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We have a loan application for a second mortgage on the applicant’s personal residence to fund a business expansion. All funds will be used for the business. Does a right of rescission apply in this case? Should we use a Loan Estimate and Closing Disclosure? – IBA Compliance Connection

IBA Compliance Connection

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We have a loan application for a second mortgage on the applicant’s personal residence to fund a business expansion. All funds will be used for the business. Does a right of rescission apply in this case? Should we use a Loan Estimate and Closing Disclosure?

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No, the right of rescission does not apply to a loan to expand a business, even if the loan is secured by the borrower’s residence, and you are not required to provide the borrower with a Loan Estimate or Closing Disclosure. An extension of credit primarily for a business purpose is entirely exempt from the Truth in Lending Act and Regulation Z, including their right of rescission and disclosure requirements.

For resources related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.3(a)(1) (“The following transactions are not subject to this part or, if the exemption is limited to specified provisions of this part, are not subject to those provisions: . . . An extension of credit primarily for a business, commercial or agricultural purpose.”)
  • Regulation Z, Official Interpretation, Paragraph 3(a), Comment 3(ii)(A) (“Examples of business-purpose credit include: . . . A loan to expand a business, even if it is secured by the borrower's residence or personal property.”)