Questions and Answers

The Commentary to Regulation Z provides quite detailed guidance on the question of when a loan secured by rental property or investment property is business credit and therefore exempt from coverage by Regulation Z. The Guidance is too lengthy to reprint here, but you can find it at 12 CFR 226, Supplement I, Section 226.3(a)-1, -2, -3, and -4.

Here’s a summary of the guidance on rental property:

First, credit to acquire, improve, or maintain rental property will be considered business-purpose credit if the owner does not occupy the rental property. Rental property is considered occupied by the owner if the owner expects to occupy the property for more than 14 days in the upcoming year. [Commentary, §226.3(a)-3] In our example where the consumer expected to occupy the lake home for the summer months, the lake home would be considered owner occupied.

Second, if the rental property is owner occupied, and the credit is for the acquisition of the property, then the credit will be considered business-purpose credit if the property contains more than two housing units. [Commentary, §226.3(a)-4] For example, if your borrower will use the loan proceeds to purchase a four-plex and will occupy one of the four units, the loan will be considered business purpose since the four-plex contains more than two housing units.

Third, if the rental property is owner occupied, and the credit is to improve or maintain the property, then the credit will be considered business-purpose credit if the property contains more than four units. [Commentary, §226.3(a)-4] If a borrower who owns an eight-plex occupies one of the units and borrows money to make improvements to the eight-plex, then this rule says the credit is deemed to be for business purposes since the rental property contains more than four units and the purpose of the credit is to improve or maintain the property. However, if the borrower in the previous paragraph borrows money to improve the four-plex, and the borrower is still occupying one of the units, this rule will not apply since the property does not contain more than four units.

These three rules deem transactions to which they apply to be business-purpose credit. However, the fact that none of these rules apply to particular credit involving rental property does not mean that the credit is necessarily for personal, family, or household purposes. The credit may still be for business purposes, depending on the circumstances. For example, if the owner and occupier of a four-plex borrows money to make improvements to the four-plex, none of the three rules would deem that credit to be for business purposes. However, if, in fact, the borrower will be using the proceeds to make improvements only to the units which the borrower does not occupy, then the transaction will probably still be considered business-purpose credit, even though none of the three rules apply. The effect of the three rules is merely to establish certain forms of credit as being for a business purpose; the rules do not establish the business or consumer purpose of any other credit.