Q An individual is obtaining a loan secured by their home for the purpose of purchasing a warehouse for their business. Is this considered a business-purpose loan for purposes of Regulation Z (Truth in Lending Act)? If so, would its classification as a business-purpose loan also exclude it from other consumer financial regulations, such as Regulation X (Real Estate Settlement Procedures Act), Regulation C (Home Mortgage Disclosure Act), and Regulation B (Equal Credit Opportunity Act)?
A Yes, this is a business-purpose loan for purposes of Regulation Z. There is not, however, a uniform treatment of business-purpose loans across federal consumer financial regulations, including Regulations X, C, and B. Whether a loan is excluded from a particular regulation must be analyzed under each regulation’s applicable coverage provisions.
Regulation Z, § 1026.3(a)(1), excludes from its coverage “[a]n extension of credit primarily for a business, commercial, or agricultural purpose.” Comment 3(a)-3.ii.A provides that business-purpose credit includes “[a] loan to expand a business, even if it is secured by the borrower’s residence or personal property.” Here, the fact that the loan is made to a natural person and secured by the borrower’s personal residence does not make the transaction consumer credit. The purpose for which the credit is extended is key; because the proceeds of the loan will be used to purchase a warehouse for the borrower’s business, the loan is an exempt transaction under Regulation Z.
Regulation X, § 1024.5(b)(2), also exempts business-purpose loans from its coverage. Further, it references Regulation Z’s definition of business purpose loans in § 1026.3(a)(1) and states that “[p]ersons may rely on Regulation Z in determining whether the exemption applies.” Therefore, assuming the loan would otherwise constitute a federally related mortgage loan, its business purpose exempts it from Regulation X.
Regulation C also uses the Regulation Z standard for determining whether a loan is for a business or commercial purpose. Comment 3(c)(10)-2. However, Regulation C does not categorically exclude business- or commercial-purpose loans from its coverage. Instead, a business- or commercial-purpose closed-end mortgage loan or open-end line of credit is excluded unless it meets Regulation C’s definition of a home improvement loan, home purchase loan, or refinancing. § 1003.3(c)(10). Financial institutions therefore must separately analyze whether the transaction meets any of these definitions before they can determine that a business-purpose loan is excluded from Regulation C. Because a loan to purchase a warehouse for a business would not also be a home improvement loan, home purchase loan, or refinancing, it would be excluded from Regulation C.
Regulation B, § 1002.2(g), defines “business credit” as “extensions of credit primarily for business or commercial (including agricultural) purposes,” subject to specified exceptions. Regulation B does not contain a general exception for business-purpose credit comparable to Regulations Z or X, nor does it include a more limited exclusion for business-purpose loans like that found in Regulation C. Instead, Regulation B generally applies to business credit, although certain requirements differ between business and consumer credit. For example, § 1002.9(a)(3) sets forth specific notification rules for business-credit applicants.
For more information, contact ABA’s Terry Hollinger.
Please note that this section is not a substitute for professional legal advice.
