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.


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