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Business purpose loans are nontraditional mortgage loans where a borrower uses loan proceeds for a non-consumer purpose. A non-consumer purpose means any loan in which the proceeds are NOT primarily used for personal, family, or household use. There is a common misconception that the primary question in making these loans is whether the property used as collateral is “owner-occupied.”

But, the more important question is whether the loan’s purpose is truly a “business purpose,” rather than “consumer” in nature. The purpose of the loan is the decisive factor in whether the loan is exempt from most federal consumer protection regulations. Simply put, if a loan is correctly classified as “business purpose,” it is subject to far less regulation at the federal level.

Notably, business purpose loans are exempt from requirements mandated in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). However, many mortgage lenders and their counsel fail to understand that other federal consumer protection laws still apply. This article will provide the reader an opportunity to understand which regulations do and do not apply to business purpose loans.

Two Major Exemptions for Business Purpose Loans: TILA and RESPAMost of the federal legislation governing mortgage lending is covered in the TILA and RESPA. These Acts set mandatory standards, procedures, and disclosures for lenders to follow. Specifically, TILA requires disclosure of certain credit terms, and RESPA requires standards for closings and fee/cost disclosures. Business purpose loans are exempt from the requirements imposed by both TILA and RESPA.

This is because TILA covers “consumer credit transactions” which are defined as “credit offered or extended to a consumer primarily for personal, family, or household purposes.” Additionally, TILA and RESPA exempt “[a]n extension of credit primarily for a business, commercial or agricultural purpose.” Most of the operative provisions of the acts are further limited in their application to “dwellings” which is defined as “a residential structure that contains one to four units, whether or not that structure is attached to real property.”

Practically, because business purpose loans are exempt from TILA and RESPA, when lenders make these loans they do not need to: (i) comply with federal requirements to verify the borrower’s ability to repay the loan, (ii) issue TRID disclosures, or (iii) comply with RESPA’s loan servicing requirements. However, various federal consumer laws still apply. It is important lenders are aware of and comply with the legislation discussed in the following section.

The Federal Consumer Laws Often Ignored by Lenders, But Applicable to Business Purpose Loans