Looking for some guidance on how to proceed with informing staff about the consequences of originating consumer purpose loans as commercial loans.

Some background on the credit in question: loan is to a married couple in an area known for having second/vacation homes. The transaction is to purchase a condo and sell it because the condo has a more desirable boat ramp for the property the borrowers actually own. The transaction is necessary to, and entirely for the purpose of, exchanging boat ramps. It's being proposed as a commercial loan because "all of the value in the transaction has to do with the condo sale, they're making a small profit on the sale, and the loan will be paid off almost immediately."

I've pointed out that the underlying purpose still appears personal in nature. This is not the first time I've had to point out the difference in consumer and business purpose loans. The threat of regulatory penalties does not appear to be enough to curb this behavior. It's not a common thing, but I feel that having to point this kind of thing out more than once is too many times. Or maybe it's an honest mistake and difference of opinion?

Would it be too much to suggest that this type of activity would rise to the level of mortgage fraud and/or a SAR on either the lender or borrowers, or both? The lender did concede that the boat ramp is for personal use but maintains that the other factors - primarily that the condo being flipped will never be used in any capacity by the borrowers - would tip the balance of the transaction to business purpose.

Ultimately I am looking for input on whether I'm making too big of a deal about this and what can I say (or what would you say to your staff) to illustrate that this is potentially a serious issue (if it is)?

Honest mistakes (in good faith) happen. Playing fast and loose with the facts is a step beyond good faith. A recurring pattern of "fast & loose" starts to look like willful blindness.

Answer this question. Prior to consummation of the loan, did the lender have good reason to believe that the use of the loan is connected with a business venture? ,Unless you can answer "yes" without reservation, then the resulting failure to provide TIL disclosures is willful and knowing...and that is a criminal offense punishable by up to a year at Club Fed. See 15 USC 1611 -- https://www.law.cornell.edu/uscode/text/15/1611

What would I say to the staff? "How do you look in stripes?"

Richard, if no TIL is given, doesn't the APR revert to "0.00%"?

The APR reverts to the note rate.

Refer to: Violations Involving the Non-Disclosure of the APR or Finance Charge

https://www.fdic.gov/regulations/laws/rules/5000-300.html

Thanks Randy - the old adage - open mouth, insert foot!

I can agree with both of you! If you're dealing with a regulator, then the Enforcement Policy cited will be the guideline for agency action. If you're sued and trying to defend yourself in court, then Section 130 of the TILA could impose civil liability that would eliminate the undisclosed FC (actual damage)--causing the APR to be 0%.

Regardless of what administrative actions or civil penalties might apply, what's most important is to eliminate the source of this problem. If the lenders can dream up ways to exempt loans that should be disclosed, then procedures need improvement. The closest the reg comes to defining "business purpose" is 6 examples. Lending procedures can be much more specific.

Another anon here: To address OP's question of whether this may involve mortgage fraud: Yes, I think so.

In my area, our market includes a city where there are a lot of AirBNB properties; people buy them as investments then rent them out. Maybe once in a while they stay for a weekend or a week, but at least 49 or 50 weeks out of the year, it's rented or available for rent, making the primary purpose of the loan, a commercial investment.

Every once in a while we find someone requesting a mortgage to finance the purchase of such a unit, in a building that is full of such units, and when they fill out our online application, they indicate it is a first residence or a second residence. During underwriting, someone usually discovers that the property is more or less a hotel, of a sort, and begins to question why the applicant is telling us it's going to be their home. One way to discover this is to simply run an online search for the property address. You may find that the unit being purchased already has rental listings targeting vacationers. Or you may find that it's a 50-unit structure and has dozens of rental listings. Or you may find that the name of the property - possibly a name not disclosed to you by the applicant - includes things like "vacation rentals" or "resort" etc.

My theory is that the reason they said it was going to be their own residence, is in order to get a better deal from the lender. A first residence might qualify for a 30-year mortgage, might have a great low rate, etc. A commercial investment might only qualify for 12 months of financing, 36 months, etc. We'd demand information about the applicant's experience in making money in such deals, and we'd have their real primary home as collateral, not accepting only the rental unit as collateral. (In one or two cases, the theory was confirmed when we told the applicant we'd need that kind of underwriting, and they said no, they wanted it done as first residence so that they'd have a lower rate and better terms; they were declined.)

In such cases, we consider a SAR for attempted mortgage fraud.

I am really sorry - but I am having a real hard time with this being considered mortgage fraud on the part of the customers. This sound to me like some serious internal control issues. If someone can point to a Federal law that the customers or loan officer may have violated - please do so.

The "it's fraud" anon here, in response to Mr. Carey:

I don't have a link direct to the applicable federal law, but in our shop we call these SARs mortgage fraud, and the narrative specifies it involves "occupancy fraud."

"What Is Occupancy Fraud?
Occupancy fraud is a type of mortgage fraud, whereby the borrower lies about whether or not the home will be owner-occupied. Occupancy fraud happens when the borrower says that a home will be owner-occupied when, in reality, it will not be. Mortgage lenders typically offer lower interest rates for mortgages on owner-occupied homes than on investment properties where tenants will live. When occupancy fraud occurs, banks are not properly compensated for risk. They are receiving a lower interest rate than they should be for the delinquency risk that exists. Occupancy fraud is relatively common. However, it can carry severe legal and financial consequences if it is discovered."
https://www.investopedia.com/terms/o/occupancyfraud.asp

P.S., regarding fraud - oh, sorry, Mr. Carey may actually be referring to the original question at hand here, regarding whether saying a consumer-purpose transaction is a commercial-purpose transaction. My occupancy fraud links may therefore be an irrelevant tangent; but my only point with all that was that yes, I think that when an application for a loan says something about the nature and purpose of the transaction that is untrue, you may be looking at a potential fraud case and SAR.

There's probably other applicable laws but just some examples:
18 U.S. Code § 1010 would apply to HUD or FHA transactions
18 U.S. Code § 1014 covers false statements made to certain types of banks, to the FHA, the SBA, etc.
I'm sure there are other and better citations but that's what I found with a couple of moments of DuckDuckGo'ing.

No argument on what you are saying, but I don't see any indication in this case that either the customer lied when applying or that the lender was doing anything but being stupid, which is not a crime or a lot of lenders would all be in jail.

New anon says:

Fraud? I guess it could be. But I am betting in 99 times out of 100 it is an uninformed consumer clicking through an online application because they dont know the difference between primary residence, secondary residence, and investment property (most likely the latter two) and nobody is there to explain what those terms mean.