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

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.