Question: Could you provide me with some advice on whether or not to provide RESPA disclosures in the following situation? We had a business loan with a limited liability company. The loan guarantors were two couples (husband and wife). The company went through some financial troubles and defaulted on the loan. One set of guarantors filed Chapter 7, while the other couple continued to make payments on the loan and would like to restructure the loan and pay it off. The new loan (new note with new terms) would be under their names and would be secured by their current personal residence (the couple is in the process of building a second residence). The residence is vested under the couple's trust with the wife being the trustee. Does this transaction still meet the business purpose exemption?
Answer: This is a tough one because in one respect the answer depends on whether you look to the purpose of the original loan or the nature of the workout. We come down on the side of considering this exempt because it is a workout loan following a default. That being said, you should also consider the nature and vulnerability of the borrowers. It is often a good idea to provide disclosures just to cover yourself and prevent a different interpretation in the future.
Fortunately, in this situation, the debate is moot because the property is held as a family trust. The FRB has consistently taken the position that a trust is not a consumer and does not trigger Regulation Z disclosures. Arguably, since RESPA now refers to Regulation Z for the business loan exemption, this should also stretch to the trust exemption. No matter how you look at it, a trust is not a natural person as defined in Regulation X.
However, watch carefully for changes on the trust issue. There are a good many who argue that if the beneficiary of the trust is living in the house, the TIL rescission rules should apply. So stay tuned in case the FRB changes its mind.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 1, 1/05
First published on 01/01/2005