RSK.IQ Question of the Week 10/20/14

Is a MECA with New Money HMDA-Reportable?


A bank in New York has assumed a residential mortgage loan as a CEMA in order to save the new borrower from mortgage taxes. How should the loan be treated for HMDA purposes? The Bank understands that CEMAs are not HMDA-reportable as a refinancing. If the new borrower received more than the outstanding balance with the original lender, should this be reported on the HMDA/LAR, and if so, in what amount?

Response Summary

The loan would not be HMDA-reportable as a refinancing, because a MECA or CEMA does not meet the definition of a refinancing: that is, a new obligation that satisfies or replaces an existing obligation by the same borrower. Whether it is HMDA-reportable will depend on whether the new money has been used for home improvements. If it has, the entire amount of the loan will be reported as a home improvement loan.

Response Detail

The requirements of the Home Mortgage Disclosure Act (“HMDA”) are sometimes confusing or ambiguous. Finding an answer is sometimes like determining what shell the pea is under. In this case, however, we can make a reasonable guess as to where the pea is.

Under HMDA requirements, a loan is HMDA-reportable if it is for home purchase, home improvement, or the refinance of a loan secured by residential property. 12 CFR §1003.4(a).

Modification, Extension, and Consolidation Agreements (that is, a “MECAs”), also called Consolidation, Extension, and Modification Agreements (that is, a “CEMAs”), are often used in states like New York and Texas to save borrowers’ mortgage or title transfer taxes. The original note and mortgage are assigned by the financial institution holding them to the one making the new loan, then modified as per the MECA.

The understanding of the Bank as to whether MECAs or CEMAs are HMDA-reportable is correct. They are not reportable as refinancings because they do not meet the definition of a refinancing, which is a “new obligation that satisfies and replaces an existing obligation by the same borrower.” In coming up with the current rule, the Federal Reserve Board considered that MECAs are substitutes for traditional refinancings in some states, but it concluded that the advantages of having a “bright-line” rule for refinancings, from a compliance standpoint, outweighed the benefits that might be obtained by including MECAs in the definition of a refinancing. 12 CFR §1003.2; 67 Fed. Reg. 7221, 7227; FFIEC HMDA FAQs.

In this case, however, new money has been extended. Some banks would not report the loan or any part of it, since it is a MECA. Other banks would report only the new money, if it was for a HMDA-reportable purpose.

What is the correct answer?

Since the better part of the loan is in the form of a CEMA, and thus is not a refinancing for HMDA purposes, and since the loan was not used for the purchase of the property, the question of whether the new money is HMDA-reportable turns on the remaining criterion: that is, whether it was used for home improvement.

A “home improvement loan” includes a “loan secured by a lien on a dwelling that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which it is located.” 12 CFR §1003.2.

This loan is secured by a lien on a dwelling, and if a portion has been used for home improvement, then it has met the “in whole or in part” requirement. In that case, it would be HMDA-reportable.

On the other hand, if the new money was not used for home improvement, it is not HMDA-reportable. Thus, it becomes simply a question of fact.

Assuming that the new money has been used for home improvement, would only the new money be reported on the HMDA Loan Application Register, or would the entire amount of the loan be reported?

One of the characteristics of the HMDA-reporting rules is their “all or nothing” aspect. They do not break loans down into portions. Rather, the amount of the loan is reported and a purpose code is given for it. This can be seen in the treatment of multi-purpose loans by the Staff Commentary. If a loan is used partly for home purchase and partly for home improvement or refinancing, it is reported as a home purchase loan. If it is used partly for home improvement and partly for a refinancing, it is reported as a home improvement loan. Staff Commentary to Regulation C, ¶1003.2, Home improvement – 5, Home purchase – 7. Under these rules, if $95,000 of a $100,000 loan is used for refinancing and $5,000 is used for home improvement, the loan will be reported as a home improvement loan.

Therefore, if the loan in question is HMDA-reportable at all, the entire amount will be reported as a home improvement loan.

There is one caveat, however: given the ambiguities of HMDA, there may be a number of seemingly valid approaches in applying its rules. A bank must select the one which seems most reasonable and then apply it consistently.

This entry was posted on Friday, October 17th, 2014 at 6:16 pm.

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