Business Purpose Loan - RESPA Applicable?

This is a point of discussion frequently in our bank. Investment does not automatically equal business purpose. The definition of consumer purpose could include personal investments, which would be for personal, family or household use. To make the determination, you have to first look to the Reg Z definition of business purpose, because RESPA says that if it is business purpose for Reg Z, it is business purpose for RESPA and therefore RESPA is not applicable.

What does Reg Z say? Well, first it depends on whether the property being acquired is rental property. If the property will be rented, then you have to look at whether it is owner-occupied or non-owner-occupied. Reg Z says a loan to acquire non-owner-occupied rental property is automatically business purpose. A loan to acquire owner-occupied rental property is also automatically business purpose if the property is more than two units. Two or less units does not mean that it is not business purpose, it just does not get the automatic treatment. You have to look deeper, just like you do for non-rental property.

Some people buy property to just hold for appreciation, or to fix up and re-sell without renting it. If that is the case, or as stated above, maybe its an owner-occupied duplex where one unit is being rented, but the other is not, then you have to look to an additional part of the Reg Z rules and commentary. For these types of loans, Reg Z says that the determination of whether the loan is business purpose or not depends on several factors. These include the size of the transaction, the relation of the acquisition to the borrower's primary occupation, the degree of control to which the borrower will exert over the management of the acquisition, etc. You definitely need to look at Reg Z section 226.3(a) and the related Official Staff Commentary comments.

If you determine, using the criteria in 226.3(a), that the loan is for a business purpose, and not a personal investment, then neither Reg Z nor RESPA would be applicable to the transaction. Here is the advice we give our lenders: if the loan is to an individual to acquire investment property, and you cannot clearly establish this as a business purpose using the criteria in 226.3(a), then treat the loan as a consumer purpose loan and provide Reg Z and RESPA disclosures.

First published on BankersOnline.com 6/29/09