We recommend reviewing the five factors in Regulation Z before determining whether or not this is a consumer-purpose loan subject to the TILA-RESPA Integrated Disclosure (TRID) requirements. While you are not required to further investigate the borrower’s statement of the loan’s purpose, which would be a business purpose, the borrower’s statement of purpose is just one of those five factors.

Generally, when credit is extended to acquire a rental property that is not owner-occupied, it is deemed to be for a business purpose, and not subject to the TRID requirements. However, the Official Interpretations to Regulation Z state that “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 the exemption for non-owner-occupied property will not apply.

The Official Interpretations to Regulation Z provide a five-part test for determining whether a loan to finance an acquisition has a business purpose, one factor of which is the borrower’s statement of purpose for the loan. We recommend analyzing all five factors:

(A) The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

(B) The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.

(C) 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.

(D) The size of the transaction. The larger the transaction, the more likely it is to be business purpose.

(E) The borrower’s statement of purpose for the loan.

The Interagency TILA/RESPA Examination Procedures also state that “all five factors must be evaluated before the lender can conclude that disclosures are not necessary” and providing the disclosures “does not control whether the transaction is covered, but can assure protection to the financial institution and compliance with the law.” Consequently, if it is unclear whether and when the customer will occupy the property, you may wish to comply with the TRID requirements in an abundance of caution.  

For resources related to our guidance, please see:

• Regulation Z, 12 CFR 1026.3(a) (“The following transactions are not subject to this part or, if the exemption is limited to specified provisions of this part, are not subject to those provisions: . . . (1) An extension of credit primarily for a business, commercial or agricultural purpose.”)

• Regulation Z, Official Interpretations, Paragraph 1023.3(a), Comment 4 (“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. 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.)”)

• Regulation Z, Official Interpretations, Paragraph 3(a), Comment 3 (“In determining whether credit to finance an acquisition—such as securities, antiques, or art—is primarily for business or commercial purposes (as opposed to a consumer purpose), the following factors should be considered: (i) GENERAL.

(A) The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

(B) The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.

(C) 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.

(D) The size of the transaction. The larger the transaction, the more likely it is to be business purpose.

(E) The borrower’s statement of purpose for the loan.”)

• Interagency TILA/Regulation Z Examination Procedures (“All five factors must be evaluated before the lender can conclude that disclosures are not necessary. Normally, no one factor, by itself, is sufficient reason to determine the applicability of Regulation Z. In any event, the financial institution may routinely furnish disclosures to the consumer. Disclosure under such circumstances does not control whether the transaction is covered, but can assure protection to the financial institution and compliance with the law.”)