Borrower buying a mixed use building, retail unit on main floor that will be rented out (currently vacant), and live in the upstairs apartment. If more than 50% of the sq ft of the building is for the NOO rental space on the main floor, is this loan business purpose and not subject to RESPA/TILA?

I have read TILA 1026.3 and official interpretations 3(a)5 for OO real property and understand that since only 2 units, would need to look at the general factors for determination of "business purpose." But does anyone know if "greater than 50% of the square feet" is enough to qualify for the business purpose exemption for a purchase transaction? I think the other 5 factors for determining business purpose seem less clear (grey!) when applying to purchase of rental property.

IMHO since this will be owner occupied property you cannot use square footage for exempting the loan from Reg. Z. The square footage comparison and exemption is a product of Reg. C to determine if the structure is a dwelling for reporting purposes.

You will need to review the Commentary to 1026.3(a)(3) and use those criteria to make your determination.

Thanks Dan, I always struggle this. But I am reading the following to mean that if more than 50% of the property being acquired will not be OO, then the exemption would apply. I know that's not explicit, but seems to follow that if purchasing "more than 2 units" is exempt, that could infer that if more than 50% is NOO/rental property, then the exemption could apply? Especially with mixed use, which is not addressed.

4. Owner-occupied rental property. If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:

• Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units.

Ok, I know this is dealing specifically with "more than 2 housing units" so not specifically for a mixed use property. But again, if more than 50% of the square feet (or income, if you had a market rate for the housing unit) is from the NOO rental unit, I think supports "primarily" business purpose.

The acquisition, maintenance or improvement of non-owner occupied rental property is automatically exempt as business purpose regardless of the number of housing units.

That rule does not apply to owner-occupied rental property. The rule for OO rental property is specific that it is exempt if there are more than 2 housing units involved (your client is purchasing rental property with only 1 housing unit).

Instead of looking at the primary use of the property, look at what the primary purpose of the loan proceeds are being used for. Is the primary purpose to purchase the building to be used as the primary residence with renting out the retail space as a secondary purpose, or vice versa. However, if the primary purpose was to purchase the retail space to rent then you are going to have to go back to 1026.3(a)(3) - unless the borrower makes a living at purchasing and renting retail space you may have a difficult time saying this is a business purpose loan since the property will be owner occupied and the correlation of the rental income to the borrower's total income.

Thanks Dan! I hate 1026.3(a)(3)... its always grey, but yes, I see how it applies in this case for determination of being exempt.

One more question: does this property, that is more than 50% commercial use, meet the FRMT definition of "principally for occupancy of 1-4 family?" If no, then possibly exempt from RESPA?

From the FRMT definition:
(A) Located or, following settlement, will be constructed using proceeds of the loan, a structure or structures designed principally for occupancy of from one to four families (including individual units of condominiums and cooperatives and including any related interests, such as a share in the cooperative or right to occupancy of the unit)

I've got another similar deal with a question about RESPA. Borrower requested loan secured by a developed lot, no house on it, that the borrower owns free and clear. Proceeds are for purchasing a new primary residence. So consumer purpose, yes, subject to TILA. But secured by land, so no RESPA or HMDA, correct?

One more question: does this property, that is more than 50% commercial use, meet the FRMT definition of "principally for occupancy of 1-4 family?" If no, then possibly exempt from RESPA?


I would most likely agree with that statement.


so no RESPA or HMDA, correct?

Correct. The loan would have to be secured by a 1-4 residential property to be subject to RESPA and the loan does not meet the definition of a home purchase for HMDA reporting.

Thanks Dan! For today, I'm going to say "I've got it!" (now, that doesn't mean next month when we get another unique deal in I'll have to look it up again, but I'll make sure to save this post...) :-)