Reg U: Credit by Banks for the Purpose of Purchasing or Carrying Margin Stock

Question 1

What does Reg U cover?

Answer 1

Persons or institutions other than brokers or dealers that extend credit for the purpose of buying or carrying margin stock if the credit is secured directly or indirectly by the margin stock.

Question 2

Who is an exempted borrower under Reg U?

Answer 2

A member of the national securities exchange or a registered broker or dealer who

• Maintains at least 1,000 active accounts annually for persons other than brokers, dealers, and persons associated with brokers and dealers
• Earns at least $10 million in gross revenues on an annual basis from transactions with persons other than brokers, dealers and persons associated with brokers and dealers
• Earns at least 10% of its gross revenues on an annual basis from transaction with persons other than brokers, dealers and persons associated with brokers and dealers

Question 3

What if an exempted borrower has been in existence for less than 1 year? Is it still possible to meet the exempted-borrower test?

Answer 3

Yes, it may be based on a 6-mo time period.

Question 4

What if a member of a national securities exchange or a registered broker or dealer ceases to qualify as an exempted borrower?

Answer 4

It must notify the lender of this fact and all new extensions of credit, renewals of existing loans and additional draws on existing lines of credit to such a borrower must meet the requirements of Reg U.

Question 5

What is purpose credit as defined by Reg U?

Answer 5

Credit for the immediate, incidental or ultimate purpose of purchasing or carrying margin stock.

Question 6

Lenders may not extend credit for the purpose of ultimately buying or carrying margin stock in an amount that exceeds the _____________ of the collateral securing the credit.

Answer 6

Maximum loan value

Question 7

Lenders who are not banks must register with the Federal Reserve on Form FR G-1 within __ days after the end of the calendar quarter during which the amount of credit extended equals or exceeds $______ or the amount of the credit outstanding at any time during the quarter equaled $____ or more.

Answer 7

30
$200,000
$500,000

Question 8

A registered non-bank lender may deregister by filing Form FR G-2 if it has not had more than $______ of qualified credit outstanding during the preceding ___ calendar months.

Answer 8

$200,000

6

Question 9

Every registered non-bank lender must file Form FR ____ by _____ of each year

Answer 9

G-4

July 30

Question 10

Banks must obtain a purpose statement for credit in an amount exceeding $______ that is secured directly or indirectly by margin stock.

Answer 10

$100,000

Question 11

Reg U: What purpose statement form must be executed by the customer and the bank officer?

Answer 11

FR U-1

Question 12

Non-bank lenders must require customers to execute Form ____, which must also be signed by a representative of the lender, when extending credit secured directly or indirectly by margin stock, regardless of the amount.

Answer 12

G-3

Question 13

What is the maximum loan value of margin stock?

Answer 13

50% of the current market value, but this is subject to change by the Federal Reserve.

Question 14

For revolving credit and multiple-draw loans, if the loan is a purpose credit, the maximum loan value of the collateral must be what?

Answer 14

Must be at least equal to the amount of the funds disbursed or, at the end of any day during which credit is extended, the lender must call for additional collateral to bring the credit into compliance with the maximum loan value requirements.

Question 15

What is the “single credit rule” under Reg U?

Answer 15

If purpose credit has been extended to a borrower, the lender may not later extend unsecured purpose credit to the same borrower unless the combined credit does not exceed the maximum loan value of the collateral securing the first purpose credit.

Question 16

When can lenders may permit withdrawals and substitutions of collateral?

Answer 16

Only if the margin situation on that day will not be weakened

Question 17

What does it mean if an account is undermargined?

Answer 17

The stock value has declined since the loan was made

Question 18

Reg U: When will a renewal or extension of credit not be considered a new credit?

Answer 18

If the credit is increased only by the addition of interest, service charges or taxes with respect to the credit.

Question 19

Reg U: When will a transfer of credit not be considered new credit?

Answer 19

If the credit was in compliance when the loan was made, the amount of credit was not increased, the collateral wasn’t changed and the transaction is not meant to evade the requirements of Reg U.

Question 20

What document must be signed by the transferor and maintained by the lender for Reg U?

Answer 20

If the transfer is between customer of the same lender, the transferor must sign a statement describing the circumstances giving rise to the transfer. This statement must be retained by the lender.

Question 21

If the transfer is between lenders, the transferee must obtain a copy of what form?

Answer 21

FR U-1 or G-3. Purpose statement for bank and non-bank lenders.

Question 22

What is the civil penalty for violating Reg U?

Answer 22

$100 per day

Question 23

What is the criminal penalty for violating Reg U?

Answer 23

Fines up to $100,000 and 5 years in prison

Question 24

Which of the following credit arrangements would most likely be considered a purpose credit because it is indirectly secured by margin stock?

a. A loan made to purchase margin stock secured by nonmargin stock
b. A loan made to a company for various corporate purposes, including the purchase of margin stock, secured by the corporate assets, which from time to time include margin stock; on the date of the consummation of the transaction approximately 10 percent of the assets of the company are margin stock
c. A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee
d. Bank is the trustee for a qualified pension plan from which the participants may borrow and use their interest in the plan as security; a participant borrows money for the purpose of purchasing margin stock

Answer 24

c. A loan made to purchase margin stock, guaranteed by an individual who has pledged margin stock as security for the guarantee

The Federal Reserve Board has issued a staff opinion letter indicating that if the guarantee is collateralized by margin stock and the purpose of the loan is to purchase stock, then the loan is indirectly secured by margin stock.

Question 25

For which of the following must a bank obtain Form FR U-1 when a loan is in excess of $100,000?

a. A loan made to purchase margin stock
b. A loan secured by margin stock
c. A loan made to purchase margin stock and secured by margin stock
d. A loan secured by stock (either margin or nonmargin)

Answer 25

b. A loan secured by margin stock

Question 26

How is the maximum loan value of margin stock defined?

a. As a percentage of the amount to be loaned
b. As a percentage of the book value of the stock
c. As a percentage of the current market value of the stock
d. As a percentage of the good-faith loan value of the stock

Answer 26

c. As a percentage of the current market value of the stock

Question 27

First National Bank has made a loan to Mr. Good, secured by margin stock, to purchase margin stock. He trades stocks frequently, makes substitutions on loan collateral regularly, and sometimes withdraws collateral and does not replace it. Must FNB ensure that margin requirements are met after every substitution and withdrawal?

a. Yes. The margin requirements must be met at all times.
b. No. If the margin requirements were met when the loan was made, there are no further requirements.
c. No. The bank is only required to ensure that withdrawals do not violate margin requirements; collateral substitutions are not covered.
d. No. In this case the margin requirement must be met only when the loan is renewed.

Answer 27

a. Yes. The margin requirements must be met at all times.

A bank may permit a customer to make substitutions and withdrawals, but the margin requirements must be met at all times.

Question 28

First National Bank has made three loans to Mrs. Elmwood. Two of the loans are regulated credits (they are for the purpose of purchasing margin stock and secured by margin stock). The third loan is for the purpose of purchasing margin and nonmargin stock, and the loan is secured by real estate and margin stock. Can the bank avoid having the third loan combined with the other two for Regulation U purposes?

a. Yes, but the real estate must have a value of at least twice as much as the third loan.
b. No. At least the part of the loan attributable to the security of margin stock must be treated as a regulated credit and combined with the other two loans.
c. No. All of the third loan must be combined with the others.
d. Yes. As long as there is any other collateral, the loan will not be a regulated credit.

Answer 28

b. No. At least the part of the loan attributable to the security of margin stock must be treated as a regulated credit and combined with the other two loans.

Question 29

Which of the following is NOT included in the definition of margin stock?

a. Stock traded on a national securities exchange
b. Nonmargin stock convertible to margin stock
c. Debt securities convertible to margin stock
d. Warrants to purchase margin stock

Answer 29

b. Nonmargin stock convertible to margin stock

The Federal Reserve Board staff has consistently ruled that nonmargin stock convertible to margin stock is not considered to be margin stock until its conversion.

Question 30

If a bank makes a loan that is in compliance with Regulation U, what will be the status of the loan at its consummation?

a. The loan will be in compliance until it is renewed, regardless of the reduction of the borrower’s equity in the stock.
b. The loan will be in compliance only if the value of the stock remains within the margin requirements.
c. The loan will be in compliance unless the status of the stock changes (for example, margin or nonmargin)
d. The loan will always be in compliance until its maturity, regardless of the reduction of the borrower’s equity in the stock, provided there are no substitutions or withdrawals that adversely affect the loan value.

Answer 30

d. The loan will always be in compliance until its maturity, regardless of the reduction of the borrower’s equity in the stock, provided there are no substitutions or withdrawals that adversely affect the loan value.

A bank may continue to maintain a credit even if the borrower’s equity in the stock is reduced or if the status of the stock changes.

Question 31

In evaluating the coverage of a bank’s Regulation U compliance for loans to purchase or carry margin stocks, which of the following securities is NOT covered in the regulatory definition of “margin stock”?

a. Any OTC stock
b. A security issued by an investment company that is licensed under the Small Business Investment Act
c. A warrant or right to subscribe to, or purchase, a margin stock
d. An equity security registered, or having unlisted trading privileges, on a national exchange

Answer 31

b. A security issued by an investment company that is licensed under the Small Business Investment Act

All of the alternatives except for (b) are specifically included in the coverage. Securities issued by an investment company licensed under the SBA Act is specifically exempted from coverage.

Question 32

Under Regulation U, prior to extending credit secured by margin stock for more than $100,000, a national bank must obtain which of the following?

a. Certificate of value for the collateral
b. Written statement from the borrower as to the purpose of the loan
c. Written statement certifying the borrower’s business address and daytime phone number
d. Notice from the borrower as to his willingness to provide additional margin stock as collateral

Answer 32

b. Written statement from the borrower as to the purpose of the loan

The borrower’s statement of purpose is part of Form FR U-1, which is required for this type of loan.

Question 33

Is the renewal of a loan considered to be a new extension of credit for purposes of valuing the collateral under Regulation U?

a. Yes
b. Yes, if any additional amounts are added to the loan balance
c. Yes, if any amounts other than interest, service charges, or taxes are added to the loan balance
d. No, a renewal is never considered to be a new credit

Answer 33

c. Yes, if any amounts other than interest, service charges, or taxes are added to the loan balance

Renewals or extensions are not considered to be new credit unless the amount of the credit is increased by funds other than interest, service charges, or taxes.

Question 34

First National Bank made the following loans to Mr. James Wilson during the previous calendar year:
• Loan A, made on February 2, is a loan for purchasing margin stock and is secured by margin stock
• Loan B, made on March 15, is also for purchasing margin stock and is secured by margin stock
• Loan C, made on June 30, is an unsecured loan for purchasing margin stock
• Loan D, made on September 10, is for purchasing a car, secured by the car
All the loans are still outstanding at the end of the year. Which of the loans must be combined for purposes of the margin requirements of Regulation U?

a. All of the loans must be combined
b. Loans A and B
c. None of the loans must be combined
d. Loans A, B, and C

Answer 34

d. Loans A, B, and C

All purpose credit extended to a customer must be treated as a single credit for purposes of Regulation U. Unsecured purpose credit extended after secured purpose credit will be combined for purposes of determining whether the loan complies with the restrictions on the maximum loan value of the collateral.

Question 35

What is purpose credit under Reg U?

Answer 35

Any loan that is secured by margin stock, equities that are traded on the exchange.

Question 36

What is the maximum loan value percentage if the loan will be used to purchase or carry margin stock?

Answer 36

50%. So if a customer wants a $100,000 loan, it has to be secured by $200,000 of margin stock.

Question 37

When must a bank have a FR U-1 in the loan file?

Answer 37

The form must be completed when a loan in excess of $100,000 is secured by margin stock. It does not have to be purpose credit (for the purchase of margin stock). This is loan amount, not the value of the stock.

Question 38

How long must the FR U-1 be retained?

Answer 38

3 years from when the loan is satisfied, not created.