Disclosures for Commercial Loan Secured by Mixed-Use Property

Bank is taking an application for a commercial mortgage on a mixed-use property consisting of two apartments and one retail space, which is owner occupied as a primary residence. Are TILA and RESPA disclosures appropriate?

Summary:TILA and RESPA disclosures are not appropriate for a commercial loan, which is excluded from the coverage of these laws and regulations. A disclosure of the applicant’s right to a copy of the appraisal under Regulation B, however, may have to be provided. In addition, if the loan is HMDA-reportable as a home purchase or home improvement loan or a refinancing, the bank will also have to request information as to the ethnicity, race, and sex of the applicant.

ANALYSIS:

Regulation Z and RESPA

The loan would not be covered by Regulation Z and subject to its disclosure requirements, since the regulation does not apply to extensions of credit primarily for a business or commercial purpose. 12 CFR 1026.3(a)(1).

Similarly, the loan is exempted from the requirements of Regulation X, giving effect to the Real Estate Settlement and Procedures Act (“RESPA”), since they do not cover extensions of credit primarily for a business or commercial purpose, as defined by Regulation Z. 12 CFR 1024.5(b)(2).

Regulation B

The bank may be required to provide a notice of appraisal availability, however. Under Regulation B, which covers commercial as well as consumer credit, the bank must provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application of credit that is to be secured by a first lien on a dwelling. The notice of the right of the applicant to receive a copy of the appraisal must be mailed or delivered not later than the third business day following the day the application is received. 12 CFR 1002.14(a).

Regulation B defines a “dwelling” as “a residential structure that contains one to four units whether or not that structure is attached to real property.” 12 CFR 1002.14(b)(2). Unlike Regulation C (“HMDA”), it does not address multi-use properties or provide rules for determining the predominate use of such a property. When the final rule was published, the Bureau of Consumer Financial Protection simply stated that, as transaction structures can vary widely, it did not believe that it would be appropriate to address all such variations in the text of the rule or the commentary. 78 FR 7215.

Given that the structure contains two residential units, a conservative approach would be to treat it as a dwelling. If the lien securing the loan in question is a first lien, then the appraisal requirements should be fulfilled.

HMDA

Whether the loan would be reported under the Home Mortgage Disclosure Act (“HMDA”) and Government Monitoring Information obtained will depend on the purpose of the loan, the type of property, and whether the borrower is a natural person.

If the loan proceeds are being used for working capital, and not for home purchase, home improvement, or as a refinancing, then the loan is not HMDA-reportable.

If the loan is used to purchase a mixed-use property, it is considered a dwelling-secured loan if it is used primarily for residential purposes. The bank may use any reasonable standard to determine the primary use of the property, such as by square footage or by the income generated. Staff Commentary on Regulation C, 1003.2 – Home purchase loan – 2.

If the loan is used to improve a property with commercial and residential use, it is a home improvement loan if the loan proceeds are used primarily to improve the residential portion of the property. If the loan proceeds are used to improve the entire property, it is a home improvement loan if the property is primarily used for residential purposes. Again, the bank can use any reasonable method for making this determination, such as by square footage or income generated. Staff Commentary on Regulation C, 1003.2 – Home improvement loan – 4.

A mortgage loan is also HMDA-reportable if it is the refinancing of a dwelling-secured loan by another dwelling-secured loan. HMDA does not address multi-use properties in the context of a refinancing, so a determination should be made as to the primary use of the property, as per home purchase or home improvement loans.

If the loan is HMDA-reportable as a home purchase or home improvement loan, or a refinancing, the bank must request the ethnicity, race, and sex of the applicant. 12 CFR 1003.4(b).

This entry was posted on Friday, May 30th, 2014 at 9:20 pm.