Customer is requesting a mortgage to purchase a 2 family dwelling. He plans to rent out both units to college students during the school year (approx 9 months of the year), and use the property personally during the summer months when college is not in session.

Would this be considered a consumer or business purpose loan under Regulation Z? It doesn't qualify the for the "automatic" Owner-Occupied Rental Property exclusion discussed in the staff commentary because the house is not more than 2 units, but the customer will be renting it out to students more than 50% of the year. So would that make it a business purpose loan under Reg. Z?

Any help would be appreciated.

Thank you.

This would be considered owner-occupied rental property. Review the Commentary to 1026.3. Since there is 2 units or less I would advise treating it as consumer.

Thank you Dan. Would you consider treating this loan as business purpose credit if the file clearly shows that the customer has other residential rental properties and derives the majority of his income from these rentals?

That's not a factor Dutch. If he lives in it for 14 days or more, it is considered "owner occupied rental property". Look at the Commentary to §1026.3(a)#5 - as Dan pointed out.

Thanks David; I did and it refers me to 3(a)-3. Here's the excerpt. Please see the last 2 sentences, which caused me to ask Dan my follow up question posted earlier.

5. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

ii. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in comment 3(a)–3.

You said this property has 2 units. Comment 5i says "MORE than 2 housing units" deems it business purpose. Therefore 2 units makes it a consumer purpose loan.
Comment 5ii says "MORE than 4 units".

I realize the last 2 sentences give some latitude about consumer vs. business, but you have to look at this loan individually. You said he's going to use it personally in the summer months. I don't believe the fact that the borrower has other rentals is a factor on this loan.

I came across this thread researching a similar question. Why does 5ii require more than 4 housing units for improvements or maintenance and 5i only requires more than 2 for acquiring the property for the loan to be business purpose? 5ii references right of rescission when the purpose is other than acquisition, but isn't that for consumer? Could someone translate this please? Thank you.

Why does 5ii require more than 4 housing units for improvements or maintenance and 5i only requires more than 2 for acquiring the property for the loan to be business purpose?

You need to address this question to the authors of the regulation.

5ii references right of rescission when the purpose is other than acquisition, but isn't that for consumer?

Under the regulation a dwelling is a 1-4 family unit. If the purpose of the loan is for anything other than the acquisition of the owner-occupied 1-4 property it is considered consumer and the ROR would apply. The exception would be if the primary purpose of the loan fell within the exemptions outlined in 1026.3.

Dealing with owner occupied rental property is not cut and dry. IMO it is advisable to err on the side of caution and treat loans to be secured by owner-occupied rental units of 1-4 or less as consumer purposes unless you can definitely exclude the loan's purpose as business under 1026.3.