Bridge loans, typically defined as short-term financing (usually 12 months or less) to bridge the gap between purchasing a new home and selling an existing one, are generally exempt from many Regulation Z provisions, including the ability-to-repay (ATR) rule and certain disclosures. However, they are still subject to specific Regulation Z requirements, such as the 3-day right of rescission if secured by the borrower's current primary dwelling.
However, several types of credit fall outside Regulation Z's scope. Business loans, commercial credit, agricultural loans, federal student loans, and loans for public utility services are generally exempt. Additionally, loans above certain dollar thresholds may be exempt from some requirements.
The borrower pays off the bridge or swing loan with funds from the sale of his or her existing home and obtains permanent financing for his or her new home from Lender A. The bridge or swing loan is excluded as temporary financing under § 1003.3(c)(3).
12 CFR Part 1026 - Truth in Lending (Regulation Z)
If the lender issues a commitment for permanent financing, it is covered by the regulation. Any construction loan with a term of two years or more is covered by the regulation, unless it is made to a bona fide contractor. “Bridge” or “swing” loans are not covered by the regulation.
Commercial or business loans
RESPA does not typically include loans backed by real estate used for business or agricultural purposes. While RESPA does not apply to a loan to an individual entity, it applies in the case of one to four residential unit rental properties.
The final rule exempted from the Regulation Z HPML escrow requirement any loan made by an insured depository institution or insured credit union and secured by a first lien on the principal dwelling of a consumer if: (1) the institution has assets of $10 billion or less; (2) the institution and its affiliates ...
Certain types of loans are not subject to Regulation Z, including federal student loans, loans for business, commercial, agricultural, or organizational use, loans above a certain amount, loans for public utility services, and securities or commodities offered by the Securities and Exchange Commission.
TILA promotes the informed use of consumer credit by requiring timely disclosure about its costs. It also includes substantive provisions such as the consumer's right of rescission on certain mortgage loans and timely resolution of billing disputes.
If the loan or line of credit is neither a closed-end mortgage loan nor an open-end line of credit, the transaction does not involve a covered loan, and the financial institution is not required to report information related to the transaction.
Also referred to as a gap loan, a bridge loan is often used in real estate transactions to temporarily help homeowners bridge the gap between the purchase of a new home and selling their current home. Bridge loans are different from mortgage loans, because they are considered short-term loans.
Regulation Z applies to mortgages, home equity loans, HELOCs, credit cards, installment loans and private student loans.
Reverse Mortgages and HOEPA Exemptions
Reverse mortgages are exempt from HOEPA coverage. These loans work differently than standard mortgages. Instead of making monthly payments, borrowers—usually seniors—borrow against the equity in their homes and repay the loan when the house is sold or they move out.
Coverage Considerations under Regulation Z
(Exempt credit includes loans with a business or agricultural purpose, and certain student loans. Credit extended to acquire or improve rental property that is not owner-occupied is considered business purpose credit.)
However, private education loans and loans secured by real property, such as mortgages, are subject to Regulation Z regardless of the amount of the loan.
It is the purpose of the loan, not the collateral, which determines if Reg Z applies.
While Regulation Z protects consumers from many types of loans, it doesn't apply to every type of credit. Here are some forms of credit that it doesn't cover: Federal student loans. Business, commercial, agricultural, or organizational credit.
A conventional loan is a mortgage loan that's not backed by the government. These loans come in all shapes and sizes, and while they don't provide some of the benefits FHA, VA and USDA loans offer, conventional loans remain the most common type of mortgage loan.
The 3-Day Right of Rescission allows borrowers to cancel certain home-secured loans within three business days of signing. Established under the federal Truth in Lending Act (TILA) and Regulation Z. Applies to refinances and home equity loans on a primary residence, not home purchases.
Bridge loans are often offered by credit unions and regional banks, which may stipulate that borrowers use them for their purchase mortgage, as well. Unlike traditional mortgages, bridge loans aren't covered by the Real Estate Settlement Procedures Act (RESPA), which protects consumers from predatory lending practices.
As a result, Section frequently classifies bridge loans as high-cost mortgages. A lender must also keep in mind that, like other consumer loans, bridge loans are subject to TRID disclosures.
What Loan Types Are Exempt From the Ability to Repay Requirements? Several loans don't have to meet ATR requirements. These include home equity lines of credit (HELOC), reverse mortgages, bridge loans with 12-month terms or less, and construction loans.