May 27, 1992
Joseph S. Melchione
Styskal, Wiese & Melchione
550 North Brand Boulevard, Suite 550
Glendale, California 91203
Re: Secondary Principal Residences (Your March 12, 1992, Letter)
Dear Mr. Melchione:
You have asked whether it is permissible for a federal credit union (FCU) to make a long-term mortgage loan under Section 701.21(g) of the NCUA Rules and Regulations (12 CFR 701.21 (g)) to purchase a secondary principal residence. Such a loan is prohibited unless the residence will be the new principal residence of the member or the member's future retirement home.
You state that many credit union members have two principal residences. That is, one principal residence during the work week and a second principal residence at all other times. You classify these two residences together as secondary principal residences of the member. You believe long term loans on such secondary principal residences are permitted under the FCU Act and NCUA's Regulations.
A member may obtain a long-term, first mortgage loan from an FCU pursuant to Section 107(5)(A)(i) of the FCU Act (12 U.S.C. 1757(5)(A)(i) and Section 701.21(g) of NCUA's Regulations. Both require that such loans be made on "a one to four family dwelling that is or will be the principal residence of the member-borrower." The legislative history of the long-term mortgage authority emphasizes that the mortgage must be on the principal residence of the borrower. (See Report No. 95-23, February 22, 1977, at p. 8, enclosed.) However, there is nothing in the legislative history that specifically defines the term "principal residence." The information you submitted from Fannie Mae indicates that they define principal residence to be limited to only one residence. Webster's defines principal as the most important, consequential or influential; chief (emphasis added). (See Websters New Collegiate Dictionary, copyright 1976.) This definition makes clear that principal is singular. Hence one can only have one principal residence at a time. You note that Fannie Mae allows for long term mortgages that are secured by a second home as well as by a principal residence. However, they do not take the position that a second home is a principal residence.
The preamble to the 1983 proposed revision to Section 701.21(g) of NCUA's Regulations (48 F.R. 52475, 11/18/83) discusses the term principal residence and states in part that:
It should also be noted that with respect to the statutory requirement that the dwelling "is or will be" the principal residence of the member, ~701.21(f)(2) [now ~701.21(g)(2)] of the proposal would not require that the member occupy the dwelling within a certain time after the loan is made ... The proposed change is designed to provide Federal credit unions the option of financing eventual retirement homes for their members.
An FCU may finance a future retirement home (as a future "principal residence") under the long-term mortgage authority. The time for judging the "principal residence" requirement is when the loan is made. If at that time it is a member's intent to establish a new principal residence, either immediately or some time in the future, an FCU may extend a long-term mortgage loan to the member. Under this analysis, a secondary residence that is not currently the principal residence may qualify if the member plans to eventually retire to that residence.
Although we have interpreted the "is or will be the principal residence" language to allow an FCU to make a second long-term mortgage loan to a member to purchase a future retirement home or to purchase a new principal residence, as noted above, an individual can have only one principal residence at given time. Thus, a loan to finance a secondary principal residence that does not meet the requirements set forth above is not permitted.