C.F.R. » Title 12 » CHAPTER II—FEDERAL RESERVE SYSTEM › SUBCHAPTER A—BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM › PART 221—CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)

12 C.F.R. § 221.117

When bank in “good faith” has not relied on stock as collateral

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(a) The Board has received questions regarding the circumstances in which an extension or maintenance of credit will not be deemed to be “indirectly secured” by stock as indicated by the phrase, “if the lender, in good faith, has not relied upon the margin stock as collateral,” contained in paragraph (2)(iv) of the definition of indirectly secured in § 221.2.

(b) In response, the Board noted that in amending this portion of the regulation in 1968 it was indicated that one of the purposes of the change was to make clear that the definition of indirectly secured does not apply to certain routine negative covenants in loan agreements. Also, while the question of whether or not a bank has relied upon particular stock as collateral is necessarily a question of fact to be determined in each case in the light of all relevant circumstances, some indication that the bank had not relied upon stock as collateral would seem to be afforded by such circumstances as the fact that:

(1) The bank had obtained a reasonably current financial statement of the borrower and this statement could reasonably support the loan; and

(2) The loan was not payable on demand or because of fluctuations in market value of the stock, but instead was payable on one or more fixed maturities which were typical of maturities applied by the bank to loans otherwise similar except for not involving any possible question of stock collateral.

Notes of Decisions
Cited in 4 cases, 1975–2011 · leading case: Costello v. Grundon, 651 F.3d 614 (7th Cir. 2010).
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Costello v. Grundon, 651 F.3d 614 (7th Cir. 2010). · cites it 3× “the particular credit”); 12 C.F.R. § 221.117 (discussing when a bank in “good faith” has not relied on stock as collateral).”
Costello v. Grundon, 651 F.3d 614 (7th Cir. 2011). · cites it 3× “the particular credit"); 12 C.F.R. § 221.117 (discussing when a bank in "good faith" has not relied on stock as collateral).”
Costello v. Grundon, 625 F.3d 342 (7th Cir. 2010). · cites it 4× “the particular credit”); 12 C.F.R. § 221.117 (discussing when a bank in “good faith” has not relied on stock as collateral).”
Alaska Interstate Co. v. McMillian, 402 F. Supp. 532 (D. Del. 1975). · cites it 2× “12 C.F.R. § 221.117 (b). 61 These two criteria, that the loan have fixed maturity dates rather than being payable on demand or in the event of market fluctuations and that the bank have examined financial statements of the borrower which can reasonably be interpreted to support…”
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