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#1384257 - 04/30/10 03:08 PM
RESPA exemption
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Gold Star
Joined: Aug 2004
Posts: 394
oklahoma
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Customer is refinacing a rental property loan (current balance $ 60,000.00) and adding $ 7,500.00 new money to replace air conditioner unit in the borrowers primary residence.
Loan officer says this is exempt form RESPA because the majority of the loan will be commercial purpose. I say it is subject to RESPA because the only new funds are going for consumer purpose.
Who is correct?
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#1384268 - 04/30/10 03:20 PM
Re: RESPA exemption
parr04
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Joined: Apr 2010
Posts: 90
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In my opinion this transaction would be exempt from RESPA as a commercial loan. With $67,500 the new balance, and $60,000 the old balance I would say that even the $7,500 is a commercial purpose loan as it sounds like it is to the entity and not the borrowers. I may not be understanding this correclty but this is how I read it.
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#1384297 - 04/30/10 03:47 PM
Re: RESPA exemption
BankingNut
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Bloomington, IN
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Reg Z only exempts the acquisition, maintenance or rehabilitation of non-owner occupied rental property. See the Commentary to 226.3.
RESPA only exempts business purpose loans as described in 226.3(a)(1). See 3500.5.
The purpose of this loan does not fall within any of those categories.
This is a consumer purpose loan.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.
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#1384316 - 04/30/10 03:57 PM
Re: RESPA exemption
David Dickinson
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I don't see where an "entity" is involved here. Also, RESPA doesn't exempt business entities, it is entirely purpose driven, so be aware that you could have a loan that's RESPA, but exempt from Z.
Keep in mind that rental property is only considered business purpose if it's for the purchase, improvements or to maintain the property. I never really thought about it, but I guess refinancing the loan would fall under the definition "maintain".
If, for instance, the borrower wanted to use his rental property to borrow the $7500 for his personal residence, you would have a personal purpose and disclosures would be required.
Because of this, you ask a very good question. Without the "50%" rule, you would have a disclosable loan, IMO.
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My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384320 - 04/30/10 03:59 PM
Re: RESPA exemption
RR Joker
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And see there...here I am questioning it...and the only positive thought is the 50% rule and perhaps maintain would be refinance...and Dan has overruled and written exactly what my mind wanted to say on my first thoughts on the matter!
Ugh!
It makes me wonder why refinance isn't mentioned in the purchase, improve, maintain section! So...how do you justify a refinance, if not by "maintain"?
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My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384325 - 04/30/10 04:02 PM
Re: RESPA exemption
RR Joker
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Joined: Apr 2010
Posts: 90
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I disagree under the context that I think both parts (or the whole amount is commercial purpose). The borrower is not the renter.
Reg Z: (12) Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.
Last edited by BankingNut; 04/30/10 04:03 PM.
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#1384338 - 04/30/10 04:17 PM
Re: RESPA exemption
BankingNut
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Bloomington, IN
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You need to read further in 226.2 the definition of a consumer. The borrower is a natural person therefore they are a consumer.
RRJ, a no cash out refi of a NOO rental property would still be exempt as a business purpose loan assuming it qualified as a business purpose loan on the NOO rental property to begin with, however any new money advanced would have to fall under the acquisition, maintenance or rehabilitation category for it to be exempt.
Acquisition - purchase.
Maintenance - upkeep of the property such as painting the walls or exterior.
Rehabilitation - repairs, remodeling.
The $7500 advanced is for the home improvement of the borrower's primary residence, it is not for the acquisition, maintenance or rehabilitation of rental property.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.
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#1384413 - 04/30/10 05:33 PM
Re: RESPA exemption
Dan Persfull
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Please help me understand your logic, as I may be misinterpreting this. Below I have included the Reg. Z definition of consumer. Because this is a rental property I believe that the borrower does not qualify as a consumer. Under the sole proprietorship scenario (which I do not know if this is), this may apply but IMO it does not.
(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.
(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.
I also believe this is not consumer credit either. In the original post it says that the funds are to purchase (replace) an air conditioning unit. Thus the previous one was damaged and "repaired". This further supports that it is exempt to me.
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#1384440 - 04/30/10 05:51 PM
Re: RESPA exemption
Dan Persfull
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You need to read further in 226.2 the definition of a consumer. The borrower is a natural person therefore they are a consumer.
RRJ, a no cash out refi of a NOO rental property would still be exempt as a business purpose loan assuming it qualified as a business purpose loan on the NOO rental property to begin with, however any new money advanced would have to fall under the acquisition, maintenance or rehabilitation category for it to be exempt.
Acquisition - purchase.
Maintenance - upkeep of the property such as painting the walls or exterior.
Rehabilitation - repairs, remodeling.
The $7500 advanced is for the home improvement of the borrower's primary residence, it is not for the acquisition, maintenance or rehabilitation of rental property. Thanks, Dan...I got warped up there for a minute on other possiblities for the meaning of "maintenance".  As in ...maintain the property (keep = loan) so really, maintain is just another word for improvements in a way. See I was going to say what you did, but David agreed and I was trying to reason how that could be... I do know that in our shop...we would look at the current purpose (improve OO home) and even tho they included a refi of the current debt on the rental...would consider it personal purpose and disclose it.
_________________________
My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384449 - 04/30/10 05:56 PM
Re: RESPA exemption
BankingNut
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Please help me understand your logic, as I may be misinterpreting this. Below I have included the Reg. Z definition of consumer. Because this is a rental property I believe that the borrower does not qualify as a consumer. Under the sole proprietorship scenario (which I do not know if this is), this may apply but IMO it does not. The borrower is a natural person which is a consumer if the loan is for a personal purpose.
(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest. Will not apply because the lien is not taken on their primary residence
(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.
I also believe this is not consumer credit either. In the original post it says that the funds are to purchase (replace) an air conditioning unit. Thus the previous one was damaged and "repaired". This further supports that it is exempt to me. The air conditioner being replaced is on thier PRIMARY residence, not the rental property
Herein lies your entire problem with this being considered "business purpose" . Had the A/C unit been for rental property, you'd have an "improvement" situation or "maintainence" situation and it would be exempt.
_________________________
My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384452 - 04/30/10 05:58 PM
Re: RESPA exemption
RR Joker
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I think the LO is just confusing this with how we sometimes look at combining a business debt with a personal debt and heaviest weighted one wins. Rental property is just a beast of it's own with it's limited exemption circumstances.
_________________________
My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384473 - 04/30/10 06:04 PM
Re: RESPA exemption
RR Joker
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Joined: Apr 2010
Posts: 90
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The customer is refinancing a rental property. Making them an entity. They are either a sole proprietor or a corp. etc. Under the definition of custmoer (as was the term used in the original post) that could be consumer or commercial. I am assuming commercial. Thus not a natural person. Even if you are considering a sole proprietor to be a natural person I do not. RESPA tells you to go to Reg. Z to find consumer vs commercial and Reg. Z lists what I stated.
RR you quoted (or highlighted) a definition of rescission. That is a seperate issue.
There are specific rules to determine whether consumer or commercial in the commentary under 226.3. I would just normally consider this commercial purpose.
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#1384496 - 04/30/10 06:19 PM
Re: RESPA exemption
BankingNut
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Joined: Aug 2004
Posts: 394
oklahoma
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Thanks for the comments. I will draw a line in the sand and say this is a consumer purpose loan and will be subject to RESPA and HMDA.
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#1384526 - 04/30/10 06:44 PM
Re: RESPA exemption
BankingNut
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The customer is refinancing a rental property. Making them an entity. They are either a sole proprietor or a corp. etc. Under the definition of custmoer (as was the term used in the original post) that could be consumer or commercial. I am assuming commercial. Thus not a natural person. Even if you are considering a sole proprietor to be a natural person I do not. RESPA tells you to go to Reg. Z to find consumer vs commercial and Reg. Z lists what I stated.
RR you quoted (or highlighted) a definition of rescission. That is a seperate issue.
There are specific rules to determine whether consumer or commercial in the commentary under 226.3. I would just normally consider this commercial purpose. Natural person + consumer purpose = consumer purpose loan. Business entity + consumer purpose = exempt from Reg Z, but not from RESPA (if falling under RESPA loan) Highlighted section pertaining to RoR - I stated this would not be rescindable because it was not the natural persons primary residence taken as collateral.
_________________________
My opinion only. Not legal advice.
Say you'll haunt me - Stone Sour
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#1384536 - 04/30/10 06:54 PM
Re: RESPA exemption
RR Joker
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Bloomington, IN
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BankingNut - Reg Z is purpose driven. Regardless what the collateral is the loan is subject to Reg Z if the purpose is for a personal, family or household use unless it meets one of the exemptions outlined in 226.3 and its Commentary.
A sole proprietor is an individual. They are not a business entity. Any loan made to a sole proprietorship is made to a natural person so the loan is only exempt if it is for a business purpose or meets one of the other 226.3 exemptions.
You are correct in the purpose of the loan was to purchase an AC unit. However if you re-read the original post the AC unit is for the borrower's primary residence, not for the rental unit.
There is no way, IMO, that this is a business purpose loan under Reg Z or RESPA.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.
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#1384775 - 05/02/10 01:37 AM
Re: RESPA exemption
Truffle Royale
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Central City, NE
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I missed the part about an entity in BankingNuts post. I don't think there is any entity involved. However, I still believe this a business purpose loan. It is amazing to me that there is even any debate about this.
Reg Z:
The Commentary to 226.3(a) #6. states (emphasis added) Business credit later refinanced. Business-purpose credit that is exempt from the regulation may later be rewritten for consumer purposes. Such a transaction is consumer credit requiring disclosures only if the existing obligation is satisfied and replaced by a new obligation made for consumer purposes undertaken by the same obligor.
1. I think we all agree the first loan of $60,000 is exempt as a business purpose loan. Now it is being refinanced with a small amount of consumer purpose proceeds. This Commentary makes it clear that it COULD become rewritten for consumer purposes, but doesn't necessarily have to be. The loan is for a majority of business purpose funds.
2. It makes no sense to say the purchase of a rental is exempt but when you refinance this loan it is now a consumer purpose. Comment #4 to 226.3(a) states:
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.
The refinancing loan is still financing the acquisition. If you disagree, then you'd have an infinite number of loans that were not disclosed and then later were. What would be the FRB's purpose in that?
RESPA:
3500.5(b)(2) states:
Business purpose loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by Regulation Z, 12 CFR 226.3(a)(1). Persons may rely on Regulation Z in determining whether the exemption applies.
Since this loan is exempt from Reg Z, it is exempt from RESPA.
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#1384836 - 05/03/10 01:41 PM
Re: RESPA exemption
Bville
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Bloomington, IN
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I do not. Show me where the refinancing, with the cash out for home improvement to the borrower's primary residence is for a the acquisition, maintenance or rehabilitation of the NOO rental property.
The primary purpose of refinancing was to get money for a personal/household reason not for refinancing the NOO rental property. The NOO rental property was just offered as security in place of the primary residence. That does not make it a business purpose loan.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.
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#1384883 - 05/03/10 02:51 PM
Re: RESPA exemption
David Dickinson
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Bloomington, IN
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See my post #1384338 in this thread.
If they provided the $7500 and secured it with a subordinate lien on the NOO rental property would you still consider it a business purpose loan?
Also, where in Reg Z or RESPA is a 50/50 rule identified or implied.
The wording is "primarily" for a specific purpose. IMO the above was "primarily" refinanced in order to obtain funds for a persona/household purpose.
The only time I use the 50/50 rule is if there is some question as to the primary use of the funds, in this case there is no question in my mind this is a refinancing for a consumer purpose.
Now if they took out $15,000 and used $7500 for the NOO rental property and $7500 for the primary residence then more than likely I would agree with the business purpose as a portion of the funds were also used for the acquisition, maintenance or rehabilitation of the NOO rental property.
I am going to be gone for several hours so I may not get a chance to get back in the threads until later this afternoon or tomorrow.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.
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#1384888 - 05/03/10 02:57 PM
Re: RESPA exemption
Dan Persfull
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Good discussion Dan. I think the "primary" rule is absolutely in Reg Z (and therefore, in RESPA as RESPA looks to Reg Z for application).
Consumer credit means credit offered or extended to a consumer primarily for personal, family or household purposes. [§226.2(a)(12)]
The Commentary to §226.3(a) #1 & #2:
[i]1. Primary purposes:
A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.
2. Factors:
In determining whether credit to finance an acquisition-such as securities, antiques, or art-is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered:
a. Relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
b. Degree of management – the degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
c. Ratio of income from the acquisition to the total income of the borrower.
d. Size of the transaction. The larger the transaction, the more likely it is to be business purpose.
e. Statement of purpose for the loan. [i]
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