpose is available at the
Federal Reserve Bank, and it will be observed that in the case o f an
exempt credit on ly the first two questions need be answered.
*

*

*

Q.

E xplain circumstances in detail which apply to the need fo r a signed
B orrow er’s Statement when the loan is not fo r real estate purposes.

A.

I f a Registrant is satisfied that the credit is not fo r real estate construc­
tion credit the requirements o f section 4 ( c ) may be met by the retention
by the Registrant o f a Statement o f the B orrow er on the form now avail­
able at the Federal Reserve Banks or contained in a loan application or
any letter or other writing, which is signed b y the borrow er and states
the facts indicated in the last sentence o f section 4 ( c ) . However, the
requirements o f the regulation may be met by means other than a State­
ment o f the B orrower, such as the retention b y the Registrant o f corre­
spondence, memoranda, etc., which show that the credit is not real estate
construction credit or b y a written endorsement or rubber stamp legend
on the credit application or other papers in connection with the credit
which is signed by the Registrant stating that he is satisfied that the
credit in question is not real estate construction credit.




18

Statement of the Borrower— Sec. 4(d)
Q.

W ou ld a short-form Statement o f B orrower, rubber stamped on credit
application forms, meet the requirements o f the regulation? I f so,
w ould you suggest an abbreviated statement, practical fo r such use?

A.

A form o f 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 fo r a rubber stamp application.
*

•

•

Q.

May the lender rely on a written statement o f the builder that con­
struction was started p rior to J u ly 19, o r A ugust 3, as the case may be,
or does he have a responsibility to make some kind o f an investigation ?

A.

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

•

*

Q.

The Federal Reserve B oard issued an interpretation (see page 8 o f
this circular) having to do with statements required from a mortgage
com pany when a loan is made to that m ortgage com pany secured by a
pledge o f other mortgages. I understand that this interpretation
requires a statement from the m ortgagor o f each pledged mortgage
which is subject to the regulation, setting forth the required inform a­
tion, but that the lender may rely upon a signed statement from the
mortgage com pany as to which o f the pledged mortgages do and which
do not involve “ real estate construction cred it.” In an instance o f
this kind, is it necessary to take another statement from the mortgage
com pany in which they certify that the proceeds o f the loan made to
the mortgage com pany will not be used fo r “ new con struction?”

A.

W ith respect to the bank’s loan to the mortgage com pany the bank must
com ply with the requirements o f section 4 ( c ) o f 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 o f the Borrower
fo r this purpose. In addition, as required by section 4 ( a ) ( 5 ) o f the
regulation the mortgages securing the loan b y the bank must conform
to the requirements o f the regulation and the bank should take steps,
as indicated in the interpretation o f the B oard referred to in the ques­
tion, to satisfy itself that such mortgages do in fact conform .




19

Minimum Amount— Sec. 5(a)
Q.

A man owns a one-fam ily house valued at $16,000 on which there is a
conventional loan— original amount $11,500— present balance $10,000.
H e wishes to have a new roof put on which will cost $1,500.
I f the m ortgage is an open-end instrument, can the lender advance
$1,500, less 10% cash down paym ent (Regulation W ) so that the
present balance would become $11,350, o r does he have to make a special
30-month loan fo r $1,350?
I f it is not an open-end mortgage and the lender and owner wish to
recast the older mortgage, can they arrange a new loan o f $11,350
($10,000 plus $1,500, less 1 0 % ) payable over a 15-year period (original
m aturity) ?
I f the above is not permitted, what action would you suggest where the
house requires a new roof and the owner cannot meet his regular
m onthly payment on the original m ortgage and the additional paym ent
on a 30-month modernization loan?

A.

In neither case would the credit be controlled by Regulation X because
it would be a mixed-purpose loan (see sec. 6 ( h ) ) and thet portion subject
to the regulation would not exceed $2,500. Regardless o f the type o f
security, the advance fo r the new ro o f properly may be made without
restriction if consolidated with the outstanding indebtedness o f $ 10,000
on the old house since Regulation W , except in the case o f an automobile
credit, does not apply to credit in a principal amount o f over $2,500.
On the other hand, if the advance fo r 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 m aturity could
not exceed 30 months.
*
#
#

Q.

A man makes home improvements and repairs costing $2,000. He
applies to the bank fo r a mortgage o f $ 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 o f $2,500 and
applies fo r a $4,500 loan to refinance as well as to pay fo r 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 im prove­
ment and repairs are in connection with an existing structure as speci­
fied in Part I o f Group D of the Supplement to Regulation W .
(b ) Unless it is made to finance purchase o f an automobile, the con­
solidated loan, if represented by a single obligation, would not be sub­




je ct 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 fo r improvements would not
exceed $2,500.
(c ) Same as (b ) without the qualification as to automobile credit.
*
Q.

*

*

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

A.

Assuming that the existing mortgage relates to realty on which there
is an old house, on ly that portion o f the loan which may be subject to
Regulation X need be considered. I f the garage is to be attached to
the residence, the portion o f the credit fo r the garage would not con­
stitute credit fo r a m ajor addition or improvement since it is less than
$2,500; if the garage is to be detached the portion fo r the garage would
not be subject to the regulation.
*

*

*

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

I f work has n ot 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) o f the regulation, the loan is in default and
is the subject o f a bona fide collection effort by the Registrant. I f the
loan has a maturity o f less than 18 months, it may be renewed if the
date o f the m aturity o f 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 fu ll
amount perm itted 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 con­
struction cred its?” This additional credit is “ fo r the purpose o f
financing the construction o f a residence.”
A man is building a new home at a cost o f $20,000, and the real estate
loan which we have granted upon the p roperty has been computed in
accordance with Regulation X . He asked fo r a tem porary commercial




2 1

loan on stock collateral above the amount allowed b y the regulation,
which loan would be due in one year and would be repaid from a bonus
he will receive from his em ployer. Is this supplementary loan on the
stock collateral regulated, as it falls w ithin the eighteen-month maturity
exemption on tem porary loans fo r “ new construction.’ ’
A.

The situation in both cases is much the same. Assum ing that construc­
tion o f the house has not been completed, the short-term loan, if fo r the
purpose o f financing the construction o f the residence, would be exem p t;
but the long-term mortgage loan would have violated the regulation
if at that time the Registrant knew o r had reason to know that the
short-term loan was contemplated by the borrower. (See sec. 4 ( b ) . )
•

•

•

Contracts to Sell— Sec. 5 (f)
Q.

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

A.

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

*

*

E xem ption fo r Certain New Construction— Sec. 5 (k )
Q.

A man approaches a lender in J u ly fo r a loan o f $10,000 to remodel
and modernize a residence. A loan is committed to at that time but not
actually recorded till A ugust 10. Construction begins on A u gust 11.
The construction is now com pleted and the owner advises that the loan
obtained is not sufficient to p ay all the bills incurred in the work. He
now requests an increase o f the loan to $15,000 to pay the unpaid bills
on the com pleted construction. Does Regulation X apply ? I f so, would
it not be a fair interpretation to say that this is a hardship case and
should be reported to the Federal Reserve Bank, and approval obtained
fo r the additional credit needed?

A.

The prohibitions o f subsections (a ) and (b ) o f section 4 do not apply
because o f section 5 (k ) which exempts from the prohibitions o f the
regulation any real estate construction credit extended prior to M ay 1,




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1951, with respect to new construction o f a two-fam ily residence begun
p rior to October 12, 1950.
*

*

*

Outstanding Contracts and Obligations— Sec. 6(b)
Q.

Our client purchased a new home just recently completed, and for
which a commitment was given fo r a building loan and permanent
mortgage before October 12. H e has applied at this trust com pany for
a loan to enable him to close his transactions immediately. The loan
w ill bring the total obligation over and above the percentage as allowed
in Regulation X , and is only made pending the sale o f his present home.
I f we made the loan, would it be a violation under Regulation X , or is
it possibly an exception to regulations as a “ short-term construction
credit ? ’ *

A.

I f construction was started before A ugust 3, 1950, the subsequent loan
to close the transaction would not be credit with respect to new con­
struction and the regulation would not apply. I f the construction was
started after A ugust 3 (except as provided by section 5 ( k ) ) the sub­
sequent loan would have to com ply with the regulation. It w ould not
be exempt as a “ short-term construction cred it” since apparently it
would not be made fo r the purpose o f financing the construction inas­
much as the structure has been completed. E ven though the previous
building and loan mortgage credit might be exempt because granted
pursuant to a firm commitment made before October 12, the amount
o f that credit would have to be included along with the amount o f the
short-term loan in determining whether the total credit outstanding
exceeds the maximum loan value.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102