For certain transactions, the Bank has made a determination to treat loans to natural persons for personal investment as consumer loans. For example, a consumer purchases a non-owner occupied investment property, for a flip. Often times because these loans are to consumers and not business entities, and because the consumer vs business purpose is often clouded over or it cannot be determined if it satisfies the five factors listed below, it is safer for the Bank to classify these as consumer loans and disclose as consumer loans because the implications of trying to pass something off as a business loan when in fact, it could be interpreted as a consumer loan, is significant if disclosures are not provided. Therefore, the system of record will show these as consumer loans.

These loans are underwritten according to the consumer credit policy, they are disclosed as consumer loans under Reg Z and RESPA, and they are classified on our system as consumer loans....therefore, from a HMDA reporting standpoint, I think these should be reported as consumer loans, investment / not occupied by owner or applicant.

The Official Commentary to Regulation Z, sets forth guidance for determining whether a loan can be considered to be primarily for a business purpose. A creditor must evaluate five factors in making a “business purpose” determination:
• the relationship of the borrower’s primary occupation to the acquisition;
• the degree to which the borrower will personally manage the acquisition;
• the ratio of total income from the acquisition to the total income of the borrower;
• the size of the transaction; and
• the borrower’s statement of purpose for the loan.

This is not always clear in all circumstances when the loan is to a consumer and not a business entity and that it why it is in our better interest to treat these as consumer loans for personal investment.
Granted, there are exceptions for rental property; however in many of these cases, it is not a loan for rental property purposes - they are flips, possible second homes, etc.

W are being questioned as to why we are not treating these as business loans and documenting as business loans on HMDA. My position is that HMDA should be using our system of record and the system says these are consumer loans and therefore should be reported as such.....thoughts

I don't know who is questioning you, but I would handle them exactly as you have been.

Are your non-owner occupied rent home purchases/refinances/home improvements being treated the same as the flip home ones? It sort of sounds like they are, and i see that as the most problematic.....those should have their rate spreads reported as NA.

While Reg. Z does give you the option to give the Reg. Z disclosures when in doubt, i think the length they go to to describe the business purpose exemption gives a strong implication that the creditor should, on a case-to-case basis, determine whether the loan is subject to Reg. Z or not. I think a blanket "we're gonna treat em all as consumer purpose" can lead you to the sort of issues you are facing. JMHO.

It sounds like they aren't...they say:

Granted, there are exceptions for rental property; however in many of these cases, it is not a loan for rental property purposes - they are flips, possible second homes, etc.

I took "...in MANY of these cases, it is not a loan for rental property purposes..." to mean, that in SOME cases, it is for rental property purposes.

Right, but it appears [to me] that they do not treat bona fide rental property as consumer purpose, by use of the term 'exceptions'.

Now, back to the OP for further clarification

No - we realize that non-owner occupied rental property meets the definition of business purpose...but this exemption only applies to rental property. It's the other loans, like flips where the borrower is not investing in the property as a rental that I am questioning.

And I'll say again. 99.99% of the time, those random flips that are not to a business or someone IN the business, we would treat as a personal investment, not business.

I guess (and again, this is just my opinion) in my mind, i can see where the criticism could come in. If you have a borrower who makes 100% of their income from flipping homes, but gets loans to purchase these flip homes in their own name, and your bank is automatically treating them as consumer purpose, then it seems to me that by reporting the numeric rate spread, you would have a HMDA error, because the loan is not for a consumer purpose and therefore isn't subject to Reg. Z.

Joker.....my take on what the OP is saying is that they don't really even investigate.....if it's a flip purchase to someone in their own name, boom, it's consumer purpose.

Gotcha. yeah, I would consider that a problem.

It does, however, look like they do take a look at them to see if they meet the BP test though...it's those you cannot definitively classify:

and because the consumer vs business purpose is often clouded over or it cannot be determined if it satisfies the five factors listed below

Well, yeah, you can interpret it that way.....you can also sort of interpret it that since they consider the whole thing "cloudy", they just routinely classify ALL flip homes as consumer purpose. I guess the OP will have to clarify.

According to Regulation Z, a special rule exists for non-owner-occupied rental property. Namely, a loan to acquire, improve or maintain non-owner-occupied rental property will always be deemed to be for business purposes. The threshold for determining owner occupancy is whether the owner plans to occupy the property more than 14 days during the coming year.

Currently, our systems categorized loans as "Investment / Rental". There is no differentiation between personal investments (ie. a flip) or rental property. They all fall in this bucket. In addition, there is no differentiation if it is rental property between owner occupied and non-owner occupied. Originally, From a compliance standpoint, I told them that you cannot presume that all loans in the "Investment / Rental" category are non-owner occupied rental properties and meet the definition of business purpose. Therefore, I recommended that procedures would need to be developed to determine any time the "Investment / Rental" is checked, whether or not it is a rental property and whether or not that rental property is non-owner occupied. Because our systems do not differentiate this would be a very manual process. An alternative, because these are consumer systems and would be loans to consumers for investment purposes (note we provide consumer disclosures), and because we cannot determine if the rental property is non-owner occupied, can we disregard the business purpose rule and simply report these loans as consumer loans anyway.

An alternative, because these are consumer systems and would be loans to consumers for investment purposes (note we provide consumer disclosures), and because we cannot determine if the rental property is non-owner occupied, can we disregard the business purpose rule and simply report these loans as consumer loans anyway.

No. You need to know if the loan to a natural person is for consumer or for business purpose based on that person's history and how it applies to the examples Z gives.

How in the world are you even documenting an actual loan purpose without this basic knowledge of the borrower?

application from a consumer, for a business purpose. Reg Z says business purpose loan don't fall under it's rules.

Many of the data fields on the new LAR say "enter NA for loans not subject to Reg Z". How is the LAR knowing which entries aren't subject to Reg Z? Is it driven from what we put in the occupancy type?

I think a key data field to help this would be how the last one is answered...business/commercial purpose.

river girl, I think you are just going to have to know what you have. For instance, if I did a commercial loan to an individual, my system will know it's not consumer purpose and thus should carry forward the right data.

FWIW, occupancy won't solve the problem. You can have non owner occupied consumer purpose loans.

The loan is booked on the consumer system. We treat it like a consumer loan, providing consumer disclosures, etc....
The problem is with Loan Purpose. If it is a personal investment or a rental (either owner occupied or non owner occupied)...our system only allows us one option "Investment / Rental" The vendor does not have any additional questions in place....for instance if you select this...it doesn't prompt Is the personal Investment? Is this rental Property? It doesn't ask if rental property if it is owner occupied or non-owner occupied. So there is quite a bit of manual work that needs to go into assessing how to differentiate this.
Because we treat these as consumer loans, we disclose them as consumer loans....is it permissible to treat them as consumer loans for HMDA purposes (even if it is a non-owner occupied rental property which would normally get the business purpose exemption). The basic difference would be that we are now providing data in fields that would normally be "NA". I'm not sure I see any harm in completing those fields, if the information is accurate....and since we are running these through a consumer system, categorizing them as consumer, and disclosing them as consumer.

RR Joker answered your question above. You need to know what you have regardless of how you choose to process the loan. You need to record them on the LAR accurately based on loan purpose - regardless of how you disclosure them or what system you process them on.