Is a Construction Loan HMDA-Reportable?

Issue/Inquiry

A borrower has obtained a construction loan from the Bank to purchase a property and build a residential dwelling on it then plans to sell the property after construction. Would this be HMDA-reportable because the borrower is selling after construction?

Response Summary

This loan is not HMDA-reportable, since it is for construction only and does not fit the definition of a home purchase loan. Given the ambiguities in the applicable HMDA definitions, however, the Bank must determine what a reasonable interpretation is and follow it consistently.

Response Detail

Financial institutions are required by the Home Mortgage Disclosure Act (“HMDA”) to report the home purchase, home improvement, and refinanced loans they make. Whether a loan is HMDA-reportable depends on whether it falls within one of these categories, as defined by Regulation C, which implements HMDA. 12 CFR §1003.4(a).  In making that determination, however, a financial institution must sometimes choose an interpretation which fits the particular factual situation with the least amount of ambiguity.

This loan provides an example of such an interpretive process. Regulation C provides that a financial institution shall not report “Temporary financing (such as bridge or construction loans)”. 12 CFR §1003.4(d)(3).

The regulation, however, never defines “temporary financing”, “construction loan”, or “bridge loan.” Federal guidance indicates that:

Construction and bridge loans are illustrative, not exclusive examples of temporary financing. The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. A loan is not temporary financing merely because its term is short. FFIEC, HMDA Frequently Asked Questions (“HMDA FAQs”).

Most construction loans are temporary financing, but while this loan was made in part for the construction of a dwelling, it does not precisely fit the definition of temporary financing provided by the guidance, as it is not intended to be replaced by permanent financing.

If the loan is not excluded as temporary financing, however, what might it be included as, for HMDA-reporting purposes? For example, could it be a home purchase loan, since it is for the purchase of land on which a residence will be built?

Regulation C defines “home purchase loan” as “a loan secured by and made for the purpose of purchasing a dwelling.” 12 CFR §1003.2. Under this definition, the loan does not appear to be a home purchase loan. It was for the purchase of the property on which the dwelling will be constructed, and it will ultimately be secured by the dwelling while the loan remains outstanding; however, since the dwelling did not exist at the time the loan was made, the loan was not made for the purpose of purchasing a dwelling.

Whether or not the loan is temporary financing, it is not a home purchase loan, for the purposes of HMDA reporting.

The official commentary provides additional insight the discussion of whether, under certain circumstances, a construction loan might be reportable as a home purchase loan:

A home purchase loan includes both a combined construction/permanent loan and the permanent financing that replaces a construction-only loan. It does not include a construction-only loan, which is considered “temporary financing” under Regulation C and is not reported. Commentary, ¶1003.2-5.

This suggests that a construction only loan which is not combined with permanent financing is not HMDA-reportable, apart from whether or not it is temporary financing as defined by the HMDA FAQs.

We can then conclude that the loan is not HMDA-reportable, since it is for construction only and does not fit the definition of a home purchase loan. Given the ambiguities of the regulatory requirements, however, the Bank must determine what a reasonable interpretation is and follow it consistently.

 

This entry was posted on Monday, January 25th, 2016 at 2:00 pm.