Came across a loan as we were doing our HMDA review and the purpose of the loan was to purchase a house near the river. The lender set it up as a commercial loan but his loan memo stated that the borrowers (husband and wife) were going to use the property as a second home but then it also states that they are going to do improvements and then try to resell it. I further questioned the lender who told me that he believed the initial intent was to purchase the property, make the improvements and then sell it. But he said the borrower told him that if the market was not there and the property did not sell they would use it for their personal benefit until they could sell it. I'm not really sure about this one whether or not it is consumer or commercial. Since the lender stated that he believed the intent was to improve the dwelling and then sell it makes me think we should just leave it as a commercial loan. But would appreciate other thoughts on this.

Unless this borrower is in the business of buying and selling homes it sounds like a personal real estate investment loan, therefore making it subject to applicable consumer disclosures.

From the HMDA-angle, was it structured on a Temporary" basis? You could maybe get out of reporting it on your HMDA-LAR. If it is not structured as a temporary loan, I believe you have a HMDA-purchase.

Good luck.

Dan - could you clarify? We have a good number of individuals who purchase rental property for investment. They buy the house, fix it up and sell it. Our bank has considered these business purpose loans and they are set up as "commercial" loans. In some cases the individuals are not "in the business".....if these are consumer loans I am very concerned. I went back and re-read the OSC Reg Z 226.3(a)(3) and it states that "Credit extended to acquire, improve or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purpose." It does go on to state about occupying the property for more than 14 days which may then be considered owner-occupied. Do you have anything different from this? Thank you.

There's a difference between investment property and rental property. Reg. Z specifically exempts non-owner occupied rental property and outlines exemptions for owner-occupied rental property.

Buying a house to renovate and resell is not purchasing rental property, it is purchasing a personal investment property.

To further complicates things, if the house does not sell and they refinance it in order to rent the house, IMO, it still would not meet the rental property exemption. The new loan is not for the purchase, maintenance or rehabilitation of rental property, it is a refinance of a personal investment loan to be secured by what now will become rental property.

I don't disagree and that's why I am having some concern about this specific loan since it is not rental property and in looking at the factors to consider in Reg Z, I don't see if falling under those guidelines. The other concern I have about this is that the loan was closed back in July. The loan is not temporary financing so we can't remove it from the LAR. So if it were to be changed from commercial to consumer would you have the lender redo the loan or just provide the required disclosures and change it on the loan system from commercial to consumer? The lender has indicated he will do what is necessary I'm just not sure what that is......

You're better off disclosing appropriately than leaving it be. I would agree with Dan in all other comments he's made. But since he hasn't answered I'll just throw my two cents in. This is an area that many banks struggle with and an area that can cost you quite a bit more than the little issues with a bad HMDA filing.

The costs of not disclosing the rest of those nasty regs can be much worse than a little error on HMDA (though of course if you know that's seriously in error you're in trouble too) they get you coming and going! WHen it comes to fines and penalties though, you'll always be beat up more when the client is affected (those other nasty regs) than when the HMDA LAR is off. They have a tollerance level of 5% or so (it gets complicated but keep that figure in your head). If you have only one bad deal that didn't make the LAR, don't worry yourself, but DO worry about the other disclosures/regs you didn't follow on this client. They will come back to haunt you if you don't fix them now.

I'm posting anonymously in order not to disclose the fact that we've never paid any attention to whether or not a property is rented out or just purchased for resale for the purpose of making money. Knock on wood, no examiner has EVER found one, or if they did, did not comment on it. I don't think we have but a scattering of loans for which the borrower is making a personal investment in residential real estate for the purpose of resale. Loan officers tend to label all non-owner occupied dwellings as "investment" property. Rental properties ARE investments. I totally agree with the concept of "investment" .vs. "rental" and the fact that different regs apply.

Another typical example of this is evident in a loan to purchase stock. Lenders almost always want to label these loans as "business" loans, when the loans are really personal investments subject to Regulation Z. Some officers even try to label loans to pay income tax as business loans. This usually occurs when a borrower does business under a DBA or trade name, but the tax return is still the borrower's personal return and thus a consumer loan subject to Regulation Z. The final error we find, here in an agriculture-centered environment, is that when a "show animal" is purchased for a kid's FFA (Future Farmers of America) project, the lender wants to label it as a small farm loan. Many times the loan is in the parents' names (who may be farmers or ranchers), but the loan is still a consumer loan secured by consumer goods. We have the above-mentioned scenarios under control. I guess I'll have to tackle the investment real estate problem this year. I may be going up against a brick wall made up of lenders who think they are above "consumer" lending and whose customers think they are "businesses." That's soooo much more prestigious.

Has anyone out there ever been "caught" and cited by examiners for failing to observe the proper regs for personal real estate investments? It may be a matter of weighing the risks and carrying on business as ususal. It's really hard to push through a change when we've doing it the wrong way from day one, without thought and without citation.

Any further comments on this issue would be appreciated. I will need ammunition.

I am really glad to see that someone else has addressed the issue of the purchase of stock as a personal investment. We have this same issue but where told that they would be set up as business or commercial loans and not consumer loans. But so far no one has questioned this. I am the Anon with the situation above and I'm trying to get some guidance on the proper thing to do. The bank may want to risk it since this is the only loan I've come across like this (recently). We are expecting a compliance exam this quarter and since it appears on our HMDA LAR, the examiner could choose it for their sample (or not).

You could weigh the risk and decide to do nothing on this loan. The fact it is 7 months old, and the statute of limitation is 1 year, you may want to ride out the remaining 5 months.

As far a having always done it this way, and we have never been caught, so we'll keep doing it is a risky decision. It only takes the first time getting caught that can and will cause you a lot of head aches and possibly a lot of money.

The Official Staff Commentary (OSC) to Reg. Z’s 226.3(a) (1) says the creditor must in each case determine if the request is for a consumer or business purpose. This simply means it is the loan officer’s (bank’s) responsibility to determine if the loan is actually for a consumer/personal or a business/commercial purpose through interviewing the loan applicant and determining the actual use of the loan proceeds.

If it is unclear if the actual purpose of the loan request is consumer or business, the Reg. allows the loan officer (bank) to disclose as a consumer purpose loan, or to use the factors listed in the OSC to 226.3(a) (2). It is important to point out, in my opinion, the last test, the borrower’s statement of purpose for the loan, should never be used as the sole determining factor.

When in doubt, DISCLOSE.

We've had loans to purchase stock show up in our data integrity exam. I hadn't caught it because it didn't make an audit, and it had a code on it which would reflect that it wasn't what it was (lenders get sneaky that way on occasion). It, rightly, was changed to a consumer loan and all disclosures applied.

Before my time, the loans to pay taxes came up, as well as the "personal investment" in property. We were critized for allowing the loans to be booked as small business. Especially those nifty deals to doctors for their spec homes We now book these consumer. The exam where these were noted was quite a bit before my time...mid 90's I believe so I can't help much on the day to day issues, except to say they didn't fly

On those ag deals to the farmers kids. What do you think happens to that cow or chicken or whatever eventually? I've been a farmers daughter. I might have won a red ribbon at the fair, but Bessie was still dinner eventually. I think it's ok to label them ag loans. I wouldn't critize my lenders for doing so.

Dawnie, I see your point, but the problem with this is that you cannot assume that every FFA project participant is a farmer's or rancher's offspring and that the animal will end up as part of that farmer's or rancher's sales. The purpose of the loan is to finance a school project that just happens to be an ag-type project so the loan is secured by consumer goods which happen to be livestock. A loan to a person who is not a farmer or rancher, for one head of livestock, which is later sold, should not be classified as a small farm loan.

Wait now...who did they sell it to? It was at one point a piece of livestock being fattened for market right? Didn't matter if it's in the back yard of my townhouse or not, it still ends up being fattened for sale....???

You’re right J We’re both probably ok, but let me share where I’m getting my idea:

Call Report Guidelines (the final word on what we use for CRA reporting)

“Loans to finance agricultural production and other loans to farmers: Report as appropriate loans for the purpose of financing agricultural production. Include such loans whether secured (other than by real estate) or unsecured and whether made to farm and ranch owners and operators (including tenants) or to nonfarmers.”

Then it goes on to list items to include:
Loans and advances made for the purpose of financing agricultural production, including the growing and storing of crops, the marketing or carrying of agricultural products by the growers thereof and the breeding, raising, fattening or marketing of livestock.

Sounds like a nonfarmer playing with livestock...but it is livestock

Thank you, Dawnie. I appreciate your fact-filled response. I see where you're coming from.

But what do you think about the Reg Z issue? The loan does not seem to be exempt from Reg Z based on the points made in the commentary.