RESPA - Investment Property

An individual would like to refinance their non-owner occupied 1-4 family property. Would this be covered by RESPA?

It depends upon what you mean by "refinance," the use of the property (rental?) and the purpose of the loan. We need more details.

Refinance-They would like to replace their existing note with a different bank with a new note from our bank.

Property-Used as a rental. Owners reside in WI, prop is in MI.

Purpose-Not sure, this is where I am getting hung up. It would seem as though this would be business purpose as it is not being used for personal, family or household purposes (or perhaps it does and I am not defining those correctly??). When I look at the reg it mentions consumer purpose as:
1. Primary purpose. There is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, nor for what constitutes the primary purpose

When I look at the exemptions for business purpose though I read this:

4. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner occupied and is not governed by this special rule. ( See comment 3(a)–5, however, for rules relating to owner-occupied rental property.)

(both of these are in the commentary)

I am not sure if exemption #4 would apply to a refi?

If your bank intends to refinance a note from another bank that was for the acquisition, improvement, or maintenance of a non-owner occupied rental property, the refinance would qualify as business purpose and be exempt from RESPA and Reg. Z.

Caveat: you say it's used as a rental.....if this status changed since the original loan (say they purchased the home as a secondary residence and later turned it into a rental, for example), you still need to go back to the purpose behind the original loan.

Well, I think you'll get different opinions on that. The reg specifically exempts loans for the purchase, improvement or maintenance of rental property....doesn't say anything about refinance. It's my personal opinion that the refinance of a loan that was for purchase or improvement or maintenance of rental property would also be exempt. So I think you're going to have to:
1. Find out what the funds for the loan you're going to refinance were specifically used.
2. Decide if (provided the original loan WAS for the purchase, improvement or maintenance), you want to go out on a limb like I have and consider that the refinance is also exempt.

Otherwise, apply both Reg Z and RESPA. A third angle might be that if the borrower has lots of rental property, the loan might be exempt from Reg Z as a business purpose loan.

Oh exactly, raitchjay! And we get those requests more frequently than one might think. The borrower purchases a home to live in. Then moves to new homestead property and rents out the original property. When the borrower wants to refinance that loan, it's still consumer purpose. But lenders will argue that endlessly, wanting to exempt it due to its rental status. Good grief!! Just give the disclosures and shut up.

Swiggles, i think the section of Reg. Z that talks about business purpose loans later re-written as consumer purpose speaks to refinances in a sense; the assumption being that business purpose loans NOT later re-written as consumer purpose loans are still business purpose and exempt.

Excellent point! Thanks!

Thank you both for the feedback...I am of the if it is in doubt, just give them the disclosures. Looks like we will have to do some further research on what the purpose of the original loan was. I am thinking it was a homestead and then couple then moved into this state and subsequently rent out the original home.

If it's a no cash out refi then it would not lose it's business purpose exemption, providing it was a business purpose loan to begin with. If it's a cash out refi then I look to the purpose of the cash out to determine if it retains its business purpose exemption.

Thank you Dan!

Question on similar train of thought:

Original RE Loan made couple of years ago at my bank to an LLC, collateralized by 3 rental 1-4 homes, considered a business loan refi, as loan at another institution was completely replaced by this loan. Was categorized then as business (exempt from REG Z and RESPA) but reported on HMDA, with one prop address used.

Fast forward to 2011--owner of the above LLC dissolves the LLC, wants to "refinance" the business loan in his name only, using same 3 properties for collateral, but one of which has now become his primary residence.

Loan officer said this was a business purpose refi loan, no HMDA, REG Z nor RESPA required. I'm not sure this is correct, so 3 questions:

(1)Wouldn't this be considered a purchase, not a refi, as they are two different entities?

(2)There is one loan-3 properties--wouldn't this be reported on HMDA, noting one prop for the geocoding?

(3)Would this continue to be considered business purpose, thereby exempt from REG Z and RESPA even if one of the properties is now his primary residence?

Any help is appreciated.

I'll vote.

It's a purchase transaction.
HMDA reportable using one property address.
I'm in Texas....would NOT do this as one loan where homestead property is concerned. The purchase of the homestead would be a separate loan - consumer purpose. The other two properties could be considered the purchase of rental property (thus business-purpose) and exempt from Reg Z/RESPA.

That's my two cents.

1. If the deed is transferred as part of the loan transaction then I would agree it would be a purchase. If the need had been quite claimed when the LLC was dissolved and before your loan transaction it would not be a purchase or a refi.

2. Due to the change in borrowers it doesn't appear the loan meets the definition of a refi.

3. The primary purpose of this loan is now to refinance non-owner occupied rental property and his primary residence. The refinancing of the primary residence now takes precedence IMO since you're refinancing a single loan into another single loan. If the previous financing had been 3 separate loans and you were now refinancing them into 1 loan then you might argue the 2 rental property loans were the primary reason for refinancing, but I would not buy into that argument with only a single loan being involved and one of the homes is now the borrower's primary residence. To me this is a good example of later refinancing business purpose credit for a consumer purpose.

I had a question on this, and I'm getting held up on the maturity date. We have a borrower who obtained a commercial loan to purchase a warehouse a few years back. Down the road the borrower then converted this warehouse into their primary residence and actually live there. The loan was then renewed on the date of maturity, where it was simply extended with a rate reduction. No new money.

Is this in fact a renewal? A Refinance? Our loan document provider is also producing a Right of Rescission for this loan. So would this be a refinance as a now consumer purpose residential loan? Or does it retain its original business purpose?

Thanks for any help.

bump, I'd be interested in comments on the above posters question as well.

eta: and isn't this thread posted below a direct contradiction to the above responses?

http://www.bankersonline.com/forum/ubbthreads.php?ubb=showflat&Number=1843148

Down the road the borrower then converted this warehouse into their primary residence and actually live there. The loan was then renewed on the date of maturity, where it was simply extended with a rate reduction. No new money.

If the loan was modified without a new note then new disclosures would not be needed. If however a new note satisfied and replaced the existing note it would be a refinancing. Again I refer to 1026.3 where a business purpose credit is later refinanced for a consumer purpose.


and isn't this thread posted below a direct contradiction to the above responses?

I guess I'm not seeing the contradiction. The link refers to a business purpose loan being refinanced for a consume purpose.

The above is referencing refinancing non-owner occupied rental property. If they are taking no cash out then the loan does not lose it's business exemption. If the non-owner occupied property was now owner occupied property then the refinancing purpose would no longer be exempt in my opinion under the non-owner occupied rental property exemption.

I know some disagree but you will find that I am consistent in my opinion and I've seen nothing to sway me from that opinion.

Thanks for replying Dan...and FWIW, I agree with you. I think I got twisted up with the subject bouncing around to different scenarios above.