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#1462785 - 11/02/10 08:30 PM
Reg Z and investment property
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Platinum Poster
Joined: Jun 2003
Posts: 660
KY
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I'm trying to get a clearer answer to a situation that has popped up at my bank...
An Individual is purchasing a single family residence for investment purposes- not to rent, but to either rehab and sell or to straight flip. This will not be a personal residence for the borrower at any time. Does Reg Z apply? HMDA?
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#1462978 - 11/03/10 01:08 PM
Re: Reg Z and investment property
Kathleen O. Blanchard
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Bloomington, IN
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Refer to the Commentary for 226.3 and it gives several points to cover to make the determination that MS K refers to about whether it's for a business or consumer purpose.
Most likely this will be a personal investment and subject to Reg Z.
A lot of people gets tripped up on Reg Z by interpreting it to automatically exempt "investment property". Reg Z does not automatically exempt the acquisition, maintenance or rehabilitation of investment property. What Reg Z 226.3 exempts is business purpose loans, agricultural loans, loans to non-natural persons and the acquisition, maintenance or rehabilitation of 1-4 non-owner occupied rental property.
Investment property could be either for a business or personal purpose and if a personal investment it's a consumer purpose loan.
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The opinions expressed are mine and they are not to be taken as legal advice.
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#1463006 - 11/03/10 01:46 PM
Re: Reg Z and investment property
Dan Persfull
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Joined: Jun 2003
Posts: 660
KY
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Thanks guys... This helps, though the water is still so muddy... We have one camp at the bank that does believe that investment property = business purpose... we have the other that believes that individuals & investment property = consumer... I'm stuck some where in the middle (being raised in commerical lending I was brought up in the first camp, but see the sense the the second camp.) I guess the dumb question I follow up with is: If the loan is in a individual name (Joe Smith) and not a business entity... how can it be anything other than consumer purpose???
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#1463040 - 11/03/10 02:10 PM
Re: Reg Z and investment property
Brandy Osborne
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Bloomington, IN
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Investment property does not automatically = business purpose nor does a loan to an individual automatically = consumer purpose.
Does Joe buy and flip houses as a business? Does he report income (capital gains/losses) regularly on his FIT forms from this activity? Is this Joe's first investment? Is this more or less a "hobby" for Joe?
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#1463183 - 11/03/10 05:06 PM
Re: Reg Z and investment property
Live 2 Comply
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Galveston, TX
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I think this loan should be completed as a business purpose loan even if it's his principal residence at this time. And it should also be WELL documented by the loan officer on the reasoning. Am I off on this assessment?
I think that you would be hard pressed to make that argument since it currently is their primary residence.
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#1463199 - 11/03/10 05:23 PM
Re: Reg Z and investment property
rlcarey
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I agree with Randy, however, I've seen in my past life where a builder would build spec homes and often live in one while it was actively for sale and then move to another and so on and so on.
On the one hand, it serves as his PR on a termporary basis...on the other hand, it was and remains a spec home for sale.
It is a grey area and difficult to deal with.
Again, from what I remember, these loans usually were still under the construction loan phase and were not refinanced prior to sale...so that would have made a difference too. Had they not sold and were later refi'd, I believe I would have handled it as a PR loan to be on the safe side!
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1463246 - 11/03/10 06:00 PM
Re: Reg Z and investment property
RR Joker
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Bloomington, IN
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From Reg Z. 226.3 (Commentary)
6. 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.
Once the builder occupies the spec home as their primary residence the loan IMO loses it business exemption if refinanced. He is now occupying the home for a family, household or personal reason which makes it a consumer purpose.
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#1463292 - 11/03/10 06:30 PM
Re: Reg Z and investment property
Dan Persfull
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#1463369 - 11/03/10 07:22 PM
Re: Reg Z and investment property
Live 2 Comply
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Dan, it may or may not be, actually, and it won't necessarily or automatically fall into the cite above.
Where it DOES fall into that category, or what I've seen anyway, is where the business is no longer viable and the refinanced debt will be paid from other personal income.
I'm not arguing, as I said above, we'd likely disclose it as consumer, regardless...but I do not believe it will automatically become personal purpose simply because the builder lays his head there (as opposed to the HI Express) until it sells.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1463386 - 11/03/10 07:52 PM
Re: Reg Z and investment property
RR Joker
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Bloomington, IN
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Regardless what the purpose of the loan was before he is now refinancing his primary dwelling (assuming of course the home is titled in his name and not the business name) to allow him additional time to sell it and locate a new primary dwelling. How is that not a consumer purpose?
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#1463408 - 11/03/10 08:15 PM
Re: Reg Z and investment property
Dan Persfull
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I'm just saying I think there's room for argument. If the purpose remains spec home and he is an active builder (let's say sole prop) and the source of repayment is the sale of the home...you have a valid argument, IMHO. And if all that was the way it is, then it's not consumer purpose, it's still primarily a business purpose loan.
Let's also assume he has six more spec homes and if this one sells, he'll just hop into one of the other ones until it sells. I personally can't imagine living that way, but I have seen them do it!
Last edited by RR joker; 11/03/10 08:18 PM.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1463426 - 11/03/10 08:33 PM
Re: Reg Z and investment property
RR Joker
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Bloomington, IN
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Once he takes possession of the home as his primary residence how does it remain a spec house? He is no longer trying to sell a spec house, he is trying to sell his primary residence.
I'm afraid this would be one argument you would lose with the examiners.
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The opinions expressed are mine and they are not to be taken as legal advice.
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#1463502 - 11/04/10 01:20 AM
Re: Reg Z and investment property
Dan Persfull
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Toano, VA
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I see this as exempt business purpose credit. Everyone has made good, well supported arguments, but nobody pointed to an exact comparable case in the OSC to Section 226.3(a), #6. If you take a lien on a producing farm, the existence of the farmer's residence on the property does not void the agricultural exemption. This is a different type of business, but isn't the principal the same?
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#1463539 - 11/04/10 12:50 PM
Re: Reg Z and investment property
Richard Insley
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to me it is, yes, Richard. Hadn't made that exact coorelation, but it is a good one!
FWIW, I really do believe I could win that argument...and that analogy adds additional weight to it.
Thanks! Again, it's been YEARS since I've seen this actually happening, but it used to not be too uncommon at all.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1463544 - 11/04/10 12:59 PM
Re: Reg Z and investment property
Richard Insley
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If you take a lien on a producing farm, the existence of the farmer's residence on the property does not void the agricultural exemption. Would that not depend on the purpose of the lien/credit? If the farmer is buying a $150,000 personal RV and using the producing farm land as security that loan would not be exempt under the agricultural exemption. As for #6, my contention is that the loan began as business purpose loan (spec house) and apparently he had trouble selling it. He therefore sold his current primary residence and took possession of the spec house as his primary residence (which I am assuming he has title to as an individual and not as a business entity such as a LLC or Corp). He now wants to refinance that loan secured by his primary residence to give him additional time to sell it and then purchase a new primary residence. IMHO that is for a family, household or personal purpose which under #6 would, again IMO, convert the credit to a consumer purpose. If the loan had been modified instead of refinanced than I would not be debating the issue.
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The opinions expressed are mine and they are not to be taken as legal advice.
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#1463598 - 11/04/10 02:00 PM
Re: Reg Z and investment property
Dan Persfull
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hehe..we don't do modifications...but again, I think the purpose is being skewed between your scenario and mine.
My scenario is not that the builder sold his current primary and took possession of one he's having trouble selling. It's also not necessarily in a busines name.
They 'hop' from one spec to another, but a spec it remains. He's a gypsy, so-to-speak, and is just "using" those spec houses to live in while he continues to sell them. It's Russion roulette on what sells and in what order, so he may be there awhile, or he may sell it quickly and move again, to another one...it's still business purpose by nature.
I do agree on your scenario of the personal purchase of an RV secured by the ag land, the loan, itself, is a personal purpose loan - not ag by definition.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1464307 - 11/05/10 01:27 AM
Re: Reg Z and investment property
Dan Persfull
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Toano, VA
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Would that not depend on the purpose of the lien/credit? Yes. The credit must relate to the - planting - propagating - nurturing - harvesting - catching - storing - exhibiting - marketing - transporting - processing - manufacturing of food or a wide range of other agricultural products. If the farmer is buying a $150,000 personal RV and using the producing farm land as security that loan would not be exempt under the agricultural exemption. Yes, if the RV is primarily for personal use. On the other hand, if it's used to transport, exhibit, or otherwise market the agricultural products, the RV could be a business expenditure and the loan exempt. As for #6, my contention is that the loan began as business purpose loan (spec house) and apparently he had trouble selling it. He therefore sold his current primary residence and took possession of the spec house as his primary residence (which I am assuming he has title to as an individual and not as a business entity such as a LLC or Corp). He now wants to refinance that loan secured by his primary residence to give him additional time to sell it and then purchase a new primary residence. IMHO that is for a family, household or personal purpose which under #6 would, again IMO, convert the credit to a consumer purpose.
If the loan had been modified instead of refinanced than I would not be debating the issue. I agree that the use of a modification would help the lender sidestep this entire debate. Nevertheless, I don't think a refinance triggers reclassification in this case. The purpose of the original credit was working capital. The house was built for sale, was offered for sale, and continues to be offered for sale. It's still working capital for a business that's struggling through a housing market disaster. Like the farmer who lives on-site in the middle of his/her business, this spec builder finds it attractive to manage his/her business on-site.
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#1464328 - 11/05/10 12:39 PM
Re: Reg Z and investment property
Richard Insley
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The Swamp
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It's been awhile since we had a great debate like this...what fun! You guys make my day...really.
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My opinion only. Not legal advice. Say you'll haunt me - Stone Sour
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#1466563 - 11/10/10 04:48 PM
Re: Reg Z and investment property
RR Joker
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Posts: 142
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Back to the ag purpose exemption.....if a customer purchases 70 acres; 35 will be rented out to a local farmer for crops and 30 acres will be rented to a local farmer for cattle pasture; and the pond and cabin on the remaining 5 acres will be reacreational for the borrower.....
Would the ag exception only apply if the borrower was farming the land himself? Perhaps the business purpose exemption would apply if he was in the business of buying farm land and renting it out?
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