My question relates to the exemption of business, commercial, agricultural or organizational credit from the Truth in Lending Act (Regulation Z).
Q When the loan applicant is an individual, but the guarantor is a limited liability company, does the exemption apply?
A It depends on the purpose of the loan.
First, generally, whether the regulation applies depends on the primary purpose of the loan. If its primary purpose is personal, family or household purposes, the loan is covered. Thus, for example, a loan whose proceeds are used for consumer purposes is covered if it is made to an individual, even if the loan is guaranteed by an LLC. However, if a loan to an individual is made for business purposes, whether or not guaranteed by an LLC, it is not covered.
Second, only loans made to “natural persons” are covered, as explained in §1026.3(a)(2) which provides that the regulation does not apply to “an extension of credit to other than a natural person…” Comment 9 to §1026.3(a) further clarifies: “The exemption for transactions in which the borrower is not a natural person applies, for example, to loans to corporations, partnerships, associations, churches, unions, and fraternal organizations. . .” Presumably the requirement that the borrower be a natural person for the loan to be covered is based on a presumption that it is unlikely a loan to those types of entities is being used for consumer purposes and it would be difficult for the lender to know or ascertain.
For more information, contact ABA’s Leslie Callaway.
Please note that this section is not a substitute for professional legal advice.
