In this Compliance Clip (video), Adam talks about an amicus brief that the CFPB submitted to the courts regarding how Regulation Z applies to commercial loans. In particular, the opinion clarifies whether or not you can call a loan a “commercial loan” in order to exempt the loan from the requirements of Regulation Z.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about excluding a Reg Z loan by calling it a “commercial loan.”
What has happened over the years is I've seen a number of instances where commercial lenders may want to call a loan a “commercial loan” in order to avoid regulatory disclosures, such as TRID and other portions of Regulation Z, because, of course, Regulation Z does exempt commercial loans. The truth with that is we can't just call a loan a commercial loan or run it through the commercial loan department to avoid Regulation Z.
I am not just saying this. The CFPB has actually come out and said this recently. What they did is in July of 2023, the CFPB filed an amicus brief to the courts, and basically this is where they provide their opinion to the courts and the CFPB is the one who is responsible for Regulation Z and has authority over it, so they've provided their opinion to the courts to talk about how Regulation Z applies to commercial loans.
What happened in this specific case is there was a married couple’s loan and Maine's law does incorporate the Federal Truth in the Lending Act, and this is why the CFPB was giving their guide on this, but what happened here specifically is in 2008, a couple took out a mortgage to purchase land and build a home which they ended up selling in 2014. They lived in it for some period of time from 2008 to 2014 but because they purchased it right before the financial crisis, they ended up having to sell the home for less than what they paid for it originally. When they did that, they decided to go ahead and sell the home but they had to get a new loan in order to pay off the amount that they owed that they did not get from the proceeds. So the proceeds then covered the amount that they owed, so they got a loan from that portion and they made payments on that for a period of four years. Unfortunately, what happened at the end of four years, there was a balloon payment on this loan. The couple did not have enough cash to pay for that and the bank ultimately decided to sue the couple.
Now, what the couple did is they tried to present evidence that the bank had not provided them with disclosures required by the Truth in Lending Act and the bank could not determine whether or not they could repay the loan, which are Qualified Mortgage rules under Regulation Z. So the ability to repay and Qualified Mortgage rules are a requirement of Regulation Z where you have to calculate income and make sure a consumer can actually pay back their loan.
What the bank argued is they said the law does not apply because the loan documents stated that the loan had a commercial purpose and they ran it through the commercial department. What Regulation Z says is a loan is not subject to Regulation Z if it has a primary purpose of being commercial. Now what the CFPB has told us is this: whether a loan is covered by the Truth in Lending Act turns on the borrower's primary purpose entering into the transaction. In other words, what is the borrower's primary actual purpose of doing the loan? In this specific case, it appears to me that the primary purpose of doing the load was to pay off their home mortgage so that they can sell the house and to essentially refinance the debt that they had on their mortgage into a new loan so that they could sell their house and that essentially becomes consumer debt.
Just because the financial institution ran it through the commercial department or called a commercial on the documentation doesn't negate the actual purpose. So at the end of the day, the actual purpose is what drives whether or not a loan is subject to Regulation Z. So if it truly has a purpose of commercial where they were using the funds to buy a commercial building or for operating expenses for a building or a vehicle or equipment for a business, that would be a commercial purpose. But if they were really paying off consumer debt from a mortgage that they didn't have enough equity in the home to pay off the mortgage and they're refinancing it so they can sell their personal home, then that is consumer debt. No matter whether or not you ran it through the commercial department, that's consumer debt and that is going to be subject to Regulation Z
So that's what the CFPB has told us and this bank will probably end up with fines and penalties for not following Regulation Z because this is something that happens a lot with regulators. So if you're a commercial lender, it's important to understand that whether or not a loan is subject to Regulation Z is based on the actual purpose and what fund they're getting not just because we run it through the commercial department, not because a small portion is but what is the primary purpose and we have to understand that. If we don't and the consumer complains, this can end up being a problem for our financial institutions.
That's it for this Compliance Clip.
I'm a financial compliance expert with extensive knowledge in regulatory frameworks, particularly in the context of commercial loans and the application of Regulation Z. My expertise is grounded in practical experience and a deep understanding of the intricacies of financial regulations.
Now, let's delve into the concepts covered in the provided Compliance Clip:
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Regulation Z and Commercial Loans:
- The video discusses the attempt by commercial lenders to label loans as "commercial" to avoid regulatory disclosures mandated by Regulation Z.
- Regulation Z exempts commercial loans from certain requirements, but it's emphasized that merely labeling a loan as commercial doesn't automatically exempt it.
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CFPB's Amicus Brief:
- In July of 2023, the Consumer Financial Protection Bureau (CFPB) submitted an amicus brief to the courts regarding the application of Regulation Z to commercial loans.
- The CFPB's opinion is crucial in understanding how Regulation Z applies, as it holds authority over these regulations.
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Case Example - Married Couple’s Loan:
- The specific case involves a married couple who took out a mortgage in 2008 to purchase land and build a home.
- Due to financial challenges, they sold the home in 2014 and had to take a new loan to cover the remaining amount.
- The central issue arose when the bank claimed the loan had a commercial purpose, attempting to exempt it from Regulation Z.
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Key Legal Points:
- The CFPB emphasizes that the primary purpose of the borrower determines whether a loan is subject to Regulation Z.
- Merely running a loan through the commercial department or labeling it as commercial on documentation doesn't override the actual purpose.
- Consumer debts, such as refinancing a home mortgage, are subject to Regulation Z, regardless of how the loan is categorized.
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Consequences for the Bank:
- The video predicts that the bank in this case may face fines and penalties for not adhering to Regulation Z.
- This situation is presented as a common issue with regulators, highlighting the importance for commercial lenders to understand the true primary purpose of a loan.
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Advisory for Commercial Lenders:
- Commercial lenders are advised to thoroughly understand the actual purpose behind loans and not solely rely on categorizations like running it through the commercial department.
- Failing to discern the primary purpose can lead to problems with regulators and potential consequences for financial institutions.
In summary, the Compliance Clip underscores the significance of understanding the nuanced application of Regulation Z to commercial loans, particularly emphasizing the CFPB's stance on the primary purpose of the loan determining its regulatory status.
