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Business Purpose Loan Changed to Consumer?

Answered by: 
Richard Insley

Question: 
Our collateral consisting of 62 acres of farmland, a residence, a hog barn and a cattle barn appraised for $465,000 in 2017. It is owned by an Amish (full-time farm family) borrower. The land and livestock buildings account for $$395,000 of the overall value. The primary residence comprised $70,000. Our first mortgage loan made in 2017 was a business purpose loan. Now these borrowers want to refinance it to add an additional $80,000 remodel. Is this a still a business purpose loan, or will it be a consumer loan? The total loan balance after the new house addition will be $366,000.
Answer: 

It sounds like this loan is for neither a consumer or business purpose, but rather an agricultural purpose. The Reg. Z exemption for agricultural purpose loans is NOT a subset of the exemption for business or commercial purpose loans. Two years ago, we had an exhaustive discussion of the agricultural exemption, here. Stop looking at collateral values as indicators of purpose, study that thread, and look for the answer to your question in Section 1026.3(a), Official Interpretation #8.

First published on 03/15/2020

Filed under: 
Lending
Filed under lending as: 
Reg. Z
Real Estate Lending

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