HMDA and Reporting a Temporary Loan for Renovation with Commitment for Permanent Financing

Issue/Inquiry

The Bank is making a temporary loan for the renovation of a residential building, which it will replace with permanent financing. Is such a loan HMDA reportable?  When the permanent loan is closed, how would it be reported? Would it be a refinance or home improvement? If the temporary loan was a construction loan, would the answer be different?

Response Summary

The official commentary to HMDA indicates that a combined construction/permanent loan should be reported as a home purchase loan. There is official opinion that the same rule applies to combined home improvement/permanent loans, though a rationale could also be provided for treating the permanent phase as a refinancing.

Response Detail

The situation described in the Bank’s question is not one that 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, temporary financing is not HMDA-reportable, as indicated below:

Excluded data. A financial institution shall not report:

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

Although the regulation lists construction loans and bridge loans as examples of temporary financing, the official guidance notes that construction and bridge loans are illustrative and not exclusive examples of temporary financing. Financing is temporary if it is designed to be replaced by permanent financing of a much longer term. FFIEC, Regulatory & Interpretive (FAQs).

Where there is a commitment for permanent financing from the same lender, however, a construction loan does become HMDA-reportable:

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. Supplement I to Part 1003, Staff Commentary, 1003.2 – Home Purchase Loan – 5.

The construction loan, then, would be reported on the HMDA Loan Application Register (“HMDA LAR”) as a home purchase loan, if the Bank has made a commitment for permanent financing.

The loan for the renovation of the residential building would properly be considered a “home improvement loan,” since it is a dwelling-secured loan made 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.

Assuming that the home improvement loan is temporary financing, as per the definition above, Regulation C and its commentary are silent with respect to how it should be reported when there is a commitment for permanent financing. The only example of temporary-to-permanent financing provided is for construction/permanent financing.

In the Federal Reserve Bank of Philadelphia’s Consumer Compliance Outlook (Second Quarter, 2011), a commentator stated that a home improvement loan with a documented take-out loan should be reported as a construction/permanent loan as follows:

If a home improvement loan is set up like a construction-permanent loan, the loan should be reported, as explained in comment [1003.2 – 5]. This section states that a construction-permanent home purchase loan is not considered a temporary loan and should be reported for HMDA purposes. If the short-term home improvement loan will be replaced with permanent financing of a much longer term, the bank would report the permanent take-out loan but not the short-term temporary loan.

What would such a loan be reported as? The commentator to Consumer Compliance Outlook suggests that it should be reported just as a construction/permanent loan would be, that is, as a home purchase loan.

While a publication of the Federal Reserve Bank of Philadelphia carries a certain weight of authority, it is not the same as official commentary or guidance.

On the other hand, if HMDA requires the permanent phase to be reported, and if it does not assign a special categorization for temporary/permanent financing for home improvement loans, as it does for construction loans, the permanent phase could also be reported as a refinancing:

Refinancing means a new obligation that satisfies and replaces an existing obligation by the same borrower, in which:

(2) For reporting purposes, both the existing obligation and the new obligation are secured by liens on dwellings. 12 CFR §1003.2.

Either approach would seem to be valid. As noted, however, where HMDA does not provide a clear and unambiguous answer, the Bank must select one of them, have a rationale for it, and then apply it consistently.

This entry was posted on Monday, May 15th, 2017 at 1:34 pm.