Consumer Purpose under TILA

When determining whether credit is for consumer purposes, the creditor must evaluate all of
the following:
? Any statement obtained from the consumer describing the purpose of the proceeds.
– For example, a statement that the proceeds will be used for a vacation trip would
indicate a consumer purpose.
– If the loan has a mixed-purpose (e.g., proceeds will be used to buy a car that will be
used for personal and business purposes), the lender must look to the primary
purpose of the loan to decide whether disclosures are necessary. A statement of
purpose from the consumer will help the lender make that decision.
– A checked box indicating that the loan is for a business purpose, absent any
documentation showing the intended use of the proceeds, could be insufficient
evidence that the loan did not have a consumer purpose.
? The consumer’s primary occupation and how it relates to the use of the proceeds. The
higher the correlation between the consumer’s occupation and the property purchased
from the loan proceeds, the greater the likelihood that the loan has a business purpose.
For example, proceeds used to purchase dental supplies for a dentist would indicate a
business purpose.
? Personal management of the assets purchased from proceeds. The lower the degree of
the borrower’s personal involvement in the management of the investment or enterprise
purchased by the loan proceeds, the less likely the loan will have a business purpose.
For example, money borrowed to purchase stock in an automobile company by an
individual who does not work for that company would indicate a personal investment
and a consumer purpose.
? The size of the transaction. The larger the size of the transaction, the more likely the
loan will have a business purpose. For example, if the loan is for a $5,000,000 real
estate transaction, that might indicate a business purpose.
? The amount of income derived from the property acquired by the loan proceeds relative
to the borrower’s total income. The lesser the income derived from the acquired
property, the more likely the loan will have a consumer purpose. For example, if the
borrower has an annual salary of $100,000 and receives about $500 in annual dividends
from the acquired property, that would indicate a consumer purpose.
All five factors must be evaluated before the lender can conclude that disclosures are not
necessary. Normally, no one factor, by itself, is sufficient reason to determine the
applicability of Regulation Z. In any event, the financial institution may routinely furnish
disclosures to the consumer. Disclosure under such circumstances does not control whether
the transaction is covered, but can assure protection to the financial institution and
compliance with the law.

The Law Offices of Michael D. Stewart

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