I am often asked how to determine whether
a loan is for a consumer purpose or a business purpose. This is a relatively
common inquiry, given that most of our clients are residential mortgage lenders
and seek to comply with Regulation Z (Truth in Lending) for the applicable
definitions.
In
making this determination, you need to be familiar with the Regulation Z
commentary to 12 CFR 1026.3(a).
These
comments list a number of general factors you should use in determining whether
a loan is a consumer-purpose or business-purpose loan.
Furthermore,
the commentary provides specific guidance regarding rental property.
For
instance, here are some rental property guidelines:
- If the proceeds of a loan are to be used to acquire, improve, or maintain rental property, and the borrower expects to occupy the property for 14 days or less in the coming year, the loan is considered to be for nonowner-occupied property and, therefore, is a business-purpose loan.
- If the borrower will occupy the property for more than 14 days in the coming year, the loan is considered to be for owner-occupied property, and the rental property rule would not apply. In this case, there are some additional guidelines to follow:
-If the proceeds of a loan are to be used to acquire, improve, or maintain rental property, and the borrower expects to occupy the property for 14 days or less in the coming year, the loan is considered to be for non-owner-occupied property and, therefore, is a business-purpose loan.
-If the purpose of the loan is to improve or maintain the property, the loan is a business-purpose loan if the property contains more than four housing units.
But be cautious!
A property that contains fewer than the required number of units under a particular test might still be a business-purpose loan based on the general factors used to determine business purpose, which is why familiarity with the commentary is really necessary. The 14-day rule is used as a general guide.
A property that contains fewer than the required number of units under a particular test might still be a business-purpose loan based on the general factors used to determine business purpose, which is why familiarity with the commentary is really necessary. The 14-day rule is used as a general guide.
However, you need to keep in mind that other factors also may affect the determination of whether a loan is for business purposes.
