RSK.IQ Question of the Week 2/29/16

Is a Loan to Purchase and Renovate a Residential Building HMDA-Reportable?


The Bank has made a commercial “construction loan” to purchase an existing four-family residential apartment building and to gut and renovate it into a condominium. The units sold will be the source of repayment for the loan. Should this loan be reported for HMDA purposes as a home purchase loan?

Response Summary

Temporary financing such as a construction loan is not HMDA-reportable, but since this loan was intended to be satisfied by the sale of condominium units rather than permanent financing, it is not temporary financing. The characterization of the loan as a construction loan is probably incorrect, since a portion of the loan proceeds was used in a fashion more closely matching the definition of “home improvement.” Since the loan was also used for the purchase of the residential property which serves as collateral, it qualifies as a home purchase loan. Where a loan is used for both “home purchase” and “home improvement,” it is to be reported as a home purchase loan.

Response Detail

The situation described in the Bank’s question is not one that the Home Mortgage Disclosure Act or Regulation C (“HMDA”) addresses directly, but breaking down the legal and regulatory requirements will allow for an acceptable answer. In a case such as this, however, where HMDA does not provide a clear and unambiguous answer, the Bank must select an approach, have a rationale for it, and apply it consistently.

Ordinarily, a financial institution shall not report “temporary financing (such as bridge or construction loans).” 12 CFR §1003.4(d)(3). The regulation does not define “temporary financing”, “construction loan,” or “bridge loan,” but 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 even if the Bank’s description of this loan as a “construction loan” is accepted, the loan does not fit the definition of temporary financing provided by the guidance, as it will be paid off from the sale of the condominium units rather than by permanent financing.

If the loan is not excluded as temporary financing, however, what might it be included as, for HMDA-reporting purposes?

Regulation C defines “home purchase loan” as “a loan secured by and made for the purpose of purchasing a dwelling.” A “dwelling” is a “residential structure.” 12 CFR §1003.2(d),(h). Since the loan was made for the purpose of purchasing a dwelling and is secured by a dwelling — that is, the building purchased — it qualifies as a “home purchase loan.”

Likewise, if the Bank had made a commitment to the borrower for permanent financing of the initial financing, the Staff Commentary to Regulation C says that such a “construction/permanent” loan would also be coded as a home purchase loan. Staff Commentary, 2(h)-2.

There is a question, however, as to whether the Bank’s internal description of the loan as a “construction loan” is accurate. While “construction loan” is not defined by HMDA, “construction” does have a commonly understood meaning:

The creation of something new, as opposed to the repair or improvement of something existing.” Black’s Law Dictionary, 6th Edition.

Under Regulation C, the term “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(g)(1). This sounds closer to what is actually being done, since the work financed is being performed on an existing structure, which can only be constructed once.

It would appear then that proceeds of a loan were used in part for home purchase and in part for home improvements. Where a loan is used for multiple purposes, Regulation C assigns an order of priority as to how it is to be reported. If a loan is used for home purchase as well as home improvements, the financial institution is to report it as a home purchase loan. Staff Commentary, ¶1003.4(a)(3)-2.


This entry was posted on Monday, February 29th, 2016 at 3:00 pm.

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