[Chris]

I am aware that Reg Z includes in its definition of consumer – Personal Trusts established for tax and real estate planning purposes.

We have a loan request that will be done in the name of a Special Needs Trust. The trust is for the benefit of a disabled young lady. The Settlor is the young lady’s mother and legal guardian. The trustee is a non-profit organization in Kentucky that serves as trustees of special needs trusts. Their information indicates that “a special needs trust is a form of pure discretionary, spendthrift trust designed to preserve a disabled person’s eligibility for government benefits.”

The Trust document itself defines the purpose of the trust as follows: “The purpose of this trust is to protect the long-term interests of _____ and to provide her supplemental care and special needs in addition to and over and above any benefits, assistance, support, and / or resources, whether public, private, or otherwise, that are presently or may at any time or times be available to ____, including, without limitation, Medicaid and SSI benefits.”

The loan purpose is to buy a primary residence, and the loan will be secured by both a wealth management investment account and an Abundance of Caution 1st REM on the new residence. It is closed-end, and secured by a dwelling.

Would this loan fall under TRID? I’m inclined to think yes because it feels consumer in nature (buying the person benefiting from the trust a new primary residence), but could really use some affirmation right now. ? (My mind is in 1,000 different directions due to an FDIC exam, so I apologize if this sounds confusing – ask me questions if you need more info!)

Thanks so much for your help.

A very scatter-brained Chris

[rcooper]

Chris,
I’m inclined to think it would be covered for Reg Z purposes:

1026.3(a)-10 says:
10. Trusts. Credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization. Specifically:

i. Trusts for tax or estate planning purposes. In some instances, a creditor may extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both). Consumers sometimes place their assets in trust, with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates. During their lifetimes, however, such consumers may continue to use the assets and/or income of such trusts as their property. A creditor extending credit to finance the acquisition of, for example, a consumer’s dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust. Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.

It does not seem as though it would fit the exemption of business, commercial, agricultural, or organizational credit and does seem it would, in substance, be consumer credit. If question still remains, it is safer to disclose when there is uncertainty. Reg Z 1026.3(a) states:
1. Primary purposes. A creditor must determine in each case if the transaction is primarily for an exempt purpose. If some question exists as to the primary purpose for a credit extension, the creditor is, of course, free to make the disclosures, and the fact that disclosures are made under such circumstances is not controlling on the question of whether the transaction was exempt. (See comment 3(a)–2, however, with respect to credit cards.)

[Chris]

Thanks, Robin.

I’ve just learned a little bit of additional information. The loan officer contacted the non-profit org (who is trustee) – and spoke to the attorney who will be executing the loan documents for this credit. The attorney was adamant about the fact this trust was in no way, shape or form created “for the purpose of tax or estate planning’. The young lady (who benefits from the trust)was not born disabled. She was disabled as a result of an accident due to someone else’s negligence. This resulted in a monetary settlement awarded to the young lady which the court ordered to be held in trust. The main purpose of the trust is to ensure the young lady remains eligible to receive “standard” disability payments from the government. If the funds were held in her name personally, she would not qualify for those payments due to her net worth.

Furthermore, the trust was not created by the consumer, but was created due to the court’s ruling that the money be held in a trust.

Does this information make any difference in your previous answer?

[jholzknecht]

Chris – I don’t understand arguments like this.
• If you are wrong what is the result?
o The consumer gets a disclosure that wasn’t required.
• If you are right what is the result?
o The consumer receives a disclosure that is required. Failure to provide that disclosure could result in liability and penalties down the road.

What is the basis for the loan officer’s position? The only one inconvenienced by providing the disclosure is the lending staff that has to prepare the disclosure in addition to the other loan documents. I refer to this as the lazy banker syndrome. It could also be the uneducated loan officer syndrome. If that is the case, shame on you for not training your staff on one of the basics of lending compliance – be safe, not sorry. Does this loan officer wear a face mask when meeting with staff or customers?

[Author]

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