A loan on our books for some time was originally for the purchase of rental 1-4. At the recent refinancing of the loan, the customer stated on the application that the purpose was to refinance their primary dwelling.

The loan was refinanced as a commercial loan because department personnel feel that the original purpose of the funds was to finance a rental purchase and that the original purpose hasn't changed, just the use of the collateral. I understand that reasoning, but…

Wouldn't the customer's stated purpose override the original purpose of the loan being refinanced?

What about the converse…if a customer refinances a loan where the original purpose was to purchase a primary residence, but years later when refinancing the loan indicates the purpose is to refinance rental property - no new money; is it still consumer purpose?

From the OSC to 1026.3:

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.

Unless you're saying that collateral was switched (i took your post to mean that the house was once a rental property but now is the primary residence of the borrower), then i think your new loan is consumer purpose (they aren't refinancing n.o.o. rental property, an automatic business purpose exemption; they're refinancing their primary residence).

In other words, you have a problem.

raitchjay...the collateral wasn't switched out, just the use of the collateral changed...so in the first scenario the loan would now be consumer?

In the second scenario would it now be commercial?


rlcarey...you are right...I have a problem :), story of my life!

How much of the new loan is new $. vs the balance on the original loan.

later when refinancing the loan indicates the purpose is to refinance rental property - no new money; is it still consumer purpose?

The gist of the regulatory commentary is that loan purpose is determine by current purpose not past purposes. If you are now refinancing non-owner occupied rental property, the transaction is exempt regardless of the original purpose. Unless as Kathleen alluded to, if it is a cash out refinance, then you are going to have to figure out what the cash is for and what portion of the loan that cash makes up.

There was no new money in my scenarios above. Thankfully department personnel were looking at refinancings with new money and changing consumer/commercial classifications when appropriate.

Thank you both for walking me through this, I really appreciate it!