Is a Loan Used for Refinancing and Construction HMDA-Reportable?
Issue/Inquiry
A single family property was purchased in 2006 for which the borrowers are now requesting to refinance the existing loan. The borrowers plan on demolishing the home and building a new single family home, which they intend to sell. The Bank has categorized this loan as a construction loan. Would it be exempt from HMDA reporting?
Response Summary
If the loan is being used for both a refinancing and construction, and there isn’t a commitment for the permanent financing of the construction, the loan should be reported on the HMDA LAR as a refinancing, since a refinancing is HMDA-reportable and a construction loan is not. If there is a commitment for permanent financing of the construction portion of the loan, that portion is considered a home purchase loan for HMDA purposes. Since a home purchase loan has priority over a refinance, the loan should be reported as a home purchase loan.
Response Detail
Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), requires a financial institution to collect data regarding applications for, and originations and purchases of, home purchase loans, home improvement loans, and refinancings for each calendar year. 12 CFR §1003.4(a)
For the purposes of our analysis, we’ll assume that a portion of the loan proceeds will be used to refinance the existing loan, with the remainder used to demolish the existing dwelling and construct a new one.
Under Regulation C, a “refinancing” is an obligation that satisfies and replaces another obligation of the same borrower, with each obligation secured by a dwelling. 12 CFR §1003.2 – refinance. Under this definition, the loan would be considered a refinancing and, thus, HMDA-reportable. The loan, however, will also be used to demolish the dwelling and construct a new dwelling. Regulation C prescribes an order of priority for multiple-use loans: If a loan is being used for home purchase and refinancing, it is reported as a home purchase loan; If it is being used for home improvement and refinancing, it is reported as a home improvement loan. Official Staff Commentary, 1003.4(a)(3)-2.
Ordinarily, temporary financing, such as bridge or construction loans, is not HMDA-reportable. 12 CFR 1003.4(d)(3). Where there is a commitment for permanent financing from the same lender, it does become HMDA-reportable. In the case of construction/permanent financing, the Staff Commentary states that it would be coded as a home purchase loan. A construction-only loan is considered “temporary financing” and not reported. Official Staff Commentary, 1003.2(h)-2.
This means that if the construction portion of the loan is not considered permanent financing, it is not HMDA-reportable. The loan, therefore, should be reported as a refinancing, since a refinancing is a HMDA-reportable purpose and a construction loan is not. However, as the construction portion of the loan is construction/permanent, it is a “home purchase” loan for HMDA reporting purposes, which has priority over the refinancing portion. It should, therefore, be reported on the HMDA/LAR with the code for “home purchase.”