... a review of the loan file shows that the purpose is really Consumer.

None of the consumer real estate regulatory requirements were applied (HPML/HOEPA testing, HMDA, ATR/QM, TRID, etc.).

Since the loan has been closed and funded, what are the appropriate corrective action steps a Bank should take in this scenario. Is there any regulatory required corrective action steps to take or do we note this as a violation as part of our compliance monitoring system?

I require restitution. In other words, no APR was disclosed, so your rate becomes the APR...In order to make good on that, you would refund all ppfc's. Depending on the specifics, I sometimes also calculate a refund of interest paid if my commercial rate exceeded the consumer rate.

If you are FDIC regulated refer to the guidance in V. Lending - TIL Restitution in the FDIC Compliance Examination manual.

Keep a file on what you discovered and how you corrected as you will be asked for that as part of your self-identification in conjunction with your exam.

Couldn't you make the argument that you should go beyond just refunding the PPFCs--that on a TRID loan, ALL the fees should have been disclosed on an LE, but weren't, and therefore, all fees should be refunded?

I am just curious on why or how you found this out post close? Purpose wasn't established by the LO at time of application?

I'm guessing it was, but LO's sometimes get the purpose wrong.

Example: "you mean a father selling his primary residence to his son to use as his primary residence isn't business purpose?"

Yep...happens somewhat often.

Wow that can be such a costly mistake and to have it go through processing and underwriting just to find out in a post close review it was wrong from the start....that is just crazy.

A lot of banks (mine at least) don't have "underwriters". Our underwriters double as LO's.

When your loan officers are accountable for compliance omissions like this, through financial penalties or other action, they will begin to pay closer attention to the rules, or at least know when they should be asking questions rather than blindly plunging over the cliff of noncompliance.

Thanks for the responses all!

Some more detail on the scenario to explain how/why the LO came to the conclusion of "business purpose" and how it was caught and why we consider it "consumer purpose".

-Property in question is a residential lot in a rural area sitting between several other residential lots all containing homes.
-Borrower's uncle owns the lot and and has sold the property to his nephew (our borrower) through an owner/financing arrangement.
-Borrower is using the front half of the lot to run his trucking business. 7-8 semi-trucks are currently parked there. There is a small workshop on the front half of the property next to these trucks. I suspect this workshop is also being used as an "office".

In the loan presentation and on the loan worksheet the LO described the purpose as to "buy land and build a commercial building". The loan writeup communicated how the property was being used and that the borrower wanted to be closer to the property or "business" though the building of this structure.

A review of the appraisal on file and the contract shows that the "commercial building" being built is actually a dwelling. The appraisal was a residential appraisal that described the property as "residential" and plans show the building is a home. Contract also provides the purpose of the contract is to build a house.

Thanks RR Joker. We recently converted from a National bank to a state chartered non-member institution soooo, the FDIC is now our regulator. I have already begun reviewing the restitution guidance that was referenced. Appreciate the suggested or recommended corrective action guidance.

See additional detail provided above. Frankly, a review of the appraisal and contract didn't supported the stated purpose on the loan presentation and loan worksheet.



I laughed out loud after reading this, lol... but sadly it's true.

"In the loan presentation and on the loan worksheet the LO described the purpose as to "buy land and build a commercial building". The loan writeup communicated how the property was being used and that the borrower wanted to be closer to the property or "business" though the building of this structure."

You not only have a restitution issue, but either an inept loan officer or they flat out lied to the loan approval committee and the bank. Hopefully, this is one and done action by the officer. It is borderline SAR activity. Lying on a loan application to the bank is a Federal offense and I am not sure that applies to just the borrower in this case.

This sounds a lot like a mixed use property. Assuming the property is zoned such that commercial or residential can be built, it might actually be a business purpose loan. It sounds like the lot is currently being used as primarily commercial. If the borrower is planning to build a structure that is a combination of home and office, that doesn't automatically make it into a consumer purpose loan. Now we have to determine the primary purpose of the loan using the standards in 1026.3(a) and commentary. If the primary purpose of the loan is to build a permanent office structure for the business that happens to have an external appearance of a home and have some residential living space in it, that doesn't automatically make it a residential purpose loan. You may have just had poor communication with the appraiser on how the structure was to be used.

Of course, you may be exactly right and the primary purpose is residential with an ancillary business purpose, in which case all the previous comments would be accurate. I'm just saying it may still require a bit more research.

Don't disagree and have come to the same conclusion of one or the other. Inexcusable IMO.

From a compliance monitoring standpoint, we do a pretty good job identifying non-compliance on real estate transactions. While the non-compliance on this particular application is inexcusable, it's a one off. We don't see any pattern or practice of such activity overall or from the officer.

The officer has already been taken to task on this. Hopefully that serves as a deterrent on reaching conclusions in questionable transactions like this without visiting with compliance beforehand for support.

In either case, it's been identified, it will be logged, and it will be reported to our internal compliance committee with discussion on what corrective action we will be taking in addition to discussion on the officer's treatment of the application and intent.

Was considered, but not supported. While the property may be "mixed-use" property, the primary use of loan proceeds is what I'm considering.

The primary use of the loan proceeds (bulk of the loan) is to fund construction of a dwelling. There is no confusion as to what is being built. It's a house. Appraisal supports this, floor plan supports this and the contract supports this. Hard to argue that constructing a structure with 3 bedrooms, two bathrooms, a kitchen, living room a garage and a patio is meant to serve as a "commercial building". If you have an opportunity to build a structure from the ground up to serve as a commercial building, you construct a commercial building, not a dwelling. And if you plan to build a dwelling that will serve as a residence and office, then I would look at what is the primary use of the structure. In that scenario it would be hard to argue that the structure's primary use is not a dwelling if one room is designated as an "office" with the remainder of the house serving as a residence. By all accounts, the primary use of the structure is residential. Floor plan does not identity any particular space as "office" and officer could not substantiate this. Also, the loan is also made to the individual and not to the trucking business.