Integrated Disclosure ‘Business Purpose’ Nightmare

To disclose or not to disclose, that is the question for non-owner occupied residential loans under the integrated disclosure rule. TILA and RESPA have long stated that disclosures under their rules do not apply to a business purpose loan. Technically a loan used to purchase or refinance a rental property today does not need a GFE or TIL. But as an industry, we like standard procedures that are conservative and keep us out of trouble. If disclosing didn’t add risk, we issued the disclosures. Historically it has been a very short list of small companies that will not issue a TIL or GFE for non-owner occupied loans. Small companies can manage exceptions much better than large companies, especially since the computer can’t pick up on the details needed to make the right decision. Although there is nothing new in the rule to change the definition of “business purpose”, lenders are rethinking whether it now makes sense to apply the business purpose exception. To complicate matters, the CFPB does not provided clear direction.

The Small Entity Compliance Guide (The Guide) published by the CFPB does not list investment properties or business purpose loans as one of the categories exempt in the rule. The Guide seems focused on addressing the product level such as HELOCs and Reverse mortgages. Lenders are trying to translate the CFPB comments made about these products to fit into the business purpose scenario. The Guide states creditors are not prohibited from using the Integrated Disclosure forms on loans not covered by TILA or RESPA and that these disclosures do not replace the need to issue the current versions. OK, that’s good news. However, if the disclosures are issued by mistake or by choice, is the loan subject to all requirements of the rule? Since business purpose is exempt from the rule, does it follow current RESPA/TILA for compliance or the new rule for compliance? The series of questions and answers provided by CFPB leaves questions about business purpose buried in the flipping and flopping that applies to HELOC and reverse mortgage products.

To determine the right path for your company start by asking if you can collect the data needed to detect the differences between business purpose under the rule and investment property as defined by the secondary market. For example, can your system accurately identify if cash out on an investment property was used to pay a personal loan? This scenario is no longer just business purpose and will trigger early disclosures are needed at application. Or can you flag a loan as investment property for secondary market but consider it a personal use under TILA when the child of the borrower is occupying? Is this still a business purpose if family is occupying without a lease? Underwriters are the best qualified to assess the circumstances but they are too late in the process. Potential legal action and legal precedents are also something to consider. Are you opening up legal risks when you disclose, or creating others of you don’t? Be sure to check with your legal counsel.

The elephant in the room is always investor policies and so far it looks like a few will require disclosures regardless of the occupancy status. Disclosing for all transactions based on the product is a safety net many will gravitate to, but definitely will incur more operational cost at a time when we need to add efficiency at the transaction level.