Question:

Hi Heather,

Question about Reg Z disclosures. The borrower is using his primary residence to purchase an investment property he plans to rent. Since the purpose of the loan is a business loan, would we still need to send out Reg Z disclosures? I just wasn’t sure because it’s a primary residence that he is using for collateral for the loan, but the loan is business purpose.

Great Question!

Reg Z exempts (from the entire regulation) “An extension of credit primarily for a business, commercial or agricultural purpose.”  The commentary to this section has a lot of info on how you determine what the “primary” purpose is.  However, if the purpose is to acquire, improve or maintain rental property (not just investment property), there’s a bright line:

4. Non-owner-occupied rental property. Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes. This includes, for example, the acquisition of a warehouse that will be leased or a single-family house that will be rented to another person to live in. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner-occupied and this special rule will not apply. For example, a beach house that the owner will occupy for a month in the coming summer and rent out the rest of the year is owner occupied and is not governed by this special rule. (See comment 3(a)-5, however, for rules relating to owner-occupied rental property.)

It doesn’t matter what the collateral is, this will be a business purpose loan and will not subject to Reg Z.  That said, it will be a member business loan and should be accounted for as such.