The original loan was commercial to purchase investment property. Now the loan has been refinanced. The customer put on the application that he/she was refinancing their primary residence. So the collateral is now the primary residence and not investment property.

This refinancing did not include new money. Just a straight refinance. Would you have kept it as a commercial loan with the purpose to refinance investment property with no disclosures?

Absolutely not. This falls into the business purpose loan later refinanced for a consumer purpose category discussed in the Commentary to 1026.3.

I have to say that it doesn't even make sense to handle a loan in this way. Why mix and match this way?

Does it make any difference that the original loan was with our insititution and it was refinanced (we don't do renewals, we always get new notes) because the original loan matured?

The argument that I am presented with is that the original purpose of the loan did not change-the funds were for the purchase of investment property, just the use of the collateral has changed.

I feel like refinancing is a purpose. If that purpose is to refinance a loan secured by your personal residence, it is now a consumer purpose loan.

What if the original loan was for the purpose of purchase business inventory secured by the investment property. Now the loan is refinanced and the customer indicates that the collateral is now personal property? I feel like this is still a commercial loan since the purpose was not tied to the collateral but rather to a business purpose.

They also used the following:

Converting Balloon Loan to Business Loan
Answer by Kathleen Blanchard and Dan Persfull, BOL Guru
Guru Bio

Question: A balloon loan is made for consumer purpose on a primary residence. The loan matures and is subject to renewal. The customer states that the home is now a rental property. Can this loan now be converted to a business loan?

Answer by Kathleen Blanchard: You should review the commentary to Regulation Z, under exempt transactions, for the examples of business purpose credit to make a determination. This is the standard used for such a decision.

Answer by Dan Persfull: One-to-four non owner occupied rental property is exempt as a business purpose loan if the loan is for the acquisition, improvement or maintenance of the property.

The renewal of the balloon payment does not fall within one of those categories. You are simply renewing a consumer purpose loan that is now secured by a business asset.

They are using this reasoning in the reverse. The original purpose didn't change, just the use of the collateral.

One more question...If an original loan is to purchase rental property and it is being refinanced because the loan has matured. The collateral use has not changed. Is it still commercial purpose? Its no longer to acquire, improve or maintain the rental.

I'll revive this one.

Pretty much the same scenario. Commercial loan to purchase and rehab a home. Now the loan is up for RENEWAL and the customer is living in the home, while using it as a model for clients.

In this case, the loan will be renewed, no new money. As a renewal, does the change in occupancy affect anything? I'm thinking that I avoid ATR rules since the loan is a renewal.

Your input please.

Up to the top it goes.

4. Non-owner-occupied rental property. 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.

Please explain how refinancing a debt that is now secured by owner occupied property falls within one of the underlined categories.

BTW a "renewal" is not automatically exempt from Reg. Z. Modifications are exempt but if the renewal note satisfies and replaces the existing note then it's a refinancing regardless what the FI calls it.

Dan, thank you for your reply. The renewal is the catch. While I believe it would be prudent to refinance this, as it is now clearly owner occupied and not business purpose as originally written, the lender is wanting to RENEW (and by that term I mean to extend the maturity date with no new money and without satisfying and replacing the existing obligation).

To that point, would this pure renewal avoid all of the Reg Z requirements?

I suppose it would be nice to have it classified properly now as a consumer purpose loan, but other than that I don't really see the point in refinancing a loan for the sake of refinancing a loan.

We treat all renewals as refinancings. To do what your loan officer is wanting to do we would require a modification agreement to be utilized, however for us the use of a modification agreement is rare.

Modifications are not refinancings thus new disclosures would not be needed.

I am reviving this old topic because we have a similar situation.
Loan maturity date is approaching. We learned that the borrower is now living in the investment property.
Lender would like to do a modification agreement to extend the date. No new money.
Thoughts?

I am arguing both sides of this with myself. With a modification agreement, we are modifying the existing commercial note, which, at the date of application was properly secured with an investment property. ? What to do?

In what context?

Disregard - the loan has matured; I'm treating it as a refinancing consumer purpose.

QCL, just to respond as to how I handle this situation. If it's done by modification, we leave it as it is...a modification of the original [commercial] note.

If we refinance it, I change it to consumer purpose [as you are doing] and give ROR since it's now technically ALL new money.

Assuming that this current revival of an old thread still focuses on compliance with Regulation Z, in a case like this, I'd back up and look at the original borrower and purpose. If the borrower was and continues to be a natural person (and not a company other entity), "investment property" wasn't enough to get you an exemption in the original loan. In any case where you discover previously undetected past violations--especially an improper exemption--it's smart to use the present transaction as an excuse to get a clean and compliant TIL disclosure in the file--even if you aren't required to provide one.