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#500735 - 02/17/06 09:46 PM
Reg Z vs. HUD's Reg X
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Joined: Oct 2004
Posts: 95
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Are consumer pupose loans made to other than a natrual person exempt from Reg Z but still potentially subject to HUD's Reg X?
Exempt from Reg Z :
226.3(a)(1): "An extension of credit primarily for a business, commercial or agricultural purpose."
- and -
226.3(a)(2): "An extension of credit to other than a natural person."
Exempt from Reg X :
3500.5(b)(2): "An extension of credit primarily for a business, commercial, or agricultural purpose, as defined by Regulation Z, 12 CFR 226.3(a)(1). Persons may rely on Regulation Z in determining whether the exemption applies."
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#500736 - 02/17/06 10:18 PM
Re: Reg Z vs. HUD's Reg X
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Quote:
Are consumer pupose loans made to other than a natural person
Isn't that, by Reg Z's definition, a business purpose loan rather than consumer purpose?
Once you've established under Z that it's a business purpose then it's also business purpose under X. I don't think it would be possible to have a loan that flip-flopped from consumer purpose to business purpose within the same transaction - that would be a nightmare.
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#500737 - 02/17/06 10:39 PM
Re: Reg Z vs. HUD's Reg X
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I would agree except that Reg X specifically cites Reg Z section 3(a)(1) (purpose oriented) and doesn't cite section 3(a)(2) (borrower oriented). That's the part that concerns me.
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#500738 - 02/17/06 11:00 PM
Re: Reg Z vs. HUD's Reg X
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Back to Z - I'm thinking that 226.3(a)(1) and the OSC are more geared to helping us determine if a loan to a human is for a business purpose since 226.3(a)(2) is pretty clear regarding exempting loans to "non-humans".
That's all I have for now - hopefully one of the big kahunas will clear this up for us.
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#500740 - 02/17/06 11:56 PM
Re: Reg Z vs. HUD's Reg X
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Quote:
In that case, you may be escaping Reg Z under 226.3(a)(2), but you're going to get caught up in RESPA.
Which part of RESPA?
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#500741 - 02/17/06 11:57 PM
Re: Reg Z vs. HUD's Reg X
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Bonnie, I'm sorry but I have to disagree. That section does not say, or indicate IMO, that a loan to a non-natural person such as partnerships, corporations, LLCs, etc. are automatically considered business loans. That sections simply says that loans made to non-natural persons are not cover by Reg. Z.
If I own a LLC and I borrow money through the LLC to pay for my grandson's college, that is a consumer purpose loan, however it is exempt from Reg. Z.
RESPA exempts business purpose loans, and they define a person at 2602 (5) as follows:
the term "person" includes individuals, corporations, associations, partnerships, and trusts;
A loan exempt from Reg. Z is not necessarily exempt from RESPA. In both cases the loan's purpose drives the coverage IMO.
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#500742 - 02/18/06 12:09 AM
Re: Reg Z vs. HUD's Reg X
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Quote:
A loan exempt from Reg. Z is not necessarily exempt from RESPA. In both cases the loan's purpose drives the coverage IMO.
I'm being dense. What would be an example of a loan that is exempt from Z as a business purpose loan but wouldn't be exempt under X?
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#500743 - 02/18/06 12:17 AM
Re: Reg Z vs. HUD's Reg X
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Cowboy Fan -
If I am understanding this correctly it would be Dan's example of an LLC borrowing for a consumer purpose.
Another example would a family trust (not a human) borrowering to put in a pool.
The fact that the borrower is not a human makes it exempt from Reg Z.
In order for it to be exempt from RESPA, it would have to also be for a business purpose.
Last edited by Marty McKay; 02/18/06 12:20 AM.
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#500744 - 02/18/06 12:27 AM
Re: Reg Z vs. HUD's Reg X
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Call me stuck on stupid (no, really, go ahead  ), I'm still not getting how a loan to a non-human could ever be a consumer purpose loan. Good thing I'm not in compliance 
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#500745 - 02/18/06 08:20 PM
Re: Reg Z vs. HUD's Reg X
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Quote:
Bonnie, I'm sorry but I have to disagree. That section does not say, or indicate IMO, that a loan to a non-natural person such as partnerships, corporations, LLCs, etc. are automatically considered business loans. That sections simply says that loans made to non-natural persons are not cover by Reg. Z.
If I own a LLC and I borrow money through the LLC to pay for my grandson's college, that is a consumer purpose loan, however it is exempt from Reg. Z.
RESPA exempts business purpose loans, and they define a person at 2602 (5) as follows:
the term "person" includes individuals, corporations, associations, partnerships, and trusts;
A loan exempt from Reg. Z is not necessarily exempt from RESPA. In both cases the loan's purpose drives the coverage IMO.
And this is where you can spin those angels dancing on the head of a pin clear into the stratosphere.
If the loan is to, let's say, an LLC which is a business entity, and the loan is to pay for the college tuition of an individual, that in and of itself does not necessarily make the loan a consumer purpose. The LLC itself is not going to college, and there is supposed to be some benefit to the LLC before paying for something that benefits another party.
It could be that the individual will perform service for the LLC as the consideration for the LLC's payment of tuition. That service to the LLC benefits the LLC's business.
It is THAT BENEFIT to the LLC which is inherently business purpose, therefore you can make the case that the loan, since it is to a business entity, has a business purpose regardless of the eventual use of the proceeds.
With Family Trusts, you cannot make that argument since a Family Trust is not a business entity. Quite frankly, Family Trusts exist in a murky area of Regulation Z which seems to go begging for some clearer regulatory guidence. I think we all know what will probably happen if the regulators really sit down and tackle the subject of Family Trusts as either consumer or non-consumer borrowers. This is one reason why a lot of lenders simply make the Reg Z disclosures to them anyways.
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#500746 - 02/18/06 08:34 PM
Re: Reg Z vs. HUD's Reg X
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Quote:
I think we all know what will probably happen if the regulators really sit down and tackle the subject of Family Trusts as either consumer or non-consumer borrowers.
Actually, I doubt that they would ever consider changing this. The reason being is that if the consumers are smart and sophisticated enough to figure out how to operate a family trust, getting consumer pricing information on a loan for comparison purposes becomes rather moot at that point.
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#500748 - 02/20/06 05:43 PM
Re: Reg Z vs. HUD's Reg X
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If I borrower through my LLC to pay for my grandson's enducation - where's the business purpose?
If a trust borrower's money to put in a swimming pool - where's the busines purpose?
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The opinions expressed are mine and they are not to be taken as legal advice.
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#500749 - 02/20/06 09:37 PM
Re: Reg Z vs. HUD's Reg X
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To follow up on Dan's comment, some people establish "family LLC's" for estate planning purposes. There's no business purpose to the LLC. A loan to the LLC is exempt from Reg. Z not because it's a business purpose loan under 226.3(a)(1), but because it's "organizational credit" under 226.3(a)(2).
However, assuming that there is a consumer purpose to the loan, it would be covered by Reg. X because Reg. X exempts business purpose loans, but not "organizational credit."
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