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Do Regulation Z’s valuation independence requirements (12 CFR 1026.42) apply to commercial real estate loans secured by a dwelling? – IBA Compliance Connection

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Do Regulation Z’s valuation independence requirements (12 CFR 1026.42) apply to commercial real estate loans secured by a dwelling?

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The applicability of Regulation Z’s valuation independence requirements depends on the purpose of the loan — Regulation Z does not apply to an extension of credit primarily for a business, commercial or agricultural purpose. 12 CFR 1026.3(a). Additionally, Regulation Z does not apply to a loan made to anyone other than a natural person.  12 CFR 1026.3(a). The scope of Regulation Z’s valuation independence requirements confirms that the valuation independence section applies to consumer credit transactions; “this section applies to any consumer credit transaction secured by the consumer’s principal dwelling.” 12 CFR 1026.42(a). Therefore, to determine whether the valuation independence requirements apply to a commercial real estate loan that is secured by a dwelling, you will need to determine the purpose for the loan.

The commentary gives some guidance on how to determine whether credit is primarily for a business or commercial purpose (as opposed to a consumer one):

  • (1) What is the borrower’s primary occupation and is it closely related to the property that is acquired by the extension of credit?
  • (2) What is the degree to which the borrower will personally manage the acquisition? The more personal the level of involvement is, the more likely it is to have a business purpose.
  • (3) What is the ratio of income from the acquisition to the total income of the borrower? The higher the ratio the more likely it is to have a business purpose.
  • (4) What is the size of the transaction? The larger the transaction, the more likely it is a business purpose transaction.
  • (5) What is the borrower’s statement of purpose for the loan?

Official Interpretations, 12 CFR 1026 Paragraph 3(a) Comment 3(i). The commentary also gives some examples of business-purpose loans. One example of a business purpose loan that is given is a loan made to expand a business, even if it is secured by the borrower’s residence or personal property.

Official Interpretations, 12 CFR 1026 Paragraph 3(a) Comment 3(ii). You asked about a loan for commercial real estate, which is secured by a dwelling. We recommend analyzing the purpose of the loan using the five factors listed.

If you determine that the credit is extended primarily for a consumer purpose, then Regulation Z’s valuation independence provisions apply. If the credit has a business purpose, then the valuation independence requirements would not apply.