Question: The CFPB says the TRID rules apply to closed-end consumer transaction secured by real estate. If a customer purchases a 1-4 family dwelling for business investment purposes, does TRID or Regulation Z apply; and, more generally, how does TRID or Regulation Z apply to rental property financing?
Presumably, if this property will not be owner-occupied property, then TRID would likely not apply. Whether this is a TRID or non-TRID transaction, one should keep in mind that any transaction that is for a business/investment purpose is not subject to Regulation Z. [12 CFR 1026.3(a)]
Contrary to some of the guidance we have seen emanating from the CFPB, the Regulation Z Commentary sets forth some clear guidelines for determining loan purpose, where rental property is involved. The guidance turns on whether or not the rental property will be owner-occupied as well as the number of units involved.
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. [Section 1026.3(a) – Comment 4] 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.]
Section 1026.3(a) – Comment 5 addresses owner occupied rental property and states that if credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply:
►Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than two housing units; and
►Credit extended to improve or maintain the rental property is deemed to be for business purposes if it contains more than four housing units.
As this statute defines dwelling to include one to four housing units, the right of rescission applies to credit extended for purposes other than acquisition. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer credit. In such cases, the determination of whether it is business or consumer credit should be made by considering the factors listed in comment 3(a)-3.
To make your loan purpose determination, be sure to question the borrower’s occupancy intentions. In addition, be sure to verify whether the loan proceeds will be used to acquire the rental property or to make improvements.
Michael Goldhirsh is executive director of Vendors Compliance Group, and director of Legal & Regulatory Compliance for Lenders Compliance Group.