Are Business Purpose Loans Exempt from RESPA?
RESPA stands for the Real Estate Settlement Procedures Act. It basically regulates the settlement costs between home buyers and home loan lenders by requiring the latter to disclose important information about their real estate transactions and settlement costs.
Many different types of loans are covered under RESPA, but a few of them are exempt from it. Although it may not hurt to disclose important information and ensure greater transparency anyway, RESPA does leave the decision to the lenders for the exempt loan types.
The Answer Is a Bit Complicated
Now, we know you want to know whether business purpose loans are exempt from RESPA, but the answer is both yes and no.
This is because the answer totally depends on the use of the borrowed funds. If the funds will be used for business purpose only, then the loan will not be covered under RESPA.
Similarly, a loan taken for agricultural purpose will not be covered under RESPA as well.
However, the RESPA rules will apply if the borrowed funds will be used to purchase or expand a rental property with 1 to 4 units.
Many people may still consider this purpose as “business purpose” simply because it may lead to increased rental income which in their view may qualify as business purpose.
Similarly, if the borrowed funds will be used for personal or consumer purpose, then the RESPA rules WILL apply and the required disclosures will have to be made to the borrower.
Understanding the Underlying Reason
Some might wonder exactly what’s the reason lenders are required to follow these rather stringent rules when lending to certain type of borrowers like first-time home buyers.
Well, the main reason is that commercial business owners are usually very savvy when it comes to financial transactions and understanding the implications of the loan they are taking. Even if they aren’t, they can afford hiring professionals to make sure the contract or loan terms do not allow the lender to abuse them financially in any way.
First-time home buyers, on the other hand, do not have access to this luxury and are usually not knowledgeable enough about financial loans either. This leaves a lot of room for lenders to impose unfair terms on them when lending them the funds.
Acts like RESPA aim to protect the interests of such borrowers. The commercial business owners are exempt because they either do not need such protection or are able to hire the protection in the form of professionals.