Is a Loan Used for Multiple Purposes HMDA-Reportable?

Issue/Inquiry

The Bank made a loan in the amount of $1,100,000, of which $540,000 paid off existing debts and the remainder was used to recoup costs that the borrower spent on repairs and to purchase a residential property. The loan is secured by five properties, four of which are commercial or with commercial use predominating, and one of which is a mixed use property in which the residential use predominates.  The loan is not secured by the residential property purchased. How would the Bank report this loan on the HMDA LAR?

Response Summary

The Bank would report the loan as a home purchase loan, as a portion of the loan proceeds was used to purchase a residential property, and the loan is secured by a residential property. The location reported would be that of the residential property securing the loan. The amount reported would be the entire amount of the loan.

Response Detail

Home Purchase Loan

Under Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), a “home purchase loan” is a home secured by and made for the purpose of purchasing a dwelling. 12 CFR 1003.2(g).

In this case, the loan proceeds are being used in part to purchase a residence, but the residence does not secure the loan. Is the loan then HMDA-reportable? According to the Staff Commentary to Regulation C, a home purchase loan includes a loan secured by one dwelling and used to purchase another dwelling. Staff Commentary, ¶1003.2(g)-1.  This means that a loan does not have to be secured by the residential property purchased so long as it is secured by a residential property.

This loan is secured by five properties, four of which are commercial or used for a predominantly commercial purpose. One of the properties is residential, however, so the loan is secured by a residential property and, thus, is HMDA-reportable as a home purchase loan.

Multiple Purpose

If the majority of the loan proceeds are being used to refinance other loans or to recoup monies spent for improvements, and only the reminder is used to purchase a residential property, how would the loan be reported? Regulation C assigns an order of priority to loans used for multiple purposes. If a loan is used for home purchase, refinance, and home improvement, it is reported as a home purchase loan. Staff Commentary, ¶1003.4(a)(3)-2.

Location

When a home purchase loan is secured by multiple properties, the Staff Commentary says that an institution reports the property taken as security. If an institution takes more than one property as security, it reports the location of the property being purchased when there is just one. If the loan is to purchase multiple properties and is secured by multiple properties, the institution reports the location of one of the properties or reports the loan using multiple entries on its HMDA-LAR (with unique identifiers) and allocating the loan amount among the properties. Staff Commentary, ¶1003.4(a)(6)-2.

In this case, there are multiple properties securing the loan, but only one of them is a residential property. Since only this one residential property is securing the loan, for HMDA purposes, its location will be reported on the HMDA Loan Application Register.

Amount

Except in the case of a home equity line of credit, a financial institution reports the entire amount of a closed-end loan that was used for multiple purposes, even if only a portion was used for home purchase. Staff Commentary, ¶1003.4(a)(4)-1. The Bank, in this case, would report the loan as a home purchase loan and would report the entire amount of the loan, even though most of it was used for other purposes than home purchase.

Mixed Use

The Bank has indicated that three of the properties securing the loan are used for both commercial and residential purposes, two of the properties are being used for a predominantly commercial purpose, and one property is being used for a predominantly residential purpose.

Regulation C allows a financial institution to use any reasonable standard in determining the primary use of a mixed-use property, such as by square footage or income generated.  The institution can select the standard to apply on a case-by-case basis. Staff Commentary to Regulation C, ¶1003.2(g)-2.

For example, the Bank in this case could adopt an income-generated standard, with square footage used if the income-generated does not provide a satisfactory answer. This would be reasonable and in line with the Official Commentary. The Bank should document the basis on which it determined the primary purpose of the properties securing the loan.

Consistent Approach

As always in applying the HMDA rules and interpretations, the Bank should adopt an approach, document its reasons for doing so, and then follow the approach consistently.

This entry was posted on Monday, February 8th, 2016 at 2:00 pm.