IBA Compliance Connection

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We made a loan secured by rental property to an individual. The rental property did not have any outstanding liens when we made the loan. The loan purpose was to purchase another rental property. We issued a Loan Estimate and Closing Disclosure for the loan, even though Regulation Z did not apply due to the loan’s business purpose. On review, I saw that the Loan Estimate listed the loan purpose as “Home Equity Loan,” but the Closing Disclosure listed the loan purpose of “Refinance.” What was the correct loan purpose?

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We recommend placing a memorandum in the loan file to document that the Loan Estimate and Closing Disclosure were issued in error, as the loan was made for a business purpose and was not subject to the CFPB’s loan disclosure rules. The memorandum should also note that these loan documents misstated the loan purpose as “Refinance” and “Home Equity,” neither of which was correct because this was a business loan.

For resources related to our guidance, please see:

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

  • Regulation Z, 12 CFR 1026.37(a)(9) (Requirement to state on the Loan Estimate “the consumer’s intended purpose for the credit, . . . using one of the following terms: . . .”)

  • Regulation Z, 12 CFR 1026.2(a)(11) (“‘Consumer’ means a cardholder or natural person to whom consumer credit is offered or extended. . . .”)

  • Regulation Z, 12 CFR 1026.2(a)(12) (“‘Consumer credit’ means credit offered or extended to a consumer primarily for personal, family, or household purposes.”)