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Commercial vs Consumer Qualified Loan

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A loan comes to loan operations with the borrower being a trust. The purpose of the loan is to purchase 1-4 family dwelling for the trustee of the trust. Would this be a commercial or consumer qualified loan and why?

The loan is clearly for a consumer (personal, family or household) purpose. That said, the next question to be asked is whether the principal borrower will be the trust (as the intended owner of the dwelling) or the individual who is the trustee. If it is the trust, a literal reading of the current Regulation Z section 1026.3(a)(2) and its official commentary would appear to allow the loan to be considered organizational credit and therefore exempt from the coverage of Regulation Z.

However, there has always been a difference of opinion on how to treat certain grantor trusts -- since they are revocable during the lifetime of the grantor shouldn't the trust be ignored for the purposes of Regulation Z, and the disclosures provided to inform and protect the true owner of the dwelling?

The controversy over whether to consider such loans subject to the regulation is to be somewhat cleared up in August. As of August 1, new comment 3(a)-10 will become effective, making loans to trusts used for personal or family tax and estate planning (see the comment for details) subject to the regulation because "in substance (if not in form) consumer credit is being extended."

Since you are considering this loan before August 1, 2015, you could decide to treat it as organizational credit and exempt from the regulation (unless there have been court decisions in your state establishing a precedent that such loans are consumer credit). A more conservative approach, though, is to treat comment 3(a)-10 as currently effective and make the loan subject to the regulation.

First published on 05/25/2015

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