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Question & Answer
Question: We have a customer who wants to refinance their mortgage with us and take out additional money. The reason they want the additional money is for start-up money for a business. If the original loan has a balance of $83,000 and the customer wants to refinance for $155,000 (the equity in the home will support this amount), what kind of loan is it? Is this a business-purpose loan or a consumer loan? The existing mortgage is clearly a consumer loan.
Answer: There are two possible answers here. Which one you choose should depend on the willingness of your bank to take risk. First, let's look at the consequences. If a refinanced mortgage loan is for consumer purposes, it is subject to Regulation Z, including rescission. If it is a business purpose loan, it is exempt from Regulation Z with the happy result that there are no disclosures required and no rescission.
No matter how you look at this, the customer still owes $83,000 on his/her mortgage. So this amount remains consumer purpose. It would clearly be a consumer loan if the customer took out a second trust for the business start-up funds and left the original mortgage in place.
But that additional amount is for business purposes. That should take that part out of Regulation Z. It would be exempt if it were a second trust with a business purpose. So you really have a mixed purpose loan.
If the loan is subject to Regulation Z, there are the two issues of disclosures and rescission. Let's assume the loan is subject to Regulation Z. What does rescission amount to? The existing debt of $83,000 cannot be rescinded - they already owe it. In a refinance with the same lender, the only amount that can be rescinded is the additional take-out. Here, however, that additional money is dedicated to business. So you could argue that this customer doesn't have any right to rescind. That is one possible answer. However, we don't recommend it.
Remember what all of these regulations are for - consumer protection. So when you are faced with a murky situation such as this, we recommend that you come down on the side of consumer protection. That way, you are always safest - at least you are if you did the disclosures correctly!
So, our recommendation is that you treat this as a covered loan - all of it. Give the customer the TIL disclosures for the full refinanced loan amount and the right to rescind for the additional $72,000 that is being taken out. It is the safest way to go.
Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 15, 11/98
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