I have a question on the interplay between Reg Z and Reg C (yes - i know they are not meant to play)

Regulation Z states: Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes.

Reg C states (paraphrasing): Report NA for Rate Spread, HOEPA, Total Loan Costs, Closing Costs, Points Paid and Lender Credits if defined as business purpose per Reg Z.

However, for individual borrowers borrowing on investment property, we still provide the CD and do not treat those borrowers differently than consumer transactions for Reg Z. This is out of an abundance of caution for the risk of non-compliance with Reg Z. By doing this, are we voiding any ability to claim a business purpose definition as allowed by Reg Z? And should we be reporting those values that we have captured under Reg C (whereas we would normally not have those values if we treated the application as a business purpose transaction)?

Thoughts are appreciated.

My thoughts: i don't understand the "abundance of caution" approach your bank takes to Reg. Z. It gives you a clear-cut exemption--take it. That would be my advice.

(However, i want to add the caveat.....you use the term "investment property" in your next-to-last paragraph, which is NOT a term that you can freely swap for the specific non-owner occupied rent home language found in Reg. Z. So my advice is: when loans are to acquire, improve, or maintain non-owner occupied rent homes, or are otherwise clearly for a business purpose, as defined in Section 3, regardless of whether the borrower is a natural or non-natural person--take the exemption and don't treat the loan as disclosable under Reg. Z.)

Unfortunately, I have no authority over the Reg Z compliance and any abundance of caution taken in that regard. I am also not the Reg Z expert to fully understand those risks of non-compliance (hence my morphing terminology). But it would seem to me that if we are not taking that exemption under Reg Z, that there may be room for a regulator to argue that the data should be reported as we are not treating the transaction as business purpose for Reg Z.

You cannot be half pregnant. You either are or you are not. Plus, as RJ has alluded to, you state: "for individual borrowers borrowing on investment property" nor do you tell us anything about the nature of the borrower. That tells us absolutely nothing as to the purpose of the actual loan.

Providing disclosures under reg Z does not make the transaction consumer purpose for Reg Z or Reg C. A not the same but analogous situation that is more common would be to provided TRID disclosures for investor purposes even though the loan is exempt under Reg Z (i.e. purchase of non-owner occupied rental). You are bound by what is in disclosure you provide, but it does not make the loan otherwise subject to Reg Z, and you would report it as business purpose for HMDA.

Edit for citation: 1026.3(a)-1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt.

I personally think that language still doesn't provide that much relief: (following emphasis mine)--"A creditor MUST DETERMINE in each case if the transaction is primarily for an exempt purpose. IF SOME QUESTION EXISTS AS TO THE PRIMARY PURPOSE for a credit extension, the creditor is, of course, free to make the disclosures..."

There's quite a bit of difference in genuine uncertainty as to whether a loan is business purpose or not and a blanket policy of treating all loans to individuals as subject to Reg. Z.

I'm not saying that the advice you (Inherent Risk) give in regards to HMDA is wrong...it probably isn't. I just still think the best advice for the OP's bank is to start making business purpose calls on a loan by loan basis.

But hey, i'm not in the investor world (and i'm pretty glad...i don't really understand the world of 'overkill everything to death and forget about actually trying to understand whether a regulation applies or not').

As the previous posters have stated an "investment property" could be for a consumer purpose or it could be for a business purpose. Reg. Z only refers to certain "rental" property transactions being exempt.

So when you refer to "investment property" in relation to Reg. Z you have to determine the intended use of the loan proceeds.

If the intended use is consumer you report the applicable information in question. Just to be clear even if the property is a rental and the loans purpose is consumer it is still a consumer loan. Remember the intended use of the loan proceeds determines the loan's purpose, not the collateral.

If the intended use is business you report NA or the appropriate code # for those fields. Reporting anything else would be data reporting errors and if you are consistently reporting incorrectly you are looking at the potential for having to refile your HMDA data and a possible CMP.