QUESTION
The CFPB says the TRID rules apply to closed-end consumer transaction
secured by real estate. If a customer purchases a 1-4 family dwelling for
business investment purposes, does TRID or Regulation Z apply; and, more
generally, how does TRID or Regulation Z apply to rental property financing?
ANSWER
Presumably, if this property will not be owner-occupied property, then
TRID would likely not apply. Whether this is a TRID or non-TRID transaction, one
should keep in mind that any transaction that is for a business/investment
purpose is not subject to Regulation Z. [12 CFR 1026.3(a)]
Contrary to some of the guidance we have seen emanating from the CFPB,
the Regulation Z Commentary sets forth some clear guidelines for determining
loan purpose, where rental property is involved. The guidance turns on whether
or not the rental property will be owner-occupied as well as the number of
units involved.
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 purposes. [Section 1026.3(a) – Comment 4] This
includes, for example, the acquisition of a warehouse that will be leased or a
single-family house that will be rented to another person to live in.
If the owner expects to occupy the property for more than 14 days
during the coming year, the property cannot be considered non-owner-occupied
and this special rule will not apply. For example, a beach house that the owner
will occupy for a month in the coming summer and rent out the rest of the year
is owner-occupied and is not governed by this special rule. [See Comment
3(a)-5, however, for rules relating to owner-occupied rental property.]
Section 1026.3(a) – Comment 5 addresses owner occupied rental property
and states that if credit is extended to acquire, improve, or maintain rental
property that is or will be owner-occupied within the coming year, different
rules apply:
- Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units; and
- Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units.
As this statute defines dwelling to include 1 to 4 housing units, the
right of rescission applies to credit extended for purposes other than
acquisition. Neither of these rules means that an extension of credit for
property containing fewer than the requisite number of units is necessarily
consumer credit. In such cases, the determination of whether it is business or
consumer credit should be made by considering the factors listed in comment
3(a)-3.
To make your loan purpose determination, be sure to question the
borrower’s occupancy intentions. In addition, be sure to verify whether the
loan proceeds will be used to acquire the rental property or to make
improvements.
Michael Goldhirsh
Executive Director/Vendors Compliance Group
& Director/Legal & Regulatory Compliance
Lenders Compliance Group
