HMDA and Temporary Financing

Issue/Inquiry

The Bank has a loan which was characterized as a 12-month construction loan.  However, the write up of the loan states that the home which is being constructed is 70 percent complete and that the loan will be used to refinance an existing construction loan at another bank.  The only work left to be completed is for cosmetics, landscaping, and fixture installations. Would this loan be HMDA-reportable as a home improvement loan?

Response Summary

The loan is HMDA-reportable as a home improvement loan, provided that it is not a construction loan or temporary financing.

Response Detail

As we know, Home Mortgage Disclosure Act (“HMDA”) and its implementing Regulation C have many ambiguities and gray areas. In this case, however, the regulatory requirements and official guidance may illuminate a proper answer to the Bank’s question.

If the loan was considered to be a multi-purpose loan used both to refinance an existing loan secured by a dwelling and to improve that dwelling, then it would be a home improvement loan under HMDA’s priority rule:

If a loan is a home improvement loan as well as a refinancing, an institution reports the loan as a home improvement loan. Staff Commentary, ¶1003.2 – Home Improvement – 5.

A “home improvement loan” is 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 – Home Improvement – (a).

HMDA does not define “construction loan,” though its meaning is fairly self-explanatory. If the home is already built, however, then anything else done to it would be an improvement, since a house can only be constructed once. A factor to consider in making this determination would be whether a certificate of occupancy has been issued. If it has, then the house has essentially been completed, and the work being financed by the Bank’s loan would be in the nature of improving it. If a certificate of occupancy has not been issued, then the construction may still be underway and the loan is not a home improvement loan.

Here is the tricky part under HMDA, however:

Excluded data: A financial institution shall not report:

(3) Temporary financing (such as bridge or construction loans).  12 CFR §1003.4(d)(3).

This means that if the loan is considered to be a construction loan, then certainly it is non-reportable, but if it is considered to be a home improvement loan, it is still non-reportable if it is also temporary financing.

An issue that arises is that Regulation C also does not define “temporary financing.” The FFIEC, in its HMDA Questions and Answers, offers this guidance:

The regulation lists as examples of temporary financing construction and bridge loans. See 203.4(d)(3). 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. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan.

In the case at hand, the loan is 12 months in duration. This in itself is not decisive. A short-term loan is HMDA-reportable if it is used for the purchase, improvement, or refinance of a dwelling. What is decisive is the following:

• Is the loan a construction loan? If it is, then it is not HMDA-reportable.
• Is the loan intended to be replaced by another loan? If so, it is temporary financing and not HMDA-reportable.

However, if the loan is not for construction and will not be replaced by another loan, then it will be HMDA-reportable, in this case as a home improvement loan. Of course, in any matter whether the legal and regulatory requirements are ambiguous, the Bank will have to adopt a rationale, document its reasons for doing so, and then follow such consistently.

This entry was posted on Monday, October 24th, 2016 at 2:00 pm.

HMDA and Temporary Financing

Issue/Inquiry

The Bank has a loan which was characterized as a 12-month construction loan.  However, the write up of the loan states that the home which is being constructed is 70 percent complete and that the loan will be used to refinance an existing construction loan at another bank.  The only work left to be completed is for cosmetics, landscaping, and fixture installations. Would this loan be HMDA-reportable as a home improvement loan?

Response Summary

The loan is HMDA-reportable as a home improvement loan, provided that it is not a construction loan or temporary financing.

Response Detail

As we know, Home Mortgage Disclosure Act (“HMDA”) and its implementing Regulation C have many ambiguities and gray areas. In this case, however, the regulatory requirements and official guidance may illuminate a proper answer to the Bank’s question.

If the loan was considered to be a multi-purpose loan used both to refinance an existing loan secured by a dwelling and to improve that dwelling, then it would be a home improvement loan under HMDA’s priority rule:

If a loan is a home improvement loan as well as a refinancing, an institution reports the loan as a home improvement loan. Staff Commentary, ¶1003.2 – Home Improvement – 5.

A “home improvement loan” is 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 – Home Improvement – (a).

HMDA does not define “construction loan,” though its meaning is fairly self-explanatory. If the home is already built, however, then anything else done to it would be an improvement, since a house can only be constructed once. A factor to consider in making this determination would be whether a certificate of occupancy has been issued. If it has, then the house has essentially been completed, and the work being financed by the Bank’s loan would be in the nature of improving it. If a certificate of occupancy has not been issued, then the construction may still be underway and the loan is not a home improvement loan.

Here is the tricky part under HMDA, however:

Excluded data: A financial institution shall not report:

(3) Temporary financing (such as bridge or construction loans).  12 CFR §1003.4(d)(3).

This means that if the loan is considered to be a construction loan, then certainly it is non-reportable, but if it is considered to be a home improvement loan, it is still non-reportable if it is also temporary financing.

An issue that arises is that Regulation C also does not define “temporary financing.” The FFIEC, in its HMDA Questions and Answers, offers this guidance:

The regulation lists as examples of temporary financing construction and bridge loans. See 203.4(d)(3). 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. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan.

In the case at hand, the loan is 12 months in duration. This in itself is not decisive. A short-term loan is HMDA-reportable if it is used for the purchase, improvement, or refinance of a dwelling. What is decisive is the following:

• Is the loan a construction loan? If it is, then it is not HMDA-reportable.
• Is the loan intended to be replaced by another loan? If so, it is temporary financing and not HMDA-reportable.

However, if the loan is not for construction and will not be replaced by another loan, then it will be HMDA-reportable, in this case as a home improvement loan. Of course, in any matter whether the legal and regulatory requirements are ambiguous, the Bank will have to adopt a rationale, document its reasons for doing so, and then follow such consistently.

This entry was posted on Monday, October 24th, 2016 at 2:00 pm.