Consumer Disclosures and Loan to Build Two Houses

Issue/Inquiry

The Bank has a borrower who will be buying a lot and building two dwellings on it. He will live in one dwelling and sell the other. Is the Bank required to make consumer disclosures for the loan?

Response Summary

Whether the TRID rules apply to the loan will depend on whether it is considered to be a closed-end consumer loan. This will in turn require the Bank to determine whether it is primarily for a business or consumer purpose. To do so, the Bank will apply such factors as the relationship of the construction and sale of a dwelling to the borrower’s primary occupation or its sale to his income. In the event that a question remains as to whether the loan is for a consumer or business purpose, the Bank can make the TRID disclosures without affecting the determination as to whether the loan was exempt from Regulation Z.

Response Detail

The TILA-RESPA Integrated Disclosure (“TRID”) rules apply to closed-end consumer loans secured by real property, including construction loans. 12 CFR §1026.19(e)(1)(i). Whether the TRID rules apply to the proposed loan will depend on whether or not it is being made for a consumer purpose.

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.

In this case, the borrower will be building two dwellings, occupying one as his residence and selling the other. If only the construction of the residence was considered, the loan would certainly be for a consumer purpose. In considering that the loan will also be used for the construction of a dwelling to be sold, the Bank will have to apply such factors as its relationship to the borrower’s primary occupation or its sale to his income. If the borrower’s primary occupation is not related to the construction and sale of residential properties and this transaction is in the nature of a “one off” to help finance the construction of his residence, then it should be considered a consumer loan, for which the appropriate TRID disclosures must be provided.

Regulation Z also takes into consideration whether a loan secured by owner-occupied residential rental property may be for a business purpose. 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.

Such rules will not apply in this matter, of course, since the other dwelling will be sold, not rented. Nevertheless, they provide the Bank with insight into whether a loan such as the one proposed will be considered to be for a business purpose.

If a question exists regarding the primary purpose of a credit extension, the official commentary states that a creditor is free to make Truth-in-Lending disclosures, and the fact that disclosures are made under such circumstances does not determine whether the transaction was exempt. Official Interpretations, §1026.3(a) – 1.

The Bank will have to make a business decision, given the penalties provided by Regulation Z for failing to provide disclosures concerning the loan or closing costs when they are required.

 

 

This entry was posted on Monday, May 22nd, 2017 at 1:34 pm.