financial ability of the applicant to undertake and pay off the obligation involved in the loan.

(2) A Federal association shall not make any disbursement of the proceeds of any loan made pursuant to the provisions of this section unless and until the borrower has made to the association a certificate in writing stating the cost to the borrower of the real estate security for the loan and of the development thereof to the date of such certification, and the items comprising such costs.

(3) With respect to each loan under this section a Federal association shall include and preserve in its record of such loan each certificate and each report referred to in this section and the date and amount of each appraisal and each determination of value referred to in this section, and shall maintain such additional records as will establish that the loan and all disbursements made in connection therewith are in accordance with the provisions of this section.

(f) Participation in making of loans; purchase and sale of participating interests; purchase of loans. Notwithstanding any other provision of this part, a Federal association may not participate in the making of any loan, may not purchase or sell a participating interest in any loan, and may not purchase any loan, if such loan is of a type that such association may make only under this section.

(g) Definitions. The term "development" as used in this section means the installations and improvements necessary to produce from the land urbantype building sites so completed, in keeping with applicable governmental requirements and with general practice in the community, that they are ready for the construction of buildings thereon for primarily residential usage.

(h) Relation to other provisions of regulations. The provisions of §§ 545.6-7 and 545.6-12, and the provisions of the second sentence of § 545.6-11 with respect to insurance, maintenance, and repairs, shall not be applicable to loans made under the provisions of this section, and such loans shall not be included in the aggregate amount of investments referred to in § 545.6-7. [24 F.R. 9049, Nov. 6, 1959]

AUTHORITY: §§ 555.1 to 555.10 issued under authority sec. 5, 48 Stat. 132, as amended; 12 U.S.C. 1464; Reorg. Plan No. 3 of 1947, 12 F.R. 4981, 3 CFR, 1947 Supp.; secs. 3, 12, 60 Stat. 238, 244, 5 U.S.C. 1002, 1011.

SOURCE: 555.1 to 555.10 appear at 24 F.R. 9415, Nov. 24, 1959, except as otherwise noted. § 555.1 Directors.

(a) Quorum of; number necessary for. Where the number of directors provided for in the bylaws or as fixed thereunder by resolution of the members have been elected, it is necessary to have a majority of the authorized number in order to constitute a quorum. This would be true even though the number of directors actually serving had been reduced by reason of death, resignation or removal from office. On the other hand, if, between annual meetings, the authorized number is increased without the election of new directors to fill the new vacancies, a quorum would be a majority of the number of directors as it existed prior to the increase. Newly created directorships which have not been filled are not counted in determining the number necessary to constitute a quorum.

(b) Vacancies; power of directors to fill. The board of directors of a Federal association having a Charter N or Charter K (rev.) and the prescribed bylaws, without calling a special meeting of the members for the purpose of electing directors to fill vacancies, may validly elect directors to fill vacancies, including vacancies created by (1) resignation, (2) increase in the number of the directors by the board of directors as provided by the bylaws, and (3) increase in the number of directors voted by the members, as provided by the bylaws, if the members failed to elect directors to the new positions created by them. Each director so elected by the board of directors shall serve until the next annual meeting of the members. § 555.2

Escrow business; power to en

gage in.

A Federal association has no power, express or implied, to act generally as an agent for the public in handling escrows. However, a Federal association may handle escrows related to real estate loans it makes and, to an extent reasonably incidental to the accomplishment of its express objects, may handle escrows for others involving the type of real estate transactions that are common to the savings and loan business. In the handling of any escrow, a Federal association may not assume duties or responsibilities or perform acts which are in conflict with the limitations on its power imposed by the Home Owners' Loan Act of 1933, as amended, and regulations thereunder or its charter.

[24 F.R. 9693, Dec. 4, 1959]

(a) Fraternity houses; classification of. For lending purposes, fraternity houses should be classified under § 545. 6-1(b) (iv) of this subchapter as "other improved real estate" designed or used primarily for residential purposes. Although fraternity houses are the residences of students, they are not homes or combination homes and business properties within the contemplation of the regulations.

(b) Motels; classification of. For lending purposes, motels, which in reality are roadside hotels, should be classified as "other improved real estate" as defined in § 541.12 of this subchapter. The regulations must be interpreted within

the spirit and intent of the governing statutes. Section 5 of the Home Owners' Loan Act authorizes the incorporation of Federal associations for two primary purposes i.e., "to provide local mutual thrift institutions in which people may invest their funds" and "to provide for the financing of homes". Recognizing that such associations would find it desirable and perhaps necessary to make other than home loans the statute authorizes within 20 percent of the assets of an association loans on "other improved real estate". The statute does not contemplate that Federal associations be authorized to finance commercial enterprises which incidentally contain residential quarters, except within the 20 percent of assets limitation. In the light of these statutory provisions, it can not be said that motels which are commercial undertakings are embraced in the definition of "combination home and business property" any more than would a hotel consisting of hundreds of rooms and one or two apartments for use by the owner or manager or other personnel. On the other hand, if the business use (tourist units) is merely incidental to the residential use of the security property, it would qualify as combination home and business property.

(c) Completed; definition of. For the purposes of § 545.6-1(a) (4) of this subchapter, pertaining to loans in excess of 80 percent of the value of the security, a residential structure is deemed to be completed when, in conformity with general practice in the community, it is ready for occupancy. For instance, the house on which the mortgage is being taken has been completed except for the second coat of exterior painting which can not be completed for reasons of weather, or the street has not been completed, but sufficient funds to pay for such work are to be held in escrow until it is done; the structure would be considered "completed" for the purposes of the regulation if it would be considered, by reason of local practice and custom, to be ready for occupancy.

(d) Paving liens against; power to purchase. A Federal association may purchase a paving certificate which constitutes a lien on property securing an association loan, if that is necessary to protect its interest in the property. However, a Federal association may not acquire such certificates as to property

on which it does not have a mortgage or for the purpose of making an investment.

§ 555.4 Real estate loans.

(a) Security for; assignment of notes and mortgages as. "Collateral" loans secured by assignment of first lien notes and mortgages held by the borrower are not loans made on the security of first liens on real estate as contemplated by the statute and therefore may not be made by Federal associations. Section 5(c) of the Home Owners' Loan Act, as amended, provides that Federal associations "shall lend their funds only on the security of first liens upon homes or combination homes and business property **". This provision of the statute has been construed and defined in § 541.9 of this subchapter as follows: "The term 'loans on the security of first liens' means loans on the security of any instrument * which makes the interest in the real estate described

* * *

*

*

*

While

therein * * specific security for the payment of the obligation secured by such instrument, provided the instrument is of such a nature that, in the event of default, the real estate described in such instrument could be subjected to the satisfaction of such obligation with the same priority as a first mortgage or a first deed of trust in the jurisdiction where the real estate is located." a first mortgage in itself evidences a first lien on realty it is, before foreclosure is completed, personal property in the hands of the mortgagee. A mortgage and accompanying note may be assigned as collateral security for a debt, but the mortgagee remains the owner of the mortgage. The assignee's interest is contingent. An assignment of a note and mortgage as collateral security for a loan by a Federal association would not permit the association, in the event of the borrower's default without default by the mortgagor, to subject the real estate described in the assigned mortgage to the satisfaction of the obligation owed the association. Such a loan would not be a loan on the security of a first lien on real estate as defined in the regulations, but would be a loan on the security of assigned personal property. This same reasoning and conclusion would apply to the assignment of a note and real estate contract as collateral security for a loan by a Federal association.

(b) Security for; shares pledged for excess over 90 percent loaned under $545.6-1(a) (4) of this subchapter. A loan may not be made under § 545.6-1 (a) (4) of this subchapter for an amount in excess of the maximum therein provided, with such excess secured by the pledge of a savings account as collateral. The maximum amount of the principal obligation of a loan made pursuant to that section is limited to 90 percent of the value of the property or 90 percent of the purchase price, whichever is lower, and in no event in excess of $18,000. In other words, the amount of the principal obligation of a loan under this section is determined only by a formula which is strictly related to either the purchase price or the value of the property, with a ceiling of $18,000.

(c) Servicing of agent for; right of Federal association to act as. The servicing of loans by a Federal association under § 545.11 of this subchapter can be undertaken to such extent as would be reasonably incidental to the accomplishment of its express objects. For example, an association may agree to service loans for others to whom it sells loans. However, there is no corporate power in Federal associations to act as loan servicing agent for the general public.

[Paragraph (c) amended, 24 F.R. 9693, Dec. 4, 1959]

(a) Hazard; control over placing of. The board of directors of each Federal savings and loan association has not only the right but the duty to establish and maintain such requirements over hazard insurance as in the fair and considered judgment of such directors are necessary to protect the association's interest in the real estate security for its loans. Subject to this limitation, those who borrow from Federal associations on real estate security should have reasonable freedom of choice in the placing of hazard insurance on their property.

(b) Life; premiums on; advances for. The fourth sentence of § 545.6-11 of this subchapter authorizes an association to make unsecured advances for the payment of life insurance premiums in connection with real estate loans. On the other hand, applicable law and regulation do not contemplate, and are not considered to permit, the indiscriminate

making of unsecured loans to finance life insurance premiums. Any lending program which in general practice contemplates or gives promise of unsecured advances to pay insurance premiums is deemed to be without regulatory sanction. § 555.6

Unsecured loans; refinancing of; authority for.

A Federal association may not make an uninsured, unsecured loan to refinance a loan previously made by another association for property alteration, repair or improvement, for the reason that its investment would not be an investment in the original loan which was for property alteration, repair or improvement, but on the contrary would be an investment in its own loan, which would be for the refinancing of the other institution's loan. The transaction would not be within the authority conferred by subsection (c) of section 5 of the Home Owners' Loan Act of 1933, as amended, to invest "in other loans for property alteration, repair or improvement". A Federal association may, however, make an uninsured, unsecured loan to refinance or recast for a borrower the unpaid balance of an uninsured, unsecured loan to such borrower made and still held by the association, provided the loan as originally made complied in all respects with § 545.8 of this subchapter, and provided the refinanced or recast loan is evidenced by a note or notes the amount and terms of which are such as could have been made by the association as an original loan pursuant to said section. However, the loan as recast could exceed $3,500 if such excess is solely by reason of inclusion of loan charges permissible under § 545.6-10 of this subchapter, inclusion of accrued interest (whether due or not), or carrying over of original gross charges into the new evidence or evidences of debt or of new items of gross charges.

security of first liens is not construed to mean that the share collateral put up as security for the loan may be acquired by the borrower out of the proceeds of the same loan. In the context in which the words appear in the statute the reasonable interpretation is that the collateral for the loan be in existence and proferred as security before the loan is granted. Section 545.7 of this subchapter is, in effect, interpretative of that provision of the statute. By this regulation it is required that loans be made only to the extent that the shares offered for collateral have been fully paid. § 555.8 Savings accounts.

(a) Payments on; receipt of, defined in relation to a fixed determination date. In the case of a Federal association that has fixed a determination date as provided in the charter, payments on savings accounts must actually be received by the association by such date in order to be considered as having been invested on the first day of the month.

(b) Redemption of; must be nondiscriminatory. Section 11 of Charter K, and section 7 of Charter N and Charter K (rev.) do not confer upon the association the power to discriminate against an individual shareholder by arbitrarily closing or redeeming his share account. To give meaning to the provision it is necessary first to interpret the word "otherwise" as it is used in that section. The doctrine of ejusdem generis is generally applied in such situations. It means that where terms evidently confined to a particular class of things are subjoined by a term of very extensive signification, the latter term, however general and comprehensive in its possible import, when thus used embraces only things ejusdem generis; that is of the same class of things comprehended by the preceding limited and confined terms. The doctrine of ejusdem generis is a mere specific application of the broader maxim "noscitur a sociis" which means that general and specific words which are capable of an analagous meaning being associated together take color from each other, so that the general words are restricted to a sense analagous to the less general. Applying the rule of noscitur a sociis to the section, it does not make the word "otherwise" an unlimited choice. When the section directs that redemption shall be by lot or other

wise as the board of directors may determine, "otherwise" is limited by the words "by lot" so that the method chosen must be one which will affect the shareholders or the shareholders of a certain class in a nondiscriminating way. If this were not true there would have been no necessity whatsoever for the provision that redemption shall be by lot. Only by such an interpretation can full meaning be given to the entire sentence.

(c) Dividends on; distribution of, prior to close of dividend period. The Board does not object to the making of dividends available by cash or credit to a member's account on the last day of the dividend period on which the association is open for business; nor does the Board object to the payment of earnings for the dividend period on savings withdrawn on the last business day of the period.

(d) Checking accounts; advertising and use as. A Federal association may not advertise that its savings accounts may be used as checking accounts nor may the withdrawal of savings be made a device by which members may at will draw personal checks against their accounts. Section 563.27 of Subchapter D of this chapter, does not permit such a representation and the powers of Federal associations do not extend to such a practice.

(e) Service charge on; prohibition of. A Federal association may not arbitrarily cancel out dormant savings accounts, no matter how small, and transfer the amounts to income. This would be tantamount to a service charge in violation of § 545.1 of this subchapter which prohibits the making of any service charge for either active or dormant savings accounts.

(f) Solicitation of; sale of merchandise in connection with. Section 563.24 of Subchapter D of this chapter, authorizes Federal associations (as well as other insured institutions) to give away merchandise, within the limits expressly stated in the regulation, in connection with the opening or increasing of savings accounts. However, the sale of merchandise is not reasonably incident to the

accomplishment or performance of any of the express powers set out in the charter for Federal associations; therefore, such associations are without authority to sell merchandise, coin banks and similar coin-saving devices excepted.

§ 555.9 Members; borrowing; loan participation, effect on.

A mortgagor executing a note and mortgage in the name of two or more Federal associations which join in making the loan would be deemed a borrowing member of each of such associations. The mortgagor would, in the case of purchase of a participation interest by another Federal association, likewise be deemed a member of such purchasing association. An obligor on a mortgage note purchased by a Federal association becomes a member of the purchasing Federal and the association would be estopped from denying the obligor his rights of membership. This conclusion is based on the premise that when a Federal association purchases a mortgage loan from a third party, it is lending its funds to a mortgagor, and consequently, it is making a loan and, under the circumstances, its act constitutes an acceptance of the mortgagor as a member of the association. Purchasing of a participating interest differs from purchasing a whole loan only in degree and not in substance, insofar as the question of membership in the participating institution is concerned.

§ 555.10

Certificates of deposit; investment in; power to make; liquidity requirement; eligibility under § 545.8-2.

A Federal savings and loan association may make deposits evidenced by certificates of deposit and may otherwise acquire such certificates. For the purposes of compliance with the provisions of § 545.8-2 of this subchapter, cash on hand, deposits made by an association in a Federal Home Loan Bank and in other banks shall be considered as cash; but no deposit evidenced by a certificate of deposit shall be considered as cash for such purposes unless the association itself made the deposit for which the certificate was issued.