I have a loan which at the moment is being done as commerical. The property is a 2 family residential home that is non-owner occupied. I wanted to do the transaction as residential b/c it would save the borrower a few dollars, plus even though this is a investment property, the dwelling is 100% residential. Is there a regulation which stipulates that this must be done as residential? Or, is this at the Bank's discretion?

If you are referring to how the bank chooses to price the transaction - that is at bank descretion.

I understand that. I guess my concern is if we do decide to this loan as a commerical transaction, could an examiner give us slack for not doing it as consumer loan giving the dwelling is 100% residential.

All our non-owner occupied rental property loans are processed as a business loan and priced accordingly. I'm not sure I understand your concern.

My concern stems from a recent examination where the recommendation was made that any non-owner occupied rental properties, which are 100% residential, should not be done as business loan. They should be handled as a consumer transaction. I am curious to see how other FI's are handling their pricing.

As you indicated, there may be a difference in pricing (and/or terms) between the different departments in the bank. If certain loans were steered to the higher priced department, and others steered to the lower priced departments, it might be an issue from a fair lending perspective, if the examiner perceived difference in treatment to any protected classes.

The issue of consumer and commercial may have different meanings too, comparing the compliance "type" of loan it might be or the department in the bank to book it.

Was this a regulatory examination or an auditing examination, and what was their citation supporting that recommendation? Reg. Z specifically exempts the purchase, renovation, maintenance, etc. of non-owner occupied residential rental property as a consumer loan. RESPA also considers these business purpose loans in conjunction with Reg. Z.

It was a regulatory exam by the lovely examiners from the NYSBD. When I pointed that same fact in Reg. Z, they responded that the Bank could have done it as a residential loan to obtain the best pricing for the customer. Nevertheless, I agree with your points Dan, as always, I thank you for your input.

I agree with your risk assessment of non-owner occupied properties. However, the NYSBD is not flexible once they formulate an opinion. Sometimes I believe they come into a FI looking for problems. When they find no major ones, they start making recommendations based on their individual opinions. In regards to Southern Banker's point, any deal with a residential aspect to it, is usually examined to see if it could be conducted as a consumer loan. All loans with similar circumstances are evaluated with the same protocol.

Flexible or not - I would ask them under what law or regulation are they citing you under. Is there some NY requirement that loans be booked in a certain way or category? If not and if they can't provide anything but an opinion, I would kick it up to the next level in the examination division.

I found this thread during a search, and I was wondering if someone could clarify something for me. I see in Reg Z where it exempts non-owner occupied rental propery, but I don't see where it exempts all non-owner occupied residential property. I have a situation where a customer is getting a loan to rehab and sell a house for investment purposes. This customer is not in this line of business, so I would classify this as a personal investment and have is subject to reg Z. Am I looking at this wrong?

Since it's not rental property, you need to evaluate this in light of the factors shown in the commentary 226.3(3)-2. Without more information, it sounds like it is consumer purpose. But you need to look at the factors.

Sorry, the citation should have been to 226.3(a)-2.