Will your Business Purpose Loan policy hold up to federal and state laws?

Interest by lenders and borrowers in business purpose loans, which are generally considered loans made not for a personal, family, or household purpose, seems to be increasing over the past few years. If you couple the notion that the environment for making consumer purpose loans is increasingly complex and carries with it material risk with the notion that business purpose loans may not be subject to consumer- protection requirements such as licensing or disclosures, then the increase should come as no surprise.

In establishing a business purpose lending platform, it is critical to establish a fully developed and well documented rationale as to how the lender developed that platform. This includes: Considering the impact and application of federal, state and local laws and regulations may have on business purpose loans, validation that those assumptions are correct and correctly applied, IT and operational controls to ensure there are bright lines between consumer and business purpose loan practices, and ongoing monitoring of laws, regulations and enforcement actions that may impact the business loan platform.

Federal Law Implications

Certain federal laws cover particular types of business purpose loans.

TILA/Regulation Z - Regulation Z generally does not apply to an extension of credit which is primarily for a business, commercial or agricultural purpose Z. The official commentary goes on to describe factors to consider in weighing if a loan is actually a business purpose loan, including:

1.      The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.

2.      The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.

3.      The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.

4.      The size of the transaction. The larger the transaction, the more likely it is to be business purpose.

5.      The borrower’s statement of purpose for the loan.

RESPA generally references TILA for its definition of business purpose loans. It provides that a federally related mortgage does not extend to an extension of credit primarily for a business, commercial, or agricultural purpose, as defined by Regulation Z. It would appear then that a person may rely on Regulation Z in determining whether the exemption applies.

Both HMDA and ECOA do cover business purpose loans. Under HMDA, Regulation C requires reporting of certain business purpose loans on the lender’s LAR, including closed-end mortgage loans or open-end lines of credit comprised of certain home improvement loans, home purchase loans, or refinancings. Under ECOA, Regulation B (which generally defines Business Credit as extensions of credit primarily for business or commercial, including agricultural, purposes) applies to Business Purpose loans in a more-limited capacity than for personal, family or household purpose loans.

State Law Implications

Some state lending laws appear to limit their scope to real estate secured loans made for personal, family or household purposes. Since business purpose loans may not fall under the personal, family, or household purpose framework, this could mean that licensing and disclosure requirements may not apply to a lender that only makes business purpose loans. Of course, in these instances this is not an express exemption from the law, so a lender should be cautious in concluding, without more information, that the law absolutely will not apply to business purpose lending.

Things to consider when reviewing state law requirements -

·        A lender should not automatically treat a state law that exempts coverage for loans secured against a borrower’s non-primary residence as a “business-purpose exemption” state as it is possible that a borrower will obtain a business purpose loan secured by his primary dwelling.

·        A lender should not automatically treat a state law that exempts coverage for loans made to corporations as a “business purpose exemption” state as it is entirely possible that a business-purpose loan will be made to a natural person, a partnership or an LLC.

·        Just because the mortgage lending law does not apply to business purpose loans, a lender should consider ALL lending licensing laws to ensure those do not otherwise cover business purpose loans.

·        Be careful of any rules that suggest a loan made for a business purpose is still subject to all consumer protection laws if the subject property is the reason for that business purpose.

·        “Commercial loans” secured by real estate may only cover business purpose loans secured against real estate not intended for residential use (e.g., 1-4 family properties), so a commercial loan license may not apply to business purpose loans secured by a 1-4 family property.

Trend -

Do not mistake the current state of the law as the states’ lack of enthusiasm or desire to become active in this space. Florida recently passed and enacted HB 935 effective July 1, 2019, modifying the Mortgage Broker and Lender law (Chapter 494) by requiring a lender making business purpose loans to be able to show compliance with TILA’s standard for business purpose loans (see above).  It also expressly made it a prohibited practice to mispresent a consumer-purpose loan as a business purpose loan, the penalty for which is a felony and subjects the lender to fines.

Also, it is always possible that state regulators or attorneys general will become more diligent and vocal about business purpose loans by invoking unfair or deceptive acts laws to challenge a lender’s business-purpose lending practices. This could be problematic if a lender applied the loan’s business purpose status to intentionally circumvent consumer protection laws, or simply did not apply enough due diligence in evidencing that indeed the loans are for business purposes. It is also possible that a state may issue policy statements indicating that state laws apply to business purpose loans even where a statute seems to limit coverage to personal, family, or household purpose loans.

Key take aways

While business purpose loans generally may have fewer laws applicable than loans made for personal, family, or household purposes, a number of vulnerabilities remain. To mitigate the risks, lenders might consider such steps as:

1.      Taking extraordinary diligence in identifying whether business purpose loans are covered in the state laws.

2.      Being cognizant of state law provisions that look like it would not apply to business purpose loans but still might in certain situations (e.g., loans made to corporations).

3.      Not assuming states will agree with the legal conclusion that the law does not apply.

4.      Ensuring that all loan files are well documented to show each loan is actually a business purpose loan, perhaps following the standard established in TILA.

5.      Particularly for ECOA and HMDA, being sure the systems and data can instruct the system how to deviate from reporting business purpose loans as consumer loan (i.e., HMDA reporting and EOCA adverse action notices).

6.      Establishing policies that would make it clear that there is no intent or opportunity for the lender to circumvent the law (For example, a policy that no business purpose loans may be secured by a borrower’s primary dwelling).

7.      Anticipating and preparing for states exercising their consumer protection powers and becoming more active in investigating and challenging practices that may appear to violate consumer protection laws.

Certainly, business purpose loans have a place in the mortgage lending landscape. A lender should just make certain it has taken the appropriate steps to ensure the business purpose lending platform was properly developed and administered, and continue to monitor its own practices and any legal, regulatory, or enforcement actions that may require the lender to make any necessary adjustments in the coming months and years.

This is only a brief summary of the major federal requirements and there may be other important details not addressed in this overview.  Garris Horn frequently represents lenders in other federal and state law requirements that specifically apply to your company’s operations.  For more information on this matter, or to discuss other business purpose issues, contact Raymond Snytsheuvel at (949) 683-7500.

Federal Regulators Highlight Importance of Standardized Approach to Cybersecurity

The Federal Financial Institutions Examination Council recently reemphasized the importance of a standardized approach for assessing and improving cybersecurity preparedness.  The FFIEC noted that following a standardized approach will help financial institutions track progress over time and share information with other financial institutions and regulators.

To assess cybersecurity preparedness, the FFIEC pointed out that financial institutions can choose among many standardized tools that are aligned with industry standards and best practices.  The agency avoided endorsing any one tool, but mentioned the following:  

·        The FFIEC Cybersecurity Assessment Tool

·        The National Institute of Standards and Technology Cybersecurity Framework

·        Financial Services Sector Coordinating Council Cybersecurity Profile

·        Center for Internet Security Critical Security Controls

The FFIEC cautioned that these tools do not replace examinations, and that agencies will continue to take a risk-based approach to such examinations.  In addition, as the risks continue to evolve, today’s tools may not cover all necessary aspects of preparedness.  Nevertheless, regulated entities would do well to keep the above list in mind when building out their respective cybersecurity systems.

Garris Horn frequently represents clients in dealing with the FFIEC and its various initiatives, including regarding cybersecurity systems.  For more information on this announcement, or to discuss any related matters, contact Troy Garris directly at 301-461-8952 or troy@garrishorn.com.

FFIEC announces release of 2018 HMDA data

The 2018 national loan-level Home Mortgage Disclosure Act (HMDA) data has been released by the Federal Financial Institutions Examination Council (FFIEC).  The data includes, for the first time, the expanded set of data points required by the new HMDA rule.  As my partner Richard Horn has written about before here, the public 2018 data is modified for privacy reasons under a CFPB final policy issued in December 2018. HMDA data has long been the most comprehensive, publicly available data-set on mortgage market activity.  The data covers mortgage lending transactions at over 5,000 financial institutions.  The data can be accessed here and the FFIEC press release is available here.

HMDA data provides critical information for financial regulators, including those examining for fair lending, consumer protection and Community Reinvestment Act (CRA) compliance.  HMDA data can also help the public assess how financial institutions are serving the housing needs of their local communities.  The data also can be used by market analysts to assess macro trends in the mortgage market.

The new data includes 48 data points, covering information about applicants, underlying properties and  types of loans.  In 2018 there were approximately 12.9 million loan applications and approximately 7.7 million loan originations (a decrease from 2017 by 12.6 percent).  As most readers of this blog will know, the data also includes several new fields for the first time including:  disaggregated race and ethnicity, age, credit score information, and ratios for loan-to-value and debt-to-income.  In addition, the 2018 data contains data on home equity lines of credit (HELOC), commercial purpose loans and reverse mortgages. A complete list of the data points can be found here

This data follows the release, in March 2019, of Loan Application Registers (LARs) for each HMDA filer, modified for borrower privacy.  In addition to the HMDA data, two articles were released by the Consumer Financial Protection Bureau (CFPB).  The first provides initial observations about the mortgage market based on the newly available data fields.  The second continues a series of reports describing mortgage market activity over time.

Garris Horn frequently represents clients interpreting CFPB initiatives and rules.  For more information on this data release, or to discuss any other CFPB-related matters, contact Troy Garris directly at 301-461-8952 or troy@garrishorn.com.

 

CFPB and AGs Working Together on New Financial Innovation Initiative

The Consumer Financial Protection Bureau last week announced the launching of the American Consumer Financial Innovation Network to help facilitate innovation in the financial space by enhancing “coordination among federal and state regulators.” This announcement was made in conjunction with its announcements of the final No Action Letter, Product Sandbox, and Trial Disclosure Program policies, which my partner Richard Horn has written about here. The Bureau stated that all state regulators were invited to join the network. Interestingly, the initial members of the network are limited to the Attorneys General of Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah.  ACFIN members will share information to facilitate coordination and work together on innovation-related policies and programs. 

ACFIN stated shared objectives with the state regulators include:

 ·        Competition

·        Consumer access

·        Financial inclusion

·        Promotion of regulatory certainty for innovators

·        Keeping pace with market innovations

·        Helping to ensure that innovations are free from fraud, discrimination, and deceptive practices

In announcing the initiative, CFPB Director Kathleen L. Kraninger stated “Federal and state coordination promotes consistency in the regulation of consumer financial products and services while facilitating consumer-beneficial innovation.  ACFIN will provide a platform for Federal and State regulators to coordinate with each other as they develop new rules of the road and apply existing ones.”

The CFPB press release announcing this initiative can be found here and the ACFIN Charter can be found here. The CFPB’s press release on its related final policies can be found here.

Garris Horn frequently represents clients interpreting CFPB initiatives and rules.  For more information on this new program, or to discuss any other CFPB-related matters, contact Troy Garris directly at 301-461-8952 or troy@garrishorn.com.