The head of commercial lending wants to make a $175,000 commercial loan to a long standing customer whereby $140,000 will be for business purposes (refi commercial building, pay taxes) but $30,000 will be used for personal family use. We don't want to do two separate loans because we want the commercial collateral. (The borrowing business entity is wholy owned by the family members.)

The consumer purpose is over $25,000 but the loan is will be secured by a retail/apartment property. The apartment is rental property - not owner occupied.

Can anyone help with what, if any, consumer documentation is needed for this loan? It looks to me like I need a TIL.

Part of the funds are for a consumer purpose, "personal, family, household" and it is secured by RE. I think I'd err on the disclosure. But why not make 2 loans on the same collateral? This would certainly make the business accounting easier and it would seem to be a cleaner transaction.

I agree with you, but that makes other aspects of the loan relationship messy to deal with.

Thanks for confirming my conclusion.

Section 226.3(a) & (b) states:
This regulation does not apply to the following:
1. Business, commercial, agricultural, or organizational credit.
(a) An extension of credit primarily for a business, commercial or agricultural purpose.

The Commentary to Section 226.3(a) #1 & #2 states:
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.

Since this loan is PRIMARILY business purpose, you do not need to worry about any TIL disclosures. This is not circumvention, this is the what the regulation says. You win, why worry?

My brain is getting rusty and David's is fresh from vacation. He is correct. I'd recommend for clarity getting a good purpose statement from the customer. (But I still think it is poor accounting.)

Thanks, David.

Like Andy, I usually err on the conservate side. However, the commentary is pretty clear, and I can always use a few brownie points with the commercial lenders. (At least they asked!)

I further recommend that you get a breakdown from the customer as to the amount of funds for business and the amount of funds for personal use. I recommend that this breakdown be in the customer's own writing, or at the very least, something on his/her letterhead.

IOW - don't let it appear as if YOU created the itemization and simply asked the customer to sign it. While there is no regulatory prohibition, I just think it makes a stronger case if it should ever get questioned by an examiner or (worse) in court!

I would leave the lenders alone on this one. Detailed documentation is overkill. The next time you have an unpopular call, you will want to remind the lenders of your open-mindedness on this deal!

Richard, what I tell the lenders is to explain to the borrower that we need them (the borrower) to write the purpose so that the "government" doesn't second guess the reason for the loan. Most business owners have had their fill of the "government" second guessing things that they (the borrowers) have done, so most of the time they are very willing to provide the purpose statement.

The lenders are happy that they don't have to jump through all the Reg Z hoops, the borrower is happy that the "government" won't be second guessing their intent, and both usually thank me for saving them time and hassle.

Sounds good if the lenders end up with the impression that you're on their side whenever possible.