We have a current commercial customer who renewed a loan that has matured and is secured by commercial real estate. They added additional money to the loan to pay off their primary residence, refinance an auto loan (which they claim as business expense), and consolidate multiple credit cards (only one of which is classified as a business card). The "new money" is primarily consumer. Lender treated the loan as commercial (looking at the amount that was renewed as primarily). We have questioned our examiner and he has stated that it should have been TRID as the new proceeds were primarily consumer. Compliance department also wrote up as an exception that the loan should have been TRID. Lender is still questioning the "primarily" issue. Any guidance????

The loan purpose was to refinance the existing business debt, refinance new added business debt and refinance new added personal debt.

What does the "new" money have to do with determining the purpose outside of it just being a portion of the use of overall funds involved in the refinance.

Why a loan officer would allow someone to mix and match such loan purposes it questionable. I would not want to be these people's accountant come tax time.

What about starting with the 4th post in this thread by John Burnett:

https://www.bankersonline.com/forum/ubbthreads.php/topics/2086175/trid-commercial-property-purpose

Is this what you are referring to, determining what percentage of the total proceeds is consumer vs. commercial purpose?

Yes this is what I was referring to with "primarily". The customers are sole-proprietors. The examiner stated that the primary purpose of the new loan (the reason they were refinancing) was consumer so it would be a TRID loan.

Put a T chart together. List business debts being paid on one side and personal debt being paid on the other. Then show the examiner the T-chart and ask them which amounts are categorized in the wrong side. Then show them this:

Official Interpretation

3(a) Business, Commercial, Agricultural, or Organizational Credit

1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose.

Comment 3(a)-6:

"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."

The commentary doesn't expand on this statement with an illustration. I have always read it to refer to a situation in which the consumer becomes primarily liable for an obligation that was originally business-purpose, perhaps because the business is no longer operating.

Thanks for the responses. We had read this comment as well and that's why it was written up as an exception by compliance(that the original loan was replaced with the new loan making it "primarily consumer". That's why we kept looking at the "new proceeds".

One of the issues is the regulation does not define "primary purpose".

As an example. I borrower $150,000 against my home to start a business. That's a business purpose loan.

A year later I decide I want to buy a new bass boat for $45,000. I don't want two mortgages so I refinance the existing loan to get cash out to purchase my new bass boat. Is my primary purpose for refinancing business or personal? My way of thinking is it is personal, others will use the 51/49 split but in my humble opinion the true purpose for refinancing is to purchase the bass boat. Has nothing to do with business.

So as Randy quoted:

3(a) Business, Commercial, Agricultural, or Organizational Credit

1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose.

And the creditor will have to defend the logic of that determination if it is later sued by the individual for failing to comply with Regulation Z on what the consumer later argues was a consumer-purpose extension of credit.

Which is one strong argument for not combining consumer and non-consumer purposes in the same extension of credit.

"The commentary doesn't expand on this statement with an illustration. I have always read it to refer to a situation in which the consumer becomes primarily liable for an obligation that was originally business-purpose, perhaps because the business is no longer operating."

John, JMCBT stated in the original post they were sole proprietors. Based on your understanding of the commentary, if they were still sole proprietors at the time of renewal, and if the total debt being satisfied and replaced plus new money was considered by the bank primarily business as determined by Randy's comment above, do you suggest documenting the loan file as such for support as to why disclosures were not given?

Yes.

Absolutely, MBTCompliance. If you don't document the file to support your decision, you may as well have flipped a coin. If you are pulled into court to back up the decision, your counsel will at least have a starting point for defending your logic.

Thanks!

What if there was no new money? Self-employed borrower has a $100,000 commercial loan on his primary residence, opened in 2010. And also has a 2nd mortgage for $50,000 (used that money to buy a boat in 2015).

Fast forward to 2020. Borrower comes in and now decides he'd like to simply combine these two loans into one loan. No new money. Loan is secured by his primary residence.

What is the purpose of the loan request to consolidate debts?

Is it business purpose or consumer purpose???

@LendingSux - I would say if the majority of the debt is still tied to a commercial purpose, then it is a commercial purpose loan overall.

Regarding the original post by @JMCBT, I would consider the new money in such a decision as part of the overall loan purpose. If the Commercial Real Estate loan that was being renewed/refinanced still makes up the majority of the overall loan proceeds, then I would consider this to be "primarily" a commercial purpose loan. I think this is where RL was headed with the T-Chart analysis post. The fact of the consumer debt being added as "new" wouldn't override the totality of the debt, as the Commercial Real Estate is still part of the primary purpose analysis. if the "primary" purpose is to refinance the commercial RE, then that is what it is. But, as noted, it gets messy when you combine a bunch of types of debt into the same loan; however, I know community banks do it relatively often.

And FYI, I'm at a community bank, where loans are cross-collateralized with real estate, dump trucks, dogs, guns, and 1997 Dodge Neon's.

Examined a lot of those over my 6 years with the OCC . I know how they roll, lol. One of the funniest things I saw were 1-yr 'bullet" notes on used cars where the bank would extend the loan every year and collect a years worth of interest payments with no principal reductions or amortization. So, they would have a 8 or 9 year old car for instance with an outstanding balance of $8,000 when the car was probably only worth a couple thousand or less at that point.