Question & Answer

Question: We are having some difficulty determining when to give Truth in Lending disclosures to certain customers. Many of our customers have both business and personal accounts with our bank. They sometimes request loans for purposes that seem to be both business and personal. How should we decide when to provide disclosures and when it is a business loan?

Answer: To determine whether a business purpose loan is exempt from Reg Z, you must first look at the purpose of the loan. The primary purpose must meet the exemption requirement. It is not exempt if the loan is primarily for consumer purposes but will also serve, in a minor way, a business purpose. Determining the primary purpose and the business relationship is not always easy. Let's look at some examples. Suppose a customer wants a loan to finance a purchase of art for their home. The customer tells you that the art is "a good investment." This is clearly a consumer purpose loan, even though the customer called it a good investment.

What if the same customer wants a loan to finance the purchase of art for their office? Now we need to decide whether this falls within the business purpose exemption of the regulation. To do this, we look at the relationship of the customer's occupation to the acquisition, the degree to which the borrower will personally manage the acquisition, the ratio of income from the acquisition to the total income of the borrower, the size of the transaction, and the borrower's statement of purpose for the loan. Before considering the loan exempt based on business purpose, you should be sure that a majority of these business purpose relationship tests are met.

If the customer is a doctor or dentist, the art investment does not appear to meet these tests. The art is merely office decor, however good an investment, and does not contribute to the borrower's income. Moreover, once hung on the wall, it will not be "managed" by the borrower.

However, if the applicant is an art or museum consultant, the purchase of art may indeed meet the business purpose test for this customer.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96