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#52480 - 01/07/03 01:18 PM consumer or business loan
JulieB Offline
Junior Member
JulieB
Joined: Apr 2002
Posts: 38
SC
I reviewed a loan file and cited the lender for no TIL disclosures, no RESPA disclosures, and no HMDA disclosures. The loan memo states, "Customers have bought a very nice second home on the lake and need this loan to reimburse their business line of credit used to purchase the property." The loan is secured by the lake home. The lender believes this is a business loan because it paid on the business line of credit. I believe that it is a consumer loan because of the underlying purpose of the funds. What do you think?

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#52481 - 01/07/03 01:27 PM Re: consumer or business loan
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,025
Bloomington, IN
I vote consumer. The purpose was to purchase a second home for the borrower. Just because he used his business line of credit to make the initial purchase does not negate the fact the loan is actually a consumer purpose loan.
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The opinions expressed are mine and they are not to be taken as legal advice.

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#52482 - 01/07/03 01:55 PM Re: consumer or business loan
JulieB Offline
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JulieB
Joined: Apr 2002
Posts: 38
SC
Thank you for your quick response. Sometimes a second opinion helps.

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#52483 - 01/07/03 02:03 PM Re: consumer or business loan
complylady Offline
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complylady
Joined: Jul 2002
Posts: 614
Michigan
In my opinion, it is not HMDA as it is not a purchase (home was already purchased), not a refinance (money going to replenish business line of credit), and not home improvement. As to Reg Z, in the Commentary to 226.3(a)5 Business credit later refinanced, it states that "business credit" (this was a business line of credit and they happened to use some of it for personal use but the intent was business when made)"that is exempt from the transaction may later be rewritten for consumer purpose. Such a transaction is consumer credit requiring disclosures only if the existing obligation is satisfied and replaced by a new obligation made for consumer purposes undertaken by the same obligor." The purpose of this loan is to pay on the business line of credit (replenish funds) to have funds available for business purpose. I vote not Reg Z and if not Reg Z also not RESPA. If we have someone who builds a home using their own funds, then they come in and obtain a loan secured by the dwelling to replenish their funds we do not consider it HMDA (but in that case would be subject to RESPA and Reg Z).

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#52484 - 01/07/03 02:28 PM Re: consumer or business loan
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,025
Bloomington, IN
Complylady, you bring up some very valid points and this loan could be exempted.

I looked at the money from the business loc being used as temporary financing to purchase the home, which is a consumer purpose, and that purpose of the loan is what I keyed on. However the fact that they are using the funds of this loan to replenish the "business loc" (which didn't regisiter in my thought pattern this morning) does make this loan a business purpose loan and therefore exempt.

Thank you for looking at this with more awake eyes than I did.
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#52485 - 01/07/03 03:11 PM Re: consumer or business loan
Anonymous
Unregistered

I say that this loan is consumer all the way, regardless of the fact that a business line of credit was intially used to purchase the lake property. These customers are paying off a temporary loan, the purpose of which was consumer. "Purpose, purpose, purpose" rules. The line of credit was simply a vehicle to provide temporary financing until the permanent loan closed.

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#52486 - 01/07/03 03:29 PM Re: consumer or business loan
David Dickinson Offline
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David Dickinson
Joined: Nov 2000
Posts: 18,762
Central City, NE
I agree that this is a "consumer" purpose loan. The only exception is if the home is legally owned by the business. For instance, if the borrowers own XYZ Co. and XYZ Co. legally purchased the home, then this would not be subject to TIL and RESPA. How is the home/land legally titled? Is the DOT (or mortgage) in the name of individuals or a business entity?
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#52487 - 01/07/03 03:56 PM Re: consumer or business loan
Anonymous
Unregistered

I go with not applicable. The purpose of the new loan secured by the lake home is to reimburse a business line of credit to be used for business purpose (in the future I assume). As all the new funds will go to the business line of credit, it appears to be business purpose all the way.

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#52488 - 01/07/03 04:03 PM Re: consumer or business loan
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,025
Bloomington, IN

Supplement I, 226.3: Exempt Transactions (01/01/93)
5. Business credit later refinanced. Business-purpose credit that is exempt from the regulation may later be rewritten for consumer purposes. Such a transaction is consumer credit requiring disclosures only if the existing obligation is satisfied and replaced by a new obligation made for consumer purposes undertaken by the same obligor.

Although the purpose was a “consumer purpose”, the customer used funds from their business line of credit to purchase the home. This transaction was not subject to any disclosure as funds were taken from an established line of credit.

They are now using the equity in the home to replenish the business line of credit. The new obligation is not replacing an existing obligation and as complylady pointed out the new funds (which may be more or less than the purchase price of the house) is not for the purchase of the house, refinancing or improvements, but to replenish the business line of credit, therefore I agree with complylady that the new transaction can be exempt from Reg. Z, RESPA and HMDA.

I’m not arguing that the original purpose was not consumer. However, I feel this could be argued as not being subject to disclosures because the new obligation is not replacing or satisfying an existing consumer obligation, and the new funds are not technically being used for “consumer” purposes but rather replenishing funds for a “business” purpose line of credit. (The customer very easily could had said that they own this second home and need to borrow against their equity to pay down their business loc (the loan officer may not even had known in this case that funds from the business loc was used to purchase the home) and this would had been a “business purpose” loan and not subject to the disclosures.

Now, let me throw this twist in. Did they borrow money from the business loc with the understanding that the loan would be repaid when a “bank” loan was obtained. If so, then the business made them (the owners) a consumer loan, and therefore this new loan would be a refinancing of a consumer loan and subject to the disclosures.

Supplement I, 226.3: Exempt Transactions (01/01/93)
Examples of consumer-purpose credit include:
• Credit extensions by a company to its employees or agents if the loans are used for personal purposes.
• A loan secured by a mechanic's tools to pay a child's tuition.
• A personal account used occasionally for business purposes

As always, if in doubt disclose.

_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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#52489 - 01/07/03 06:39 PM Re: consumer or business loan
Lucy Griffin Offline

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Lucy Griffin
Joined: Nov 2000
Posts: 1,544
The test here is the loan purpose, not how the purchase was rigged in the first place. The purpose is to purchase a vacation home, hence a consumer loan. I also have problems with this customer using their business credit line for personal purposes. My accountant wouldn't allow that!

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#52490 - 01/07/03 08:21 PM Re: consumer or business loan
Anonymous
Unregistered

Rigged is a good word. Unless the business was purchasing the home in the first place, the advance on the line of credit was a consumer purpose loan and subject to all required disclosures. Error number one, and two wrongs don't make a right. We have commercial lenders try to hide and bastardize consumer purpose transactions all the time. If it looks, walks and quacks like a duck........

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#52491 - 01/07/03 09:56 PM Re: consumer or business loan
Anonymous
Unregistered

I agree that the purpose of the loan is the key. The purpose of the first loc was for business purpose, they just used part (?) of the money for other purposes. The purpose of this new loan is to replenish the business loc (for I assume this time business purpose). If so this to me is business purpose. Just my opinion.

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#52492 - 01/07/03 10:09 PM Re: consumer or business loan
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,292
Lucy touched upon a comment I wanted to make but didn't have time today (examiners are here). Besides having a consumer loan that was (probably) incorrectly documented/disclosed, you most likely - depending upon your commercial loan documents in this case - have a violation of the terms of your commercial line of credit. Those lines normally state that they are for "working capital" of the business, and other business expenditures of a short term nature. They should not even be used - without approval - for purchases of a long term business asset.
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#52493 - 01/07/03 10:21 PM Re: consumer or business loan
Jack Holzknecht Offline

Gold Star
Joined: Aug 2001
Posts: 330
Louisville, KY
I agree that this loan may be exempt from HMDA, but the lender could report it as a refi, if they chose to. It is paying off an existing debt and the loan is secured by a dwelling.

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#52494 - 01/07/03 11:37 PM Re: consumer or business loan
Lucy Griffin Offline

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Lucy Griffin
Joined: Nov 2000
Posts: 1,544
When figuring out the purpose of the loan, you should probably be looking to what they are paying off, not to what the plan to do with the renewed line of credit. That draw -- hopefully business purpose this time -- would determine the nature of the new extension.

I would also suggest asking your commercial lenders to take a hard look at what their customers are doing with commercial lines of credit. You may have a contract issue with some customers. For example, what would you do if a borrower "just used part of" the mortgage proceeds to buy a big-screen TV?

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#52495 - 01/08/03 12:25 PM Re: consumer or business loan
Richard Insley Offline
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Richard Insley
Joined: Oct 2000
Posts: 10,097
Toano, VA
I can imagine only one scenario where transactions of this type could possibly be exempt from Reg. Z--the credit extension is >$25,000 and not secured by the R/E.

We're not told all the facts here, but if the LOC is in the name of the customer's business (Jones Enterprises, Inc.), then your takeout loan to John is a new transaction involving a different obligor and is clearly consumer credit. On the other hand, if the LOC is in John's name (John Jones, dba Jones Enterprises), then a new closed-end credit for the purpose of acquiring a vacation home would also be covered. There was never any business purpose to this credit extension, and as others have observed, the customer may be in default of the business LOC agreement for structuring the deal in this manner.
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#52496 - 01/09/03 02:25 AM Re: consumer or business loan
HRH Dawnie Offline
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HRH Dawnie
Joined: Aug 2002
Posts: 7,353
Anchorage Alaska
(ex business lender here) The purpose of the loan was to pay down the business line of credit. What the line of credit was used for is not material. Closely held businesses use their lines for many purposes, some I'd approve of and some I think they might find accounting nightmares, but that's their problem. The bank got their business LOC paid down, the business owner probably was able to use cheaper cash and easier access (already in place) and continues to operate their business using the now paid down LOC. Monitoring every expense on a closely held business is a nightmare, and is not cost effective for a bank. If this is a good client, with good repayment history, frankly I wouldn't care what they do with their line as long as their business operates as it was when we agreed to their LOC. Check out Doctors and Lawyers lines folks...property purchases, vacation homes, "business/personal" travel, it's all there. If the line is used in the majority for the business, it was taken out fairly as a business LOC (normally thats how we see it when we get the app). We don't re-write because they used it for a personal use for a couple of months and then paid down.

The purpose is...paying down business debt. The purpose several layers deep would be the vacation home...we're not required to dig that many layers that I know of. If I were the lender, I'd argue this one til I was blue in the face.

But...thats just me
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CRA Rating is in...Oh who cares...I'm home with the baby.

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#52497 - 01/09/03 03:41 PM Re: consumer or business loan
complylady Offline
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complylady
Joined: Jul 2002
Posts: 614
Michigan
The original poster said nothing about paying off the loc, only paying down. I agree with your assessments. I don't normally side with commercial lenders, but in this case I agree. This would not be a refi of anything as nothing was refinanced (satisfied), only a pay down. If the borrower had not told the lender the business loc was utilized for the vacation home, we all would agree this loan was business purpose all the way.

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#52498 - 01/09/03 06:15 PM Re: consumer or business loan
JulieB Offline
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JulieB
Joined: Apr 2002
Posts: 38
SC
Wow, thanks for all your comments. After reading all, this is how I interpret the situation. The lender knew and encouraged the borrower to use his business line of credit to purchase a second home. The line of credit is in the personal name of the borrower, not the business. The reason for using the line was that the borrower got a good deal on the property by being able to close the loan quick. To be conservative, I think the lender should treat this as a consumer loan, especially since the lender knew and encouraged the transaction.

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#52499 - 01/09/03 06:28 PM Re: consumer or business loan
Dan Persfull Offline
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Dan Persfull
Joined: Aug 2002
Posts: 47,025
Bloomington, IN
Based on this information and the following from the Reg. then I difinitely agree it should be treated as a consumer loan. Even though the LOC may be in his personal name it was set up as business purpose LOC and the LOC loaned him the money to purchase the home until he could arrange permanent financing.

Supplement I, 226.3: Exempt Transactions (01/01/93)
Examples of consumer-purpose credit include:
• Credit extensions by a company to its employees or agents if the loans are used for personal purposes.
• A loan secured by a mechanic's tools to pay a child's tuition.
• A personal account used occasionally for business purposes

_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

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