Consumer purpose or business purpose?

Posted By: dutchbltz

Consumer purpose or business purpose? - 11/15/21 05:28 PM

We received a 1003 marked as a 'second home' some time ago and doc'd it out accordingly as a consumer loan covered by TRID. This morning, I was informed by Credit that we would not do this loan as consumer; and that it has to be in the commercial portfolio. (among other differences, the rate will be about 1% higher and not fixed.) This is not a situation I have previously been in the loop on, so I called the LO to find out what was going on. Here are the cliff notes:

-home is the applicants PRIOR home. It is now fully occupied; 365, by the parents of the applicant.
-the applicant is a natural person.
-There is some sort of life estate situation. The applicant is legally obligated to allow the parents to live their the remainder of their life, and per the loan officer, even if they wanted to kick the parents out and rent it out to someone else at full market value; they cannot do so.
-HOWEVER, the parents have been paying rent. (This is what concerned credit and why they are saying that it can't be consumer.) But if they couldn't any more, they would still continue to live there.
-The applicant is not in any way in the real estate business. The applicants income is medical in nature, and the 'rent' from the parents shows at a loss on the tax returns.
-the bank I work at is currently 100% a portfolio lender. We do not enforce any fannie/freddie type rules like distance from primary residence to a secondary; etc.

At my prior employer, we probably would have called it an investment property, but left it on the consumer side of things and stayed under the TRID rule. It definitely does not feel 'business purpose' to me - or the loan officer - but I can sort of see why credit feels that it is, because it IS reported on the tax returns. (and technically, it is NOT owner occupied.) If we say 'no' I will have to write up an AAN for this; and I have no idea on what grounds we would actually be denying it. We have loans we have closed in the past 3 months that are recorded as 'second homes' but are literally 2 miles from the primary. I feel like there is additional guidance about the difference between business purpose and consumer purpose that I am not locating/remembering where is - I seem to remember reviewing something more detailed on this topic back when TRID came out. I've reviewed Reg Z's definition of business purpose and the only thing I'm really seeing is that one of the defining factors is the borrower's statement of purpose for the loan.

Anyone have any thoughts on this?
Posted By: raitchjay

Re: Consumer purpose or business purpose? - 11/15/21 05:50 PM

There's lots of information about the collateral, but not much information about what the funds will be used for--that's what is going to determine whether this loan is subject to Reg. Z or not.
Posted By: dutchbltz

Re: Consumer purpose or business purpose? - 11/15/21 05:57 PM

The funds are being used to refinance the property in question. No cash out.
Posted By: raitchjay

Re: Consumer purpose or business purpose? - 11/15/21 06:06 PM

Well, you're always free to be cautious and disclose the loan as subject to TRID (i don't really understand Credit's reasoning about it MUST be done as commercial)....but if the secondary residence part was truly just a mistake on their part, and the home is being rented (wouldn't matter to me that the renters are related, as long as they're paying their rent in good old U.S. dollars), then it sounds like business purpose to me. However, if the loan that you would be refinancing was consumer purpose, then i think the safest thing would be to treat this loan as subject to TRID (the assumption here being that they originally financed the home while it truly was their secondary residence). I'm not a lawyer, so i don't have any advice on the life estate i said, if in doubt, disclose it as TRID and move on would be my advice.
Posted By: dutchbltz

Re: Consumer purpose or business purpose? - 11/15/21 06:33 PM

I guess to me, it just isn't a business purpose. He owns this property, to house his parents. It's not for a business purpose - housing a family member is not a business purpose. Especially beings he has to do that with or without rent; due to the legal situation. I guess it would feel different to me if this guy had a rental house that mom and dad just decided they wanted to be tenants at - but that isn't what happened here by all accounts. And he's not making money by housing them; either. (but is taking the tax write off). I'm going to find out what Credit's issue is but I think the big deal is they just don't want to give him a consumer rate. And yes, the loan being refinanced appears (by everything I can see) to be a traditional, consumer purpose mortgage. What I'd like to propose is to leave the TRID disclosures (etc) in place and just change the rate/structure; but I am not sure if systemically that is going to be possible.