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Question: Our loan administration department is working on a commercial loan that will be assumed by another individual. Is that subject to TRID?

Answer: You said this is a commercial loan, so it likely has a business purpose. When a loan does not have a consumer purpose, then it is not subject to Reg. Z, and disclosures are not necessary because Reg. Z, and thus TRID, only applies to consumer purpose loans.

If the loan has a consumer purpose, it is still unlikely that it is subject to TRID, but much of the analysis depends on what you mean by “assumed by another individual.” If you mean that the current debtor and the assumptor (individual assuming the loan) are both natural persons, then an assumption may be subject to TRID. However, if the current debtor is a legal entity, the assumption is not subject to TRID.

When a natural person takes over the obligation of a legal entity, Section 1026.20(b) does not apply because Section 1026.20(b) requires that both the current debtor and the assumptor be consumers, and a legal entity cannot be a consumer under Reg. Z. See Comment 20(b)-5 and the definition of Consumer in 1026.2(a)(11):

5. Status of parties. Section 1026.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another consumer. It does not apply, for example, when an individual takes over the obligation of a corporation.

(11) Consumer means a cardholder or natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§ 1026.15 and 1026.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person's ownership interest in the dwelling is or will be subject to the security interest. For purposes of §§ 1026.20(c) through (e), 1026.36(c), 1026.39, and 1026.41, the term includes a confirmed successor in interest.

If your loan is Subject to Reg. Z and the assumption is consumer-to consumer, then you would look to Section 1026.20(b) to determine if the assumption is subject to Reg. Z. Under Section 1026.20(b), an assumption is considered a new transaction requiring new disclosures when there are 3 elements present:

1. If it is a “residential mortgage transaction” under Reg. Z as to the assumptor. In other words, is the property the assumptor’s principal dwelling or will it be?

2. If the creditor accepts the subsequent consumer (assumptor) as the new borrower.

3. If there is a written assumption agreement.

When those 3 elements are present, then you must disclose for the assumption.

On May 1, 2019, the CFPB published a fact sheet on whether an LE/CD is required on an assumption. There is a decision tree on the second page of the fact sheet where you can check your facts against that decision tree to see if an assumption is a disclosable transaction.

https://files.consumerfinance.gov/f/documents/cfpb_tila-respa-factsheet.pdf

Reg. Z, Section 1026.20(b)

(b) Assumptions. An assumption occurs when a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction. Before the assumption occurs, the creditor shall make new disclosures to the subsequent consumer, based on the remaining obligation. If the finance charge originally imposed on the existing obligation was an add-on or discount finance charge, the creditor need only disclose:

1. The unpaid balance of the obligation assumed.

2. The total charges imposed by the creditor in connection with the assumption.

3. The information required to be disclosed under §1026.18(k), (l), (m), and (n).

4. The annual percentage rate originally imposed on the obligation.

5. The payment schedule under §1026.18(g) and the total of payments under §1026.18(h) based on the remaining obligation.The annual percentage rate originally imposed on the obligation.

Official Staff Commentary

20(b) Assumptions

1. General definition. i. An assumption as defined in §1026.20(b) is a new transaction and new disclosures must be made to the subsequent consumer. An assumption under the regulation requires the following three elements:

A. A residential mortgage transaction.

B. An express acceptance of the subsequent consumer by the creditor.

C. A written agreement.

ii. The assumption of a nonexempt consumer credit obligation requires no disclosures unless all three elements are present. For example, an automobile dealer need not provide Truth in Lending disclosures to a customer who assumes an existing obligation secured by an automobile. However, a residential mortgage transaction with the elements described in §1026.20(b) is an assumption that calls for new disclosures; the disclosures must be given whether or not the assumption is accompanied by changes in the terms of the obligation. (See comment 2(a)(24)–5 for a discussion of assumptions that are not considered residential mortgage transactions.)

2. Existing residential mortgage transaction. A transaction may be a residential mortgage transaction as to one consumer and not to the other consumer. In that case, the creditor must look to the assuming consumer in determining whether a residential mortgage transaction exists. To illustrate: The original consumer obtained a mortgage to purchase a home for vacation purposes. The loan was not a residential mortgage transaction as to that consumer. The mortgage is assumed by a consumer who will use the home as a principal dwelling. As to that consumer, the loan is a residential mortgage transaction. For purposes of §1026.20(b), the assumed loan is an “existing residential mortgage transaction” requiring disclosures, if the other criteria for an assumption are met.

3. Express agreement. Expressly agrees means that the creditor's agreement must relate specifically to the new debtor and must unequivocally accept that debtor as a primary obligor. The following events are not construed to be express agreements between the creditor and the subsequent consumer:

i. Approval of creditworthiness.

ii. Notification of a change in records.

iii. Mailing of a coupon book to the subsequent consumer.

iv. Acceptance of payments from the new consumer.

4. Retention of original consumer. The retention of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. But the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption. However, if neither party is designated as the primary obligor but the creditor accepts payment from the subsequent consumer, an assumption exists for purposes of §1026.20(b).

5. Status of parties. Section 1026.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another consumer. It does not apply, for example, when an individual takes over the obligation of a corporation.

6. Disclosures. For transactions that are assumptions within this provision, the creditor must make disclosures based on the “remaining obligation.” For example:

i. The amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original transaction.

ii. If the finance charge is computed from time to time by application of a percentage rate to an unpaid balance, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor, but must include in the finance charge any prepaid finance charge imposed in connection with the assumption.

iii. If the creditor requires the assuming consumer to pay any charges as a condition of the assumption, those sums are prepaid finance charges as to that consumer, unless exempt from the finance charge under §1026.4. If a transaction involves add-on or discount finance charges, the creditor may make abbreviated disclosures, as outlined in §1026.20(b)(1) through (5). Creditors providing disclosures pursuant to this section for assumptions of variable-rate transactions secured by the consumer's principal dwelling with a term longer than one year need not provide new disclosures under §1026.18(f)(2)(ii) or §1026.19(b). In such transactions, a creditor may disclose the variable-rate feature solely in accordance with §1026.18(f)(1).

7. Abbreviated disclosures. The abbreviated disclosures permitted for assumptions of transactions involving add-on or discount finance charges must be made clearly and conspicuously in writing in a form that the consumer may keep. However, the creditor need not comply with the segregation requirement of §1026.17(a)(1). The terms annual percentage rate and total of payments, when disclosed according to §1026.20(b)(4) and (5), are not subject to the description requirements of §1026.18(e) and (h). The term annual percentage rate disclosed under §1026.20(b)(4) need not be more conspicuous than other disclosures.

https://www.bankersonline.com/regulations/12-1026-020#20b