Consumer Loans, Investment Loans, and TIL

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Question:

A lender that I represent asked me whether the following was a loan that should be excepted for the purposes of truth in lending as an investment loan. The borrower wishes to refinance a condominium unit he owns - no existing lien, full cash out. The unit currently is investment property for him and he has listed the unit on his tax returns as income producing property for the last three years - although the property is currenly empty. However, on his application the reasons he listed for refinancing were largely personal, i.e., replenishing his brokerage account, etc. Therefore, this does not seem to fit neatly within the non-owner occupied rental property exceptions set forth in Truth in Lending. The lender's credit department felt that this was a consumer loan because of the personal nature of the use of the funds. I disagreed.

Answer:

The special rules for non-owner occupied rental property apply if the purpose of the loan is to acquire, improve, or maintain the property. This does not seem to be the case in this case. So one has to revert to the "primary purpose of the loan" rule, which in this case puts the loan, in my opinion, in the consumer category. If we knew more about the dollars to be spent on each category of purpose (how much to replenish the investment account, how much to do this, how much for that, etc.) we could better categorize the loan.

But don't forget, one can always treat the loan as a consumer transaction and provide disclosures.

First published on BankersOnline.com 8/05/02