Real Estate Loans & Trusts

Question: We are making a secured real estate loan to a trust. The trust owns the property that will secure the loan and several other assets. The beneficiary of the trust lives in the house and will be a co-borrower or guarantor for the loan. Is this covered by compliance regulations?

Answer: Yes and maybe. The loan is subject to Regulation B which applies to all credit, including credit not offered to natural persons.

The loan is also clearly subject to the requirements of flood hazard certification and insurance. Any loan secured by improved real property falls under the flood regs.

For purposes of Fair Credit Reporting, if you obtain and use a credit report on the individual who will be a co-borrower or guarantor, then the FCRA provisions regarding permissible use and notifications any adverse action apply.

RESPA applies to all loans that are secured by a 1-4 family dwelling. The coverage does not depend on who or what the borrower is. Unless the transaction is subject to one of RESPA's exemptions, RESPA would apply even though the primary borrower is a trust rather than a consumer or a natural person. The transaction does not appear to meet any of the exemptions (unless the property is 25 acres or more). Even though it is not clearly a consumer loan, it does not met the business purpose test to reach exemption status. So treat the loan as covered for purposes of RESPA.

As for Truth in Lending, the issue is less clear. If your borrower is the trust, you don't clearly meet the TIL definition of consumer. Regulation Z defines a consumer as a natural person to whom credit is offered or extended.

The definition of consumer also includes "a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person's ownership interest is or will be subject to the security interest." Since the consumer here is the beneficiary of the trust that owns the house in which the consumer dwells, this transaction would be covered by Regulation Z for rescission purposes.

That back-doorway leads us to conclude that you should treat the loan as covered by Truth in Lending. This means that you should prepare and provide early disclosures and final disclosures - along with the Good Faith Estimate and the HUD-1.

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 3, 3/99