Is Loan for Purchase of House to be Torn Down HMDA-Reportable?

Question.

Bank asks whether a loan to purchase land with a dwelling on it is HMDA-reportable, if the dwelling is to be demolished and a new residential structure built in its place? The proceeds of the loan will be used to purchase the land with the dwelling on it, demolish the dwelling, and construct the new dwelling.

Summary.

HMDA does not provide a satisfactory answer with regards the initial purchase, given that its definitions of “home purchase loan” and “dwelling” allow for different interpretations in the absence of any specific commentary. If the proceeds are also used to construct the new residential structure and are tied to permanent financing, the loan would be considered HMDA-reportable as a home purchase loan.

ANALYSIS.

Home Purchase

The regulatory context is found in the definitions of “home purchase loan” and “dwelling.” A “home purchase loan” is a loan secured by and made for the purpose of purchasing a dwelling. A “dwelling” is a residential structure. 12 CFR 1003.2. The Official Commentary does not deal with any examples similar to the case at hand, however.

An argument can be made that the loan is being used to purchase land that happens to have a building on it. The building is not a dwelling because no one will dwell in it. The purpose of the loan is not to purchase the building, but the land on which a residential structure will be built. Hence, the loan is not for the purpose of purchasing a dwelling and is not HMDA-reportable.

The counter argument is that the building has a fixed character as a residential structure, whether or not anyone dwells in it. The dwelling necessarily comes with the land being purchased. Whatever the ultimate use the purchaser intends to make of the property, the loan in its initial phase is for the purchase of a dwelling. Thus it is HMDA-reportable as a home purchase loan.

The Official Commentary offers some support for the principal that purpose controls, since it indicates that, with regards characterizing mixed-use property, a bank may use any reasonable approach in identifying the primary use of a property. Similarly, it says that a loan for the purchase of a property used primarily for agricultural purposes is not considered a home purchase loan, even though a dwelling many be on the property. Official Commentary to Part 1003, Section 2, Home Purchase Loan, 3 and 4.

A federal regulation should not criticize the bank for reporting the loan or not reporting the loan, provided the bank documents the reason for its determination and applies this rationale consistently in its HMDA reporting.

Construction/Permanent

Whether or not the initial purchase of the property makes the loan HMDA-reportable, the use of the proceeds to construct a new residential structure may still make it reportable, if the loan is tied to permanent financing.

Ordinarily, temporary financing is not HMDA-reportable. 12 CFR 1003.4(d)(3). A construction-only loan, for example, is considered “temporary financing” and not reported. Where there is a commitment for permanent financing from the same lender, however, a construction loan does become HMDA-reportable. A loan to provide construction/permanent financing would be coded as a home purchase loan. Official Commentary to Part 1003, Section 2, Home Purchase, 5.

Thus, if the loan is construction/permanent, it should be reported on the HMDA/LAR with the code for “home purchase.” If permanent financing is not involved, it is temporary financing and not HMDA-reportable.

This entry was posted on Friday, June 27th, 2014 at 7:14 pm.