How to distinguish between a business- and consumer-purpose loan: Does TILA apply?
Whether or not the Truth-in-Lending Act applies (think disclosures, L.O. comp. rule and ATR/QM) depends on whether or not the mortgage loan is "consumer- purpose" or "business-purpose." Here are some thoughts on identifying that sometimes-fuzzy line.
The Truth-in-Lending Act (TILA) does not apply to business- purpose loans. What exactly is considered "business-purpose"? Good question! Until now, it has never been that important to know. A lender is always free to "play it safe" and give TILA disclosures if it isn't sure whether TILA applies.
But now this distinction is important. Some examples- You might want to pay a loan officer based on profits for business loans (can't do that under LO Comp. rule if TILA applies). Or you might have a loan that simply can't meet the QM/ATR rule's documentation requirements.
General Rule
The Truth-in-Lending Act does NOT apply to "an extension of credit primarily for a business, commercial, or agricultural purpose." In other words, where the primary purpose is business, rather than consumer.
5 Factors
How do you know what the "primary" purpose is? You balance the following 5 factors--
The relationship of the borrower's primary occupation to the asset purchased. The more closely related, the more likely it is to be business purpose.
The degree to which the borrower will personally manage the asset purchased. The more personal involvement there is, the more likely it is to be business purpose.
The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
The borrower's statement of purpose for the loan. Note that this is only one of 5 factors- you can't rely on what the borrower says alone!
Example
Let's see how we do this applies with a simple example. Borrower comes in to refinance his family home to buy a bulldozer for his construction business.
Question = Is the primary purpose here business or consumer? Factors-
Number One: Is the borrower a construction worker? Or is he a stockbroker with a small construction company as a "hobby"? If he's a stockbroker, this is more likely to be a consumer loan.
Number Three: Are we talking about a small, second-hand bulldozer that the stockbroker's monthly salary could easily cover? Or is it an industrial bulldozer that the construction worker is really extending himself on? (more likely to be business if the latter)
Number Five: Does the stockbroker say he wants the bulldozer mostly for landscaping in his own backyard? Or does the construction worker plan to use it in a couple of jobs he's working for the county?
Notes:
The factors are just a general guide- you won't always use all of them, and even if you do, they might not always paint a perfect picture
This has to be a case-by-case determination. You can't just decide, "all loans to construction workers to purchase equipment will be business-purpose." This is a decision the regulations require be made individually with each loan.
Special Case: Rental Properties
Under the general rule, it is tough to call close cases because you're just making your best guess based on balancing the 5 factors. Fortunately, there are specific rules to help identify the fine line between business- and consumer-purpose loans when dealing with rental properties. And here they are, in a nutshell!
Non-owner occupied rental property
This is always business-purpose loan. TILA does not apply. Note: "Owner occupied" means the borrower (or a college-age son who's living at the beach house for the summer) lives there for 14 or fewer days per year.
Owner-occupied rental property
It depends on (a) purpose and (b) number of housing units.
So to apply the rule in the table- a loan to purchase a rental property (owner occupied) would only be "business-purpose" (and therefore exempt) if it had 3 or more housing units.
Other news/thoughts/trivia:
A couple of reports from CFPB examinations: (A) examiners quiz staff on loss mitigation options available- remember that staff must know all those that are available .. easy to protect yourself with training! (B) tracking exceptions in individual files is inadequate, with examiners expecting exceptions to be tracked and maintained in a separate, comprehensive file.
Watch out for unintended consequences! "A group of scientists have started attaching sensors to sharks to help predict hurricane intensity. They're hoping the information they gather will save enough lives to offset the number of lives lost attaching sensors to sharks." -- Seth Meyers
We're expecting the CFPB to approve the post-close points + fees "cure" change to the QM rule. But we're still working on comments (due in a couple of weeks) to encourage the CFPB to increase the "small creditor" threshold (currently at 500) and to implement some type of DTI "cure" or "correction." Chime in if you'd like to voice some opinions on this issue! I'd appreciate your support.
Remember when the CFPB was merely seeking "good faith efforts" to achieve "substantial compliance" with the new servicing regs? Well- have you seen Steve Antonakes' recent comments to the MBA? It sounds like the temporary period of leniency is over:
"Servicers have had more than a year now to work on implementation" of "basic practices of customer service that should have been implemented long ago" .... "A good faith effort ... does not mean servicers have the freedom to harm consumers." .... "Mortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules."
How does your business run? Do you strictly follow an organizational chart? Is everyone always a manager or a subordinate? Well here's an interesting analogy, perhaps more for a smaller or more flexible shop: Maybe your team is modeled after a jam session ... you know, with guitars- (and other instruments, I guess?) The idea is that you have a team of people, any one of which may step up and take the lead on a particular project. As your focus shifts to another project (or chord?) then perhaps another teammate steps up to the front. Interesting way of looking at team dynamics, I think.
"The two most important days in your life are the day you are born, and the day
you figure out why."
- Mark Twain
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