Hello,
I am trying to settle a dispute regarding whether or not loans secured by investment properties (non-owner occupied) are considered commercial purpose simply because they are secured by said property. Furthermore, are these also exempt from Reg Z because of that type of collateral? I know that there is also the purpose test to report for HMDA, but this property type seems to be a sticking point.
I would appreciate any feedback. Thank you!

Investment properties are not exempt from Reg. Z unless it is a business purpose investment. Reg. Z does exempt the acquisition, maintenance or improvement of a non-owner occupied rental property as a business purpose loan. See 1026.3(a) and its Commentary.

Reg. Z coverage is based on the loan's purpose, not the collateral securing the loan. Securing a child's college education with the equity in a non-owner occupied rental property would be a consumer purpose loan and would not be exempt from Reg. Z.

Collateral type does not make a loan exempt from Regulation Z. I could secure a personal debt consolidation loan with business assets or rental property and it would still be a consumer purpose loan. Here is the definition of consumer credit from Regulation Z:

(12) Consumer credit means credit offered or extended to a consumer primarily for personal, family, or household purposes.

Official Interpretation

2(a)(12) Consumer Credit

1. Primary purpose. There is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, nor for what constitutes the primary purpose. (See, however, the discussion of business purposes in the commentary to § 1026.3(a).)


The definition does not mention collateral.

Thank you. There is an underlying impression that because there is an investment property involved, that automatically means it is a commercial loan. I am trying to change that line of thinking. I appreciate your feedback!

Good luck...really really bad way to think and awfully common.

I have a scenario that I would like to add to this and would like the opinion from others. We have a loan where a borrower is using investment property to get cash out in order to reimburse their personal savings account for the purchase of this rental property and another rental property. This seems like a gray area to me and will help me decide whether or not the loan should be removed from the HMDA LAR.

On one hand I can see it being an "Other" purpose consumer loan that should remain on the LAR since he is using the proceeds to go back into his personal savings account.

On the other hand I can see it being non-reportable as an "Other" purpose commercial loan because the funds that are being replaced were the result of a commercial deal in order to purchase investment property with the intent to get permanent financing later.
Any help on the topic would be greatly appreciated.

If it's true rental property [try to avoid the term investment, it's ambiguous] then it will not be reportable since it will be commercial purpose. Where he took the money from to buy it to me is immaterial...he basically loaned it to himself, but it's till commercial purpose.

If we have a loan subject to Reg Z, consumer purpose - debt consolidation secured by a rental property, how do we report Rate Spread and HOEPA Status since the loan is not secured by a principal dwelling? We believe HOEPA should be a '3 - Not Applicable' but not sure on Rate Spread. Information I have states enter NA for 'covered loans that are assumptions, reverse mortgages, purchased loans, or are not subject to Reg Z'. This scenario is subject to Reg Z. Would NA be acceptable?

I agree with you on the HOEPA status--report NA since it's not the primary residence. But the numeric rate spread needs to be reported. The loan is subject to Reg. Z and there is no exemption from the rate spread based on whether it's their primary residence or not--it needs to be reported. If your LOS won't calculate it for you, you'll have to use the CFPB's rate spread calculator.

Thank you. So it doesn't matter that HPML does not apply to a rental property when reporting the Rate Spread for HMDA? Our LOS does calculate it for us so we are good there, just wasn't sure if we needed to report or not since it is not their principal dwelling.

Correct. It doesn't matter. Applicability to HPML doesn't rule HMDA rate spreads.

Are you considering it commercial purpose because the loan is secured by rental property? Initially I felt the same way but, later found a thread that made me think about it slightly differently since I have to test against what Reg Z defines this loan to be per the commentary 1003.3(c)(10)(2). I'm not as savvy with Reg Z and can almost see this being consumer or business. Is there anything in Reg Z that you feel defines this more as a commercial purpose loan?

Sorry not trying to debate. Really just trying to see this from all angles. Hoping to write procedures around these one offs.

Being secured by a rent home doesn't make a loan business purpose. You must look to the use of the funds. DoubleNickel stated in her first post that the loan was "consumer purpose--debt consolidation".

And on the flip side--a loan secured by the borrower's primary residence to purchase livestock or a commercial building for the borrower's business isn't a consumer purpose loan just because it's secured by their primary residence.

Right. I definitely have no problem on some of those scenarios. I'm just stuck on this situation because our borrower is putting the funds back in their personal savings account. So should I look at it from the point of view that the funds going directly into his personal savings account as consumer purpose without worrying over why funds were pulled out to begin with? Or, should I look at it from the stand point that a very commercial event occurred that triggered the need to replace funds in the personal savings account?

I honestly think reporting as consumer other or choosing not to report it at all and classifying as a business other is ok in either scenario. I'm trying to pick a way and stay consistent and have written procedures around it. What I'm really looking for I guess on this post is the opinions of others and see what side most would choose. That would probably sway my decision a little more. I see so many good responses on this site on topics such as this I think I could get a better idea of my direction. Maybe I should have set up some sort of poll. lol

In my previous life (and prior to 2018 HMDA) - we treated these loans as consumer purpose as the funds were to an individual and the proceeds were to replenish personal savings.

I know I already responded to your question, but I'll say it again...borrowing business purpose funds from themselves does not make the purpose consumer purpose just because it was their 'personal' funds.

Yeah, i was a bit confused....the original poster was asking one thing and then the conversation swerved.

Let me explain this another way. I have my eyes on a prime piece of rental property. I have to jump on this opportunity and I have the cash available. I buy it and pay cash. Now I can apply to my bank to pay myself back and create a tax asset and deduction for the rental property. At the bank, I will have to wait for 1) an appraisal to be done 2) to receive the appraisal and wait, or sign a waiver and still wait a bit...

If I'd don't that initially, I would have lost the deal. This does not suddenly make it personal

**done

You are right that this is challenging scenario and I too can see it going both ways, depending on the circumstances. The question I think you need to answer and seem to be missing (at least in what you wrote) is this: why are they putting the funds back into their savings account?

To answer this question, consider this:

1) Are they putting funds in their savings account because they always intended to finance a rental property as Joker has explained? If their intent was always to finance the property, but couldn't do so initially because of timing (like the scenario Joker gave), then I agree this is commercial purposes. The loan with you is sort of paying off a commercial loan they gave themselves (though of course it isn't really a "loan" when they are a sole prop and co-mingling personal and business purpose funds).

2) Are they putting the funds in their savings for the purpose of increasing personal savings and, if so, why? I have seen some loans where a rental property was purchased some time ago (maybe a year or two) with cash and the borrower now wants to use that equity to buy a lake/2nd home or pay for college. In this case I would call it consumer purposes. Other times, a sole proprietor might have a purpose of replenishing cash reserves to buy another rental property. In that case, I would (probably) call it commercial purposes as the reasoning for the cash is to position themselves to purchase a rental property.

3) What was the timing with the purchase and requested loan? If it was close in proximity, it would seem that Joker's scenario is probably correct and this is a commercial loan to "finance an investment property." If not, you may need more information as to the full intent of wanting to increase their savings account.

Regardless of what you do, make sure that your documentation clearly supports your decision so that you can avoid future criticism as, like I said before, I could see this going either way - depending on all of the specific facts and circumstances.

Thanks so much for your response Adam. I think your explanation regarding timing and trying to determine whether or not there is future intent to continue to use these funds for future investments is the direction I'm heading toward right now. I've got a few questions out to the account officer and waiting on a response. I found a very similar post to this one after I had posted my question and it seemed to lean more toward the consumer side over the commercial side. Honestly, I think it can fit into both categories. Thanks so much everyone for your responses.

Just to clarify. My response was given based on a literal reading of the question:

I have a scenario that I would like to add to this and would like the opinion from others. We have a loan where a borrower is using investment property to get cash out in order to reimburse their personal savings account for the purchase of this rental property and another rental property

I wholeheartedly agree that if a loan was subsequently taken out against the free and clear rental(s) for a purely consumer purpose, such as vacation/education/wedding/whatever, the loan would be consumer purpose. However, that is not what the question was about.

I also would not consider the future use of those funds as playing any part in the actual purpose at hand. Whether they repeat the usage of the savings for future rental purchases or not has no affect on the current purpose.

We commonly have real estate investors request cashout on free and clear rental properties with the purpose of the proceeds for "future business investment." As in this thread, they purchased the rental property for cash, and are now reimbursing themselves, but I believe by stating the purpose is for "future business investments" that clarifies the business purpose.