QUESTION
We hear a lot about consumer purpose versus
business purpose loans. Our particular interest is in wanting to know about the “rental property rule.” So, what is the “rental property
rule” and what is its effect on consumer purpose loans?
ANSWER
Use the Truth in Lending Act’s Regulation Z to
determine whether a loan is for a consumer purpose or a business purpose. In
making this determination, you need to be familiar with the Regulation Z
commentary to 12 CFR 1026.3(a). The commentary lists a number of general
factors you should use in determining whether a loan is a consumer-purpose or
business-purpose loan.
In addition, the comments provide specific
guidance regarding rental property.
Here are some guidelines for the rental property
rule:
· 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 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:
o
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.
o
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.
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 necessary. The 14-day rule is used as a general guide. However, keep in mind that other factors also may affect the determination of whether a loan is for business purposes.
Jonathan Foxx
Managing Director
Lenders Compliance Group
