Marilyn Mooney, Esq.
Fulbright & Jaworski L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, DC 20004-2615

Dear Ms. Mooney:

This is in response to your letter of April 3, 1998, concerning the application of Regulation U (12 CFR 221) to a purpose credit secured by margin stock.

We understand the facts to be as follows. Fifteen years ago, a bank extended purpose credit to your client. The purpose credit was secured by margin stock and was extended in conformity with Regulation U. The loan is still outstanding and is currently secured with exempted margin and nonmargin securities, with a Regulation U loan value in excess of the loan balance. The loan is currently under renegotiation and the bank is considering releasing the margin and nonmargin stock collateral. The bank has made an evaluation of the borrower's current creditworthiness and would be willing to maintain the loan with collateral that does not have sufficient value to support the entire credit. This would result in a portion of the loan being unsecured. Specifically, the bank would be willing to maintain the loan collateralized solely with exempted securities that have a value of 90 percent of the loan.

The release of margin stock from a purpose loan would be a withdrawal under section 221.3(f) of Regulation U. This section provides that a lender may permit any withdrawal of cash or collateral if the withdrawal would not "cause the credit to exceed the maximum loan value of the collateral." Your letter indicates that the contemplated withdrawal of collateral would result in a loan balance that exceeds the maximum loan value of the remaining collateral and is therefore not permitted under Regulation U. While you acknowledge that section 221.3(f) prohibits a bank from allowing the withdrawal of some margin stock from a purpose credit if the withdrawal causes the credit to exceed the maximum loan value of the collateral, you argue that section 221.3(f) does not apply if all of the margin stock securing a purpose credit is released, because the loan would cease to be regulated under Regulation U after the withdrawal takes place. Board staff believes that the express terms of section 221.3(f) preclude the bank from permitting the contemplated withdrawal even though the end result will no longer be covered under the regulation.

You indicate that the bank would be willing to extend some unsecured credit to the borrower based on its current evaluation of the borrower's creditworthiness. However, under section 221.3(d)(2) of Regulation U, a lender that has extended purpose credit secured by margin stock may not subsequently extend unsecured purpose credit to the same customer unless the combined credit does not exceed the maximum loan value of the collateral securing the prior credit. If the unsecured credit is used to pay down the outstanding loan balance, the credit would be for the purpose of "carrying" margin stock, as defined in section 221.2 of Regulation U. Section 221.3(d)(2) of Regulation U would limit the amount of unsecured credit that could be extended to the amount of excess loan value of the collateral securing the fifteen-year old loan.

Your argument that the renegotiated loan would not involve purpose credit secured by margin stock is premised on the withdrawal of the margin stock currently securing the purpose loan. Board staff is unable to concur with your interpretation that the withdrawal and substitution provision of Regulation U does not apply to a purpose credit secured in part by margin stock, as long as the loan is no longer secured with margin stock after the withdrawal. This is a staff opinion only, as the matter has not been presented to the Board.

Yours truly,

(signed) Scott Holz

Scott Holz