TILA Compliance: Consumer or Business Mortgage Lending?
In an effort to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably, the federal Truth in Lending Act (TILA), 15 USC 1601 et seq., was enacted on May 29, 1968, as title I of the Consumer Credit Protection Act (Public Law 90-321). The TILA, implemented by Regulation Z (12 CFR 226), became effective July 1, 1969. Since then it has been amended numerous times, most recently in 2000 with the Electronic Signatures in the Global and National Commerce Act (the E-Sign Act), 15 USC 7001 et seq.
Before TILA, the consumer credit industry was not aligned under one common set of formats. Consumers were faced with a bewildering array of credit terms and rates and it was difficult to compare loan offers. With TILA, all creditors must use the same credit terminology and expressions of rates. In addition to providing a uniform system for disclosures, the Act:
Protects consumers against inaccurate and unfair credit billing and credit card practices;
Provides consumers with rescission rights;
Provides for rate caps on certain dwelling-secured variable rate loans; and
Imposes limits on home equity lines of credit and certain closed-end home mortgages.
Penalties for noncompliance can be severe. Any lender who willingly and knowingly fails to comply with any requirement of the TILA can be fined not more than $5,000 or imprisoned for not more than one year, or both. Mortgage lenders are well advised to know the law.
Consumer or Business Loans?
The TILA is specifically designed to protect consumers who seek credit for their own personal use. Transactions that are exempt from the implementations of Regulation Z include credit extended primarily for a business, commercial, or agricultural purpose.
For the mortgage loan originator (MLO), it is not always easy to determine if a loan or loan application is intended for a business purpose. The Comptroller’s Handbook published by the Department of the Treasury describes five criteria that MLOs can use to determine if a loan is for a consumer or business purpose. They are:
Any statement obtained from the consumer describing the purpose of the proceeds. If the applicant states that he or she is buying a beach house for use as an executive retreat, further investigation is advised.
The consumer’s primary occupation and how it relates to the use of the proceeds. If the applicant is a business consultant and is purchasing a house to convert into an education center, this may indicate a purely business use.
Personal management of the assets purchased from proceeds. The more the borrower is personally involved in managing the investment or enterprise purchased by the loan proceeds, the more likely the loan will have a business purpose. A person who borrows to buy an apartment building will have a direct stake in the financial management of the investment.
The size of the transaction. Unless the borrower is buying a seaside mansion, the larger the size of the transaction, the more likely the loan will have a business purpose.
The relative amount of income derived from the property acquired by the loan proceeds. The greater the income derived from the acquired property relative to the borrower’s total income, the more likely the loan will have a business purpose. This can get tricky when borrowers are self-employed and a have a home office or office in an outbuilding such as a detached garage.
With the number of home offices increasing rapidly, it may become more challenging to sort out which loans are purely for consumer purpose and which are for business. The answer is continued professional education and awareness of the law and its interpretation.