TRID and a Business Loan to an Individual

Issue/Inquiry

The Bank has a customer who wants a loan secured by their primary residence to pay off a mortgage loan secured by a commercial building. Is this loan subject to the TILA RESPA Integrated Disclosure (“TRID”) Rule?

Response Summary

The TRID Rule will not be applicable if the loan is primarily for a business or commercial purpose, but the Bank must make this determination. If the Bank determines that the commercial property is in the nature of a personal investment or that the relationship of the property to the individual borrower is ambiguous, it should provide the TRID disclosures to avoid the possibility of underdisclosing the APR, Finance Charge, and closing costs of the loan, with the resulting risk of having to reimburse these costs to the borrower.

Response Detail

Whether the proposed loan is subject to the requirements of Regulation Z and the TRID Rule depends on its purpose.

The TRID Rule only applies to closed-end consumer loans secured by real property. Likewise, Regulation Z exempts extensions of credit primarily for a business, commercial, organizational, or agricultural purpose. 12 CFR §§1026.3(a);19(e)(1)(i).

The Bank must determine whether the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, a creditor is free to provide the TILA disclosures, and the fact that disclosures are provided under such circumstances is not controlling on the question of whether the transaction was exempt. Official Interpretations, ¶1026.3(a)-1.

In this case, an individual wishes to obtain a loan to be secured by his residence, in order to pay off a loan secured by a commercial property. The nature of the property securing the loan that will be paid off suggests that such would be a business purpose loan, but this is not conclusive. The term “consumer credit” means credit extended to a consumer primarily for personal, family, or household purposes. A “consumer” is a natural person to whom credit is extended. 12 CFR §1026.2(a)(11),(12). If the commercial property was in the nature of a personal investment by the individual, the proposed loan might be for a personal purpose and, as such, it would be a consumer loan subject to Regulation Z.

The official commentary to Regulation Z acknowledges that there is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, or for what constitutes the primary purpose. Official Interpretations, ¶1026.2(a)(12)-1. It does provide guidance, however, for determining whether a loan to acquire property is primarily for a business or commercial purpose. Considering the following can be helpful in determining the purpose of the proposed loan:

• The relationship of the borrower’s primary occupation to the acquisition, as the more closely related they are, the more likely it is a business purpose
• The degree to which the borrower will manage the acquisition, as the more personal the involvement, the more likely it is to be a business purpose
• The ratio of income from the acquisition to the total income from the borrower, as the higher the ratio, the more likely it is to be for a business purpose
• The size of the loan, as the bigger the loan, the more likely it will be for a business purpose
• The borrower’s statement of purpose of the loan. Official Interpretations, ¶1026.3(a)-2.

If the Bank applies these factors and determines that the commercial property loan is related to the individual borrower in such a way as to demonstrate that the proposed loan to pay it off will be primarily for a business or commercial purpose, then Regulation Z and the TRID Rule will not be applicable. The Bank should document its basis for making this determination.

On the other hand, if the Bank determines that the commercial property is in the nature of a personal investment, or if its analysis indicates that the nature of the relationship of the individual borrower to the property is ambiguous, it should make the TRID Rule disclosures in order to avoid the possibility of underdisclosing the APR, Finance Charge, and closing costs of the loan, with the resulting risk of having to reimburse these costs to the borrower.

 

This entry was posted on Monday, March 7th, 2016 at 3:00 pm.