I ran into an interesting situation the other day and I'd like to get your take. Here are the details:

1. Borrower approaches institution with an interest in financing their 3-unit resi. investment property. Proposed collateral is owned by the individual (i.e. not owned by a business entity). Various loan options are discussed, all of which are commercial in nature.

2. Borrower selects one of the commercial loan options discussed (i.e. a commercial R/E term loan) and applies for the financing by completing the institution's Business Loan Application. A Resi. Loan Application is NOT completed.

3. Underwriting is completed from a commercial loan perspective. Loan narrative submitted to supervisor for approval.

4. Supervisor (agitated) indicates the loan is disclosable as it's a 3-unit resi. property owned by an individual. Supervisor supports their case by stating the property, by definition, is "residential" as a result of the fact it is 4-units or less. Supervisor notes the situation is compounded as residential disclosure did not occur within the 3-day disclosure window.

Is the institution in violation of disclosure laws?

My answer is "No" as there is clear and conscise documentation supporting the applicant's desire to seek commercial financing on their 3-unit resi. investment property. The applicant did NOT apply for resi. investment financing as (case in point) a Resi. Loan Application was not filled-out and, therefore, disclosure laws do not come into play.

I suspect the answer (above) changes if the "residential" definition test holds water. Not sure.

What say ye?

Does the borrower herself/himself live in the property?

And if the answer to Sage's question is "no", are the units for rental purposes?

The answer to Sage's question --- No, the property is not (and will not be) the individual's residence.

The answer to RR Joker's question --- Yes, all of the units will be used for rental purposes. They will be rented to unrelated 3rd parties. No businesses.

then you have a bonafide business purpose and no RESPA, Reg Z disclosure requirements.

(my answer may have been different if it was for "investment" purpose, like resale...but rental property is excluded by definition)

The regulatory cite to support RRJ's response will be found in the Commentary to Reg Z at 226.3(a)(3).

Your supervisor's reasoning as to the definition of "residential" is correct... as it is a 1-4 family residential property and should be coded that way as opposed to commercial property. However, the assumption that any and all "residences" require disclosures is inaccurate. Even if the property was a single-family residence owned by an individual, the fact that it is a rental property excludes it from the "consumer" disclosure requirements.

I am not sure about everyone else, but we have a coding system to break down all code 1C2A's for the call report among owner-occupied, rental, etc. to clarify this on our system.