TRID and Refinance of Owner Occupied Three Family Property

Issue/Inquiry

The Bank asks whether a Loan Estimate and Closing Disclosure must be issued for the refinance of a loan secured by an owner-occupied three family dwelling.

Response Summary

The Bank will have to determine whether the loan is a closed-end consumer loan. If it is, then it will be covered by the TRID rules, since it is secured by real property.

Response Detail

The TILA-RESPA Integrated Disclosure (“TRID”) rules requiring the Loan Estimate and Closing Disclosure apply to closed-end consumer loans secured by real property. 12 CFR §1026.19(e)(1)(i). Thus, the refinance of a loan secured by real property used for a dwelling would be covered by the TRID rules, if the loan was also considered to be a closed-end consumer loan.

Therefore, the Bank will have to determine whether or not the loan was made for a consumer purpose, in order to know whether it is covered by the TRID rules.

Regulation Z defines a consumer credit as credit offered primarily for personal, family, or household purposes. The official commentary states that there is no precise test for what constitutes credit offered or extended for such purposes, or what constitutes the primary purpose. It refers to its discussion concerning business purpose for guidance in making such a determination. 12 CFR §1026.2(a)(12).

Business-purpose credit is exempted from the requirements of Regulation Z and thus from the TRID rules. 12 CFR §1026.3(a). The official commentary lists the following factors to be considered in determining whether credit for an acquisition is primarily for business or commercial purposes:

• The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
• The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
• The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
• The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
• The borrower's statement of purpose for the loan.

Basically, the greater the ratio of income generated by the acquisition to the total income of the borrower, the larger the transaction, or the closer the relationship of the acquisition to the borrower’s primary occupation, the more likely it is that the credit is being used for a business purpose. The purpose stated by the borrower is also to be considered. Official Interpretations, §1026.2(a)(12) – 1, 3(a) – 3.

Regulation Z also takes into consideration whether a loan secured by owner-occupied residential rental property may be for a business purpose. For example, if credit is extended to acquire, improve, or maintain rental property that will be owner-occupied, it will be deemed to be for a business purpose if it was used to acquire a property having more than two housing units, or if it was for the improvement or maintenance of a property containing more than four units. Official Interpretations, §1026.3(a) – 5.

In this case, the property consists of three units, one of which is owner-occupied, meaning that a loan for the acquisition of such a property or its improvement or maintenance would have been deemed to have been for a business purpose. Since the loan in question, however, is for the refinance of the property, it would not be deemed a business purpose loan on the basis of this interpretation. As such, the Bank will have to make a determination of its purpose based upon the other applicable factors.

This entry was posted on Monday, May 8th, 2017 at 1:34 pm.