Landlords: Which Regulations Apply?
Many credit union compliance professionals are familiar with traditional mortgage transactions – when a member purchases his or her home with a loan from the credit union. However, the regulatory landscape looks a bit different when the member is purchasing a dwelling to use as an investment property to produce rental income, rather than as his or her own residence.
To illustrate these differences, I’ll use a hypothetical: Larry Landlord is a member of ABC Federal Credit Union, and he wants to purchase a one-to-four family dwelling solely for the purpose of renting it out to others. Larry does not intend to live at this property.
First, let’s consider maturity limits. What kind of maturity limit would apply to Larry’s loan for the rental property? Section 701.21 of the NCUA regulations provides rules that apply to lending activity by FCUs, including the maturity limits for FCU loans. Section 701.21(c)(4) states that all FCU loans will have a maturity limit of 15 years unless an exception applies. Section 701.21(f) permits certain loans to have a maturity limit of 20 years, but that provision’s application is limited to specific factual scenarios, all of which require the property to be the member’s residence. Section 701.21(g) would allow a long-term mortgage loan to have a maturity limit of 40 years. However, that provision is also specifically limited to a “one to four family dwelling that is or will be the principal residence of the member-borrower” (emphasis added). The NCUA has discussed the “is or will be” language in a 2010 legal opinion letter, which stated the long-term mortgage loan exception may be used so long as the house is intended to be used as the future principal residence of the member-borrower. If ABC FCU had evidence that Larry planned to use the dwelling as his principal residence at any point in the future, then a 40-year maturity limit could be appropriate. However, in our hypothetical, Larry merely wants to use the property as rental property and does not intend to live there. Thus, the exceptions in section 701.21(f) and (g) would not apply and section 701.21(c)(4) would impose a maturity limit of 15 years.
Next, let’s look at the Home Mortgage Disclosure Act (HMDA) and Regulation C implications for a commercial-purpose loan to purchase a rental property. Section 1003.3 provides exemptions from HMDA’s data collection and reporting requirements. Specifically, section 1003.3(c)(10) excludes closed-end mortgages and open-end lines of credit “made primarily for a business or commercial purpose.” However, there are some exceptions to this exclusion. The data collection and reporting requirements of HMDA will apply to business or commercial credit if the loan is a home improvement loan, a home purchase loan, or a refinancing. In our hypothetical, Larry was looking for a loan to purchase the property. The term “home purchase loan,” is defined in section 1003.2(j) to mean: “a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of purchasing a dwelling” (emphasis added). The term “dwelling” is also defined in section 1003.2(f), and includes a home, condo, or even a multifamily residential structure or community. In our hypothetical, ABC FCU would be required to collect data on Larry’s loan and report it on their LAR as part of the HDMA reporting – assuming ABC FCU is not exempt from HMDA reporting requirements by originating closed-end loans or open-end lines of credit in numbers below the applicable thresholds. Additionally, HMDA reporting would also be required under section 1003.3(c)(10) if Larry were to take out a loan to improve the rental dwelling or to refinance it.
Finally, let’s look at some regulations that do not address commercial purpose mortgages:
For example, traditional mortgage transactions require compliance with the TILA-RESPA Integrated Disclosure (TRID). However, section 1026.3(a) states that Regulation Z (which implements the Truth in Lending Act) does not apply to credit for a commercial or business purposes. The staff commentary to section 1026.3(a) explicitly states: “Credit extended to acquire, improve, or maintain rental property (regardless of the number of housing units) that is not owner-occupied is deemed to be for business purposes” (emphasis added). Because Larry is planning to use this property to earn rental income and does not plan to live there, the transaction has a commercial purpose, and therefore the transaction would be exempt from the disclosure requirements of Regulation Z. Similarly, section 1024.5(b)(2) of Regulation X (which implements the Real Estate Settlement Procedures Act) also exempts commercial-purpose loans. Thus, federal regulations would not impose any specific disclosure requirements for commercial purpose loans on an investment property, and such loans would not be subject to the disclosure requirements of TRID.
Finally, the NCUA has regulations discussing commercial loans and member business loans (MBLs), such as requiring an FCU to have a written commercial loan policy and setting certain limits on the amount of commercial loans or MBLs that an FCU may make. However, section 723.2 defines the term “commercial loan” in a manner that excludes “loans secured by a 1- to 4-family residential property (whether or not it is the borrower's primary residence).” Additionally, section 723.8 defines MBL in such a way that also excludes loans secured by a lien on a 1-to-4 family dwelling. Thus, Larry’s loan to purchase a 1-to-4 family dwelling for a rental property would not be covered by the regulations regarding commercial loans or MBLs.
Credit unions may want to review their policies and procedures to determine if they address commercial purpose mortgage loans and what disclosures to provide for them. While the disclosure requirements of Regulation Z will not apply, some credit unions may choose to voluntarily apply regulation Z to their commercial loans, or may even contractually obligate themselves to do so. Additionally, it is possible that FCUs may decide to voluntarily include these types of loans in their commercial lending/MBL policy. The risks and costs associated with business-purpose mortgages may vary from traditional mortgages, so credit unions may want to ensure their staff are knowledgeable and properly trained before providing these loans to their members.
About the Author
Nick St. John, was named regulatory compliance counsel in March 2020. In this role, Nick helps credit unions with a variety of compliance issues.