An individual has applied for a loan to purchase a two-unit mixed purpose building, which will secure the loan. He plans to make one unit his primary dwelling and rent out the other unit (a store front with a workshop and back office). We will not be using any commercial income in the underwriting. Does this loan require the TILA-RESPA Integrated Disclosures (TRID)?

We believe that in most cases, a loan secured by a two-unit building that will be owner-occupied should be treated as a consumer-purpose loan subject to the TRID requirements.

The TRID requirements apply to most closed-end consumer credit transactions that will be secured by real property. This loan will be secured by real property, and consequently TRID disclosures are required if the loan qualifies as a “consumer credit” transaction — credit extended to a consumer primarily for personal, family, or household purposes.

The Official Interpretations to Regulation Z set a clear test for credit secured by owner-occupied rental property that contains more than two housing units, which is deemed to be exempt business-purpose credit. Consequently, in most cases, a loan secured by owner-occupied rental property containing two or fewer housing units will be treated as consumer credit. In this case, the property has just one dwelling unit, as the second unit is a commercial unit — but we believe it would be appropriate to analogize to this test and treat this loan as consumer credit because the property has only two units total, and it will be owner-occupied.

The Official Interpretations to Regulation Z also provide a five-part test for determining whether a loan to finance an acquisition has a business purpose, and this test also is echoed in the Interagency TILA/Regulation Z Examination Procedures. Your bank may wish to confirm that this loan’s primary purpose is for personal, family, or household purposes by analyzing those five factors (which are copied in our resources below), but we believe that this analysis would be unnecessary unless there are additional facts suggesting a commercial purpose.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.19(e)(1) and (f)(1) (The TRID Loan Estimate and Closing Disclosure requirements apply only to consumers in a “closed-end consumer credit transaction secured by real property . . . .”)

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.”)

Regulation Z, Official Interpretations, Paragraph 2(a)(12), Comment 1 (“There is no precise test for what constitutes credit offered or extended for personal, family, or household purposes, nor for what constitutes the primary purpose. (See, however, the discussion of business purposes in the commentary to § 1026.3(a).)”)

Regulation Z, Official Interpretations, Paragraph 3(a), Comment 5 (“If credit is extended to acquire, improve, or maintain rental property that is or will be owner-occupied within the coming year, different rules apply: (i) Credit extended to acquire the rental property is deemed to be for business purposes if it contains more than 2 housing units. . . .”)

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.”)