Are abundance of caution mortgages taken on one-to-four family residential property HMDA-reportable if the Bank pays off an existing mortgage?
Yes, a dwelling secured mortgage paid off with another dwelling secured mortgage is HMDA-reportable, even if the property is taken out of an abundance of caution.
Abundance of Caution loans (“AoCs” or “ABCs”) are generally not exempt from the rules of such laws and regulations as HMDA, Regulation B, Regulation Z, or the Flood Disaster Protection Act, so if the Bank has Abundance of Caution mortgages, there may be a reason to examine these files to make sure they were disclosed properly. However, with specific regard to HMDA, the nuance with an Abundance of Caution mortgage lies with the purpose of the loan for which the abundance of caution is being taken. The following examples will illustrate this point:
Example #1: A “commercial” loan is being made to finance the purchase of investment properties (vacation rentals), the primary collateral securing the purchase is margin stock, and the Bank is using the borrowers principal dwelling out of an abundance of caution to secure the loan. This loan is reportable as a purchase because the principal dwelling is also being taken as an abundance of caution. Using one dwelling to secure the purchase essentially makes the loan “dwelling secured” and therefore reportable for HMDA. If the loan was made only on the basis of margin stock, the loan would not be reportable. The use of the principal dwelling to secure the loan is what makes it reportable, even though it is only taken as an abundance of caution.
Example #2: A “commercial” loan is being made to finance the purchase of a commercial warehouse property, the mortgage on the warehouse property is the primary collateral and the Bank takes the borrower’s primary residence out of an abundance of caution to secure the loan. The Bank is also paying off the mortgage at another bank to assume a first lien position on the primary residence. This loan is reportable as a refinance since the bank is paying off a dwelling secured mortgage and replacing it with another dwelling secured mortgage.
Example #3: A “commercial” loan is being made to refinance an existing commercial real estate mortgage. The Bank is adding the borrower’s primary residence to the loan as an abundance of caution. This loan is not HMDA reportable, as the loan being refinanced is not a dwelling secured loan and is not being used to purchase, refinance, or improve a dwelling. However, if this loan is later refinanced and the Bank maintains the primary residence as an abundance of caution collateral, then the loan would be reportable as a refinance because the loan is dwelling secured and is being refinanced with another dwelling secured loan.
With regards to abundance of caution we find that many Banks see this as a panacea for underwriting. As many of our clients have found out, though, this can actually be a poison pill for their compliance program. This is especially true when the loan application originates outside the residential lending department due to the fact that most commercial and consumer loan departments can be woefully out of touch with compliance requirements for loans secured by residential real property. As a general recommendation, we urge our clients to be cautious and deliberate with their use of the abundance of caution designation for collateral, especially when that collateral is residential real property.