Hello,

Pardon my idiot questions..

An LLC wants to refinance a primary residential mortgage loan under a commercial loan. The real purpose is not business, because it is owner occupied. Can a bank make this loan as a commercial loan? I don't think it can, but is there any regulation or language that dictates it?

Thank you

"Commercial loan" is a bank term indicating WHERE (department) the loan originates. Some loans made in the consumer loan department are exempt from regulations and some made in the commercial loan department are NOT exempt. it depends on purpose.

To determine if consumer purpose regulations apply, you have to look at if the loan is exempt from reg Z (which makes it exempt from RESPA)

http://www.bankersonline.com/regs/12-1026/12-1026-003.html

Actually, it can be exempt from Z , but not from RESPA...This is a prime example of one exempt and the other technically not exempt.

Reg X only recognizes part 1 of Z's exemption.


(b) Exemptions. (1) [Reserved]

(2) Business purpose loans. An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by 12 CFR 1026.3(a)(1) of Regulation Z. Persons may rely on Regulation Z in determining whether the exemption applies.

Sticky wicket, and we're likely to see lots of this both as a combination of the increased publicity of "fix n' flip" and wanting to avoid TRID. Owner occupied and owned by an LLC? there better be "6 degrees of separation" in order to truly call this "business purpose" and not Reg. Z.

I'm in CRE now, but wanted to weigh in. CFPB may quickly identify this as a potential UDAAP concern.

And really, if the LLC owns it, the natural person isn't really an owner occupant. If the LLC rents to the natural person...it could truly be rental.

the natural person is the owner of the LLC, who resides the building.

A loan to an LLC is exempt from Regulation Z, period. If an LLC is acting in violation of their formation documents or IRS regulation you need to be visiting with legal counsel to determine the impacts on your loan.

I am in the camp of an LLC can't possibly conduct a consumer purpose activity. Before being party to such a transaction, the bank should inquire how the LLC will be accounting for the transaction. Is the individual paying rent to the LLC, is providing the home rent free being counted as compensation to the individual (giving them a home is a benefit), etc.

The bank should not be a party to a transaction that enables tax fraud.

The legalities aside, a loan to an LLC as the borrower is not subject to Regulation Z, period. The mention above that the RESPA exemption only goes to the purpose of the loan, not to the borrower, is a point well taken.

And so what are you suggesting? As of 8/1 you cannot just give RESPA disclosures. We have discussed this many times....how can a business entity conduct a transaction for a consumer purpose, which is what would trigger RESPA?

An LLC can only conduct business transactions and must account for this transaction on its books in some manner, collect rent, treat as compensation, or it is not legitimate.