Member Business Loan Secured by Third Party Primary Residences

Dear Mr. Simon:

You have asked if a proposed line of credit from your federal credit union (FCU) client to its
mortgage company member (the Company) qualifies under an exception in the member business loan (MBL) rule because the Company will assign liens on one-to-four family dwellings to secure the line of credit. No, the line of credit to the Company is an MBL and is not within the exception for an MBL secured by a lien on a one-to-four family dwelling that is the primary residence of the member. 12 C.F.R. §723.1(b)(1). The FCU is lending to the Company and this exception applies where the dwelling is the primary residence of the borrower.

While you did not submit all details of the proposed line of credit, you provided sufficient
information for us to determine the line of credit is an MBL. The Company proposes to use the
proposed line of credit to fund mortgage loans for its customers (homebuyers) who are or will be
FCU members. Each loan will be secured by a one-to-four family dwelling that is the homebuyer’s
primary residence. The Company will assign the notes and mortgages for its loans to homebuyers to the FCU as collateral to secure its line of credit. You also note that, before the Company originates each loan, it will obtain a forward commitment to purchase the loan from Fannie Mae or Freddie Mac, or an unconditional purchase commitment from another third party.

The proposed line of credit does not qualify for the MBL exception excluding loans fully secured by
a lien on a one-to-four family dwelling that is the borrower’s primary residence. 12 C.F.R. § 723.1(b)(1). The term “borrower” in the exception refers to the MBL borrower and not persons without an obligation to the FCU under the MBL. Even if the Company’s homebuyers are FCU members, they are not borrowers under the MBL, but under a separate loan agreement with the Company. The homebuyers are not obligated to repay the MBL and assignment of the homebuyer’s note and mortgage as collateral does not qualify the line of credit for an MBL exception.