I found some prior posts on this topic but I am still not convinced. Please convince me.

If a borrower, who is an individual, purchases an investment SFR to use as a rental property, is that not a business purpose loan?

If the answer to that question is "yes," then why would it matter if the borrower spends personal funds for the purchase and then obtains an equity loan to reimburse the personal funds? The loan purpose is still the same. The borrower bought a house....like a quick sale and then seeks to replenish the expenditure. I agree that this would not be HMDA reportable, but I can't see how it's a consumer purpose loan simply because the borrower used personal funds for the purchase.

The HMDA Loan Purpose and whether or not a loan is for Business or Commercial Purpose are two separate data points in the regulation and are NOT tied to each other except for the fact that the “other” purpose cannot be used for business purpose loans. HMDA Loan Purpose is found at 1003.4(3) and Business Purpose is found at 1003.4(38).

HOME MORTGAGE DISCLOSURE ACT – REGULATION C
Section 1003.4 Compilation of Data

HMDA LOAN PURPOSE 1003.4 (3)

(3) Whether the covered loan is, or the application is for, a home purchase loan, a home improvement loan, a refinancing, a cash-out refinancing, or for a purpose other than home purchase, home improvement, refinancing, or cash-out refinancing.
COMMENTARY TO 1003.4(3)
4. Purpose—other. If a covered loan is not, or an application is not for, a home purchase loan, a home improvement loan, a refinancing, or a cash-out refinancing, a financial institution complies with § 1003.4(a)(3) by reporting the covered loan or application as for a purpose other than home purchase, home improvement, refinancing, or cash-out refinancing. For example, if a covered loan is for the purpose of paying educational expenses, the financial institution complies with § 1003.4(a)(3) by reporting the covered loan as for a purpose other than home purchase, home improvement, refinancing, or cash-out refinancing.
5. Purpose—business or commercial PURPOSE loans. If a covered loan primarily is for a business or commercial purpose as described in § 1003.3(c)(10) and comment 3(c)(10)-2 and is a home purchase loan, home improvement loan, or a refinancing, § 1003.4(a)(3) requires the financial institution to report the applicable loan purpose. If a loan primarily is for a business or commercial purpose but is not a home purchase loan, home improvement loan, or a refinancing, the loan is an excluded transaction under § 1003.3(c)(10).


The above section is saying that a business PURPOSE loan is excluded from reporting unless it is for home purchase, home improvement or refinancing. There is no “other” purpose for business purpose loans. There is absolutely NO reference to the borrower being an entity or an individual. The “other” purpose is only for consumer PURPOSE loans…..which, of course, would be loans to individuals for a consumer purpose under Regulation Z.

BUSINESS PURPOSE 1003.4 (38)

(38) Whether the covered loan is, or the application is for a covered loan that will be, made primarily for a business or commercial purpose.
COMMENTARY TO 1003.4(38)
1. Primary purpose. Except for partially exempt transactions under § 1003.3(d), § 1003.4(a)(38) requires a financial institution to identify whether the covered loan is, or the application is for a covered loan that will be, made primarily for a business or commercial purpose. See comment 3(c)(10)-2 for a discussion of how to determine the primary purpose of the transaction and the standard applicable to financial institution's determination of the primary purpose of the transaction. See comments 3(c)(10)-3 and -4 for examples of excluded and reportable business- or commercial-purpose transactions.

EXCLUDED TRANSACTIONS (FROM HMDA) 1003.3 (c)

1003.3(c)(10) – EXCLUDED TRANSACTIONS
(10) A closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose, unless the closed-end mortgage loan or open-end line of credit is a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p);
COMMENTARY TO 1003.3(10)
2. Primary purpose. An institution must determine in each case if a closed-end mortgage loan or an open-end line of credit primarily is for a business or commercial purpose. If a closed-end mortgage loan or an open-end line of credit is deemed to be primarily for a business, commercial, or organizational purpose under Regulation Z, 12 CFR 1026.3(a) and its related commentary, then the loan or line of credit also is deemed to be primarily for a business or commercial purpose under § 1003.3(c)(10).
3. Examples—covered business- or commercial-purpose transactions. The following are examples of closed-end mortgage loans and open-end lines of credit that are not excluded from reporting under § 1003.3(c)(10) because, although they primarily are for a business or commercial purpose, they also meet the definition of a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p):
iii. iii. A closed-end mortgage loan or an open-end line of credit to a corporation, if the funds from the loan or line of credit will be used to purchase or to improve a dwelling, or if the transaction is a refinancing.
4. Examples—excluded business- or commercial-purpose transactions. The following are examples of closed-end mortgage loans and open-end lines of credit that are not covered loans because they primarily are for a business or commercial purpose, but they do not meet the definition of a home improvement loan under § 1003.2(i), a home purchase loan under § 1003.2(j), or a refinancing under § 1003.2(p):
iii. A closed-end mortgage loan or an open-end line of credit whose funds will be used primarily for business or commercial purposes other than home purchase, home improvement, or refinancing, even if the loan or line of credit is cross-collateralized by a covered loan.


The above citation says that the definition found in Regulation Z is used to determine if a loan is for business or commercial purpose.

A loan that is determined to be for Business Purpose under Regulation Z, that is secured by a dwelling, is NOT reportable for HMDA UNLESS the purpose is home purchase, home improvement or the refinance of a dwelling-secured loan. A loan for cash out, where the cash-out is not used for a HMDA purpose (purchase/improve/refinance) is NOT reportable at all….regardless of if the loan is to an entity or to an individual.

A loan that is determined to be for a Consumer Purpose under Regulation Z, that is secured by a dwelling, and is for cash-out where the cash-out is not used for a HMDA purpose (purchase/improve/refinance), is reported as “other” purpose.

So the regulation, in no way, says that a cash-out loan, secured by a dwelling, and made to an individual is a consumer purpose loan. Because that loan would NOT be consumer purpose under Regulation Z.

Here is what Regulation Z states regarding consumer purpose.

TRUTH IN LENDING ACT 1026.2 Definitions

(12) Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.
Commentary
2(a)(12) Consumer Credit
1. Primary purpose. There is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, nor for what constitutes the primary purpose. (See, however, the discussion of business purposes in the commentary to § 1026.3(a).)
3(a) Business, Commercial, Agricultural, or Organizational Credit
1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.
3. Factors. In determining whether credit to finance an acquisition—such as securities, antiques, or art—is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered:
i. General. A. The relationship of the borrower's primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
B. 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.
C. 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.
D. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
E. The borrower's statement of purpose for the loan.

FWIW - The loan is not to purchase rental property. The loan is to replenish personal funds. The fact that they previously used their own funds to purchase rental property is not even relevant, as it has nothing to do with this transaction. Unless the funds are stated to be used for a future business purpose, I would classify it as a loan for personal purposes.

I agree with Randy. I'll add this: IMO, "replenishing funds" isn't a real loan purpose. It's the equivalent to me of saying "I'd like a loan for $250,000 because i like to have a lot of money sitting in my checking account". I think the question should always be asked....."i understand you want to replenish funds....but for what purpose? Future investment real estate purchases? Expected maintenance of your rental pool?" I mean, facts can vary from customer to customer....maybe it's an established business account that is always used for the purposes i mentioned....but if it's to replenish funds for a personal account that has mixed consumer and business transactions, i think the question needs to be asked.

Thanks Randy....and that's a great point, raitchjay. I guess I have trouble seeing the difference between the bank directly financing the purchase and the borrower, buying a house under a quick sale...no time to go through the mortgage loan steps, and then reimbursing him/herself.....being considered differently....regardless of where the borrower obtained the cash funds.

So if the borrower's stated purpose is "replenish my funds so that I'll have money for future investments," might THAT be considered a business purpose?

The borrower might have all of his/her funds in one bucket...not some special "business" account for investments in SFRs.

I would rely on their statement, yes. And if that's what they said, i wouldn't have an issue with exempting as business purpose. Honestly, there's no incentive for a borrower to have a loan treated as business purpose vs. consumer purpose...if anything, they should be more incentivized to have it treated as consumer purpose.

There is no brightline test on this one. It is all about risk for the lender.

3(a) Business, Commercial, Agricultural, or Organizational Credit
1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.

"there's no incentive for a borrower to have a loan treated as business purpose vs. consumer purpose"

That is true, but the risk is on the lender and not the borrower if they later claim that it was a consumer purpose loan.

iii. Consumer-purpose examples. Examples of consumer-purpose credit include:

C. A personal account used occasionally for business purposes.

Even a previous business purpose loan can change into a consumer purpose loan:

6. Business credit later refinanced. Business-purpose credit that is exempt from the regulation may later be rewritten for consumer purposes.

Randy, you're my guy on stuff, so you know this is just a question, but....if the borrower states the loan is for a purpose that meets the business purpose exemptions in Reg. Z and later comes back and says it was for a consumer purpose, hasn't the borrower just admitted to mortgage fraud? Just curious. I get where you're coming from on risk, yes.

Well, if I got a statement like "replenish my funds so that I'll have money for future investments", which means nothing to me regulatory wise as the word "investment" never appears in 1026.3, so it is not something I would hang my hat on.

I am not saying that the specifics facts of this specific situation (since we only know what has been said in a couple of sentences and have no history or financial information on the specific customer or transaction in question) results in a consumer or business purpose, but the entire risk of getting it correct lies with the lender.

It is not a slam dunk one-way or the other.

I get it. I don't like the word "investment" much either, and i should have clarified above. You're right.....that phrase is sort of vague. If the borrower said "i plan to buy more non-owner occupied rent homes"....that would be a lot easier to justify.