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#2198208 - 11/14/18 06:46 PM Property type - 1 to 4 or multifamily?
CRL Offline
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Trying to determine if a loan to refinance the following property is subject to RESPA: 1 tax parcel with six detached dwellings on it. Borrower lives in 1 of the dwellings, rents out the other 5.

First: While this is exempt from TILA since more than 4 housing units, is it subject to RESPA as a FRML or not?

Federally related mortgage loan:
(1) Any loan (other than temporary financing, such as a construction loan):
(i) That is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property, upon which there is either:
(A) Located or, following settlement, will be constructed using proceeds of the loan, a structure or structures designed principally for occupancy of from one to four families (including individual units of condominiums and cooperatives and including any related interests, such as a share in the cooperative or right to occupancy of the unit);

Second, IF deemed 1-4 family and subject to RESPA, would anyone consider it exempt for business purpose? Since the loan purpose is to refinance a 1st and 2nd mortgage of the borrower's primary residence, I would lean conservatively and not call this business purpose, so not exempt for that reason (even though the "majority" of the subject property is NOO income property.)

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#2198400 - 11/15/18 10:50 PM Re: Property type - 1 to 4 or multifamily? CRL
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Bump - would love to hear that I'm nuts for thinking this could be considered 1-4 family... :-)

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#2198410 - 11/16/18 08:44 AM Re: Property type - 1 to 4 or multifamily? CRL
rlcarey Online
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Sounds to me like you are referring to 6 single family dwellings of which each has one unit and which are not going to be automatically exempt from either Z or X.
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#2198427 - 11/16/18 02:22 PM Re: Property type - 1 to 4 or multifamily? CRL
Dan Persfull Online
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I agree with Randy. These are multiple 1-4 dwellings for Z & X purposes.

The loan's purpose determines Reg. Z coverage, not the collateral.
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#2198434 - 11/16/18 02:57 PM Re: Property type - 1 to 4 or multifamily? Dan Persfull
Adam Witmer Offline
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Originally Posted By Dan Persfull
The loan's purpose determines Reg. Z coverage, not the collateral.

This is key.
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#2198465 - 11/16/18 04:28 PM Re: Property type - 1 to 4 or multifamily? CRL
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Thank you! To be clear, a consumer purpose loan secured by a multifamily dwelling is NOT subject to RESPA - correct?

And a refinance of a 5+ dwelling unit property is exempt from TILA, even if one unit is owner occupied, correct?

Therefore, if this property type is deemed multifamily, and the loan purpose is to refinance the prior mortgages, then I believe this loan would not be subject to RESPA or TILA, even though the loan purpose is to refinance of the borrowers primary residence (which happens to also be rental/income property.)

So if as Randy opined, this loan is secured by 1-4 family - then it is NOT exempt from RESPA. But I would argue even if it is 6 single family dwellings, it IS exempt from TILA, due to the following:

Reg Z - Section 226.3—Exempt Transactions
3(a) Business, commercial, agricultural, or organizational credit.

4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:
• Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units.

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#2198517 - 11/16/18 08:02 PM Re: Property type - 1 to 4 or multifamily? CRL
Dan Persfull Online
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And a refinance of a 5+ dwelling unit property is exempt from TILA, even if one unit is owner occupied, correct?

All depends on the purpose of the loan. As I said the loan's purpose, not the collateral determines if the loan is covered by Reg. Z.


You need to read that section a little closer.

ii. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units,

You have multiple 1-4 housing units. You do not have a multi-family dwelling.
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#2198554 - 11/16/18 10:43 PM Re: Property type - 1 to 4 or multifamily? CRL
rlcarey Online
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But I would argue even if it is 6 single family dwellings, it IS exempt from TILA, due to the following:

You need to go the Act itself. You are missing the meaning of the definition. More than 4 units in one building. Not a conglomerate of single family houses on one piece of property.

"The term “dwelling” means a residential structure or mobile home which contains one to four family housing units, or individual units of condominiums or cooperatives."
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#2198566 - 11/16/18 11:58 PM Re: Property type - 1 to 4 or multifamily? CRL
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Maybe I'm misinterpreting the meaning of maintain in the "acquire, improve or maintain rental property" exemption. Does a refi of a purchase money mortgage meet the definition of "maintain" for meeting this exclusion?

4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

i. Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

ii. Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than 4 housing units. Since the amended statute defines dwelling to include 1 to 4 housing units, this rule preserves the right of rescission for credit extended for purposes other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in comment 3(a)–


Regarding property type, the exemption states "rental property ... contains more than 4 housing units." The subject property (1 parcel) contains 6 housing units. They happen to be detached housing units, but 6 housing units nonetheless?

The commentary uses a rental warehouse earlier in the rental property example, demonstrating ANY rental real estate is exempt if NOO. So I am assuming for this owner occupied rental property exemption, it's allowing the rental property exemption if more than half is income/rental property - which when one of six is OO, that meets the criteria.

Randy - can you point me to the Act? Crazy, but I'm not sure where to find on the Federal Register for the commentary about this section, I always just look up the regulation?

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#2198568 - 11/17/18 12:33 AM Re: Property type - 1 to 4 or multifamily? CRL
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Let's be clear about the property and the loan. You said it's one tax parcel with 6 separate housing units on it. It sounds like there is one loan, secured by the entire property on which the 6 units are situated.

RESPA:

It is subject to RESPA unless it's a business purpose loan, because it is a loan secured by a lien on residential real property on which there is a structure OR STRUCTURES designed principally for occupancy of one to 4 families. (The fact that there is more than one such structure is not relevant, although that may play into the question of whether the loan is a business purpose loan.)

In determining whether it is exempt from RESPA as a business purpose loan, you look to the rules under Reg. Z Section 1026.3(a)(1).

TILA:

It's not organizational credit, so the question is whether it is exempt as business purpose credit under 1026.3(a)(1), which is also the defining question for the RESPA exemption. For owner occupied rental property, OSC 5 provides guidance on whether loans are treated as business purpose loans. A purchase money loan is deemed to be for business purposes if the property contains more than 2 "housing units." If the loan is to improve or maintain the property it's deemed to be for business purposes if the property contains more than 4 "housing units." This property has 6 housing units. Each of those housing units is a dwelling. One of them is the consumer's dwelling. But the dwelling definition is irrelevant except to rescission, which only comes into play if this is not a business purpose loan. (The OSC reference to dwelling simply confirms that because a dwelling is defined as a structure that contains 1-4 family housing units, a non-purchase money loan secured by an owner-occupied property that has 4 or less units on it may be subject to the right of rescission because it is not automatically deemed to be for business purposes.)

Also note that OSC 6 says that business purpose credit that is refinanced with a new loan, the new loan can be consumer credit if it is for a consumer purpose (i.e. if there is cash out and proceeds are used for a non-business purpose). As nearly everyone has noted, you haven't said what the purpose is (other than refinancing, if any) or whether the loan that is being refinanced was a purchase money loan or for some other purpose. But assuming that the original loan was for purchase money or was otherwise a business purpose loan, and proceeds of this loan aren't used for any consumer purpose, it should be exempt.


You can find the definitions portion of the Act here: TILA definitions

It won't really help you here because it doesn't define "housing units" and doesn't define "business purpose." That's why the OSC provisions on what transactions are "deemed" to be for a business purpose are helpful.
Last edited by rainman; 11/17/18 12:44 AM.
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#2198569 - 11/17/18 12:48 AM Re: Property type - 1 to 4 or multifamily? CRL
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Rainman and all, thank you, I'm obviously struggling with this.

Yes, the loan purpose is the refinance of a purchase money first mortgage with no cashout. Because the borrower lives in one unit, I believe there is some "consumer purpose" to this refi. But are you saying that it SHOULD be exempt not because of the OSC 5 exemption, but rather because the majority of the refi is for the 5 rental units?

“But assuming that the original loan was for purchase money or was otherwise a business purpose loan, and proceeds of this loan aren't used for any consumer purpose, it should be exempt."
Last edited by CRL; 11/17/18 12:55 AM.
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#2198570 - 11/17/18 01:17 AM Re: Property type - 1 to 4 or multifamily? CRL
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I don't know how you determine that "the majority of the refi is for the 5 rental units" unless there were 6 separate loans and now they are being combined into one. And given that we are talking about a single property, not 6 properties, I'm guessing that there was only one loan.

The OSC doesn't refer to purchase of the housing units. It refers to purchase of the property. The "property" that is covered by your trust deed consists of the land and all of the structures that are built on it. "Credit extended to acquire the RENTAL PROPERTY is deemed to be for business purposes if it contains more than 2 HOUSING UNITS." (Capitalizing for emphasis, not yelling.)

So I am saying that the exemption applies if the original loan was used to purchase the property, because the property contains more than 2 housing units. If the original loan (or part of the current loan) was/is used to improve or maintain the property, then the exemption is because the property contains more than 4 housing units. Because of that, it is (according to the OSC) deemed to be for a business purpose. (But again, I would caution that the OSC is not an "all purpose" statement - it is predicated on use of the funds to either purchase or improve/maintain the property. If some of the refinance is for a consumer purpose, such as pulling money out to pay for a kid's college, then it's consumer purpose and thus covered by both regs.)
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#2198576 - 11/17/18 07:33 AM Re: Property type - 1 to 4 or multifamily? CRL
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I think you need to forget about the units. There is only one unit in each structure so that is a moot point. If I get a loan to buy 6 single family houses, whether on one property or not, and five of those houses are non-owner occupied rentals and the value of those five houses far exceeds the value of the property in which I am going to live, the loan is definitely business purpose. Same with a straight refinance of the original purpose.
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