Business or Consumer Loan
by Dan Persfull, BOL Guru Guru BIOS
Question: We have a construction loan for 18 months made to an individual to build a Tri-Plex. One unit will be his personal residence and the other two he will rent. The borrower already owned the property. In Reg Z 226.3 (4) it talks about owner occupied rental property and whether it is determined to be business purpose. The borrowers income is $9,000 from financial planning and an estimated $3,000 from rentals. We also have a takeout commitment from our mortgage division approving his permanent loan. Would this be considered a business purpose loan or a consumer loan?
Answer: From the Official Staff Commentary to 226.3(a)
4. Owner-occupied rental property. 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.
• Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for 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)-2.
Because the triplex contains more than two housing units, and a construction loan is an acquisition loan, I would opine you have a business loan.
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