Q: Mortgages secured by the borrower's primary residence that are obtained from a financial institution under its normal lending procedures, terms and requirements and obtained while not a covered person in the firm meet the loans/debtor-creditor relationship exception in Rule 2-01(c)(1)(ii)(A)(4). Are second mortgages, home improvement loans, equity lines of credit and similar obligations collateralized by a primary residence generally treated in the same manner?

A: Yes. In Release No. 33-7919 (November 21, 2000), Final Rule: Revision of the Commission’s Auditor Independence Requirements, the Commission clarified that the rationale for the stated exception focuses on the status of the covered person at the time of the loan origination.

The staff believes that the same focus should apply to second mortgages, home improvement loans, equity lines of credit and similar mortgage obligations collateralized by a primary residence obtained from a financial institution under its normal lending procedures, terms and requirements and while not a covered person in the firm.

Further, if there is a change in the ownership of the loan and, as a result, the borrower becomes a covered person, the staff would not object to the auditor's independence based solely on the existence of that loan, provided there is no modification in the original terms or conditions of the loan or obligation after the borrower becomes, or in contemplation of the borrower becoming, a covered person.