IBA Compliance Connection

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A borrower requested two separate loans secured by a first and a second mortgage to finance the purchase of his primary residence. Are both loans considered a “Purchase” transaction for the purpose of the Loan Estimate? Or would the second mortgage be considered a “Home Equity Loan”?

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In our view, you should list “purchase” as the purpose of both loans. Under Regulation Z’s Loan Estimate provisions, the term “home equity loan” should be used to describe only those loans that are not for a purchase, refinance or construction of the real estate securing the loan. In this case, both mortgages are for the purpose of purchasing the real estate. Consequently, it would be incorrect to list “home equity loan” as the purpose of the second mortgage.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.37(a)(9)(i) (“If the credit is to finance the acquisition of the property identified in paragraph (a)(6) of this section, the creditor shall disclose that the loan is for a ‘Purchase.’”)

  • Official Commentary, Regulation Z, 12 CFR 1026.37(a)(9)(i), Comment 1(i) (“PURCHASE. The consumer intends to use the proceeds from the transaction to purchase the property that will secure the extension of credit.”)

  • Regulation Z, 12 CFR 1026.37(a)(9)(iv) (“If the credit is not for one of the purposes described in paragraphs (a)(9)(i) through (iii) of this section, the creditor shall disclose that the loan is a ‘Home Equity Loan.’”)