RSK.IQ Question of the Week 3/4/19

HMDA and New York CEMAs


What purpose is reported for a New York CEMA on the HMDA LAR? What about the refinance of an existing obligation using a New York CEMA?

Response Summary

The purpose of a New York CEMA could be home purchase, home improvement, or refinancing, depending on the purpose of the transaction. This is a question of fact. However, where the transaction concerns an existing obligation to the same borrower, it probably should be reported as a refinancing.

Response Detail

Under the revised HMDA reporting rules, as implemented by Regulation C, a “covered loan” is a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction under the rules. A “closed-end mortgage loan” is an extension of credit that is secured by a lien on a dwelling and that is not an open-end line of credit. 12 CFR §1003.2(d),(e).

For purposes of Regulation C, an “extension of credit” refers to the granting of credit pursuant to a new debt obligation. If a transaction modifies, renews, extends, or amends the terms of an existing debt obligation without satisfying and replacing the original debt obligation with a new debt obligation, the transaction generally is not an extension of credit under revised Regulation C. Official Interpretations, 1003.2(d) – 2.i.

Ordinarily, a modification of an existing loan would not be considered an extension of credit, and therefore would be a covered loan reportable under HMDA.

However, under a narrow exception, a transaction completed pursuant to a New York State Consolidation, Extension, and Modification Agreement and classified as a supplemental mortgage under New York Tax Law Section 255 (i.e., a “New York CEMA”) such that the mortgagor owes reduced or no mortgage recording taxes is also considered to be an extension of credit, even though the original obligation has not been satisfied and replaced. Official Interpretations, 1003.2(d) – 2.ii.

Under the New York Tax Law, a “supplemental instrument or mortgage” may be recorded after the original mortgage and not be subject to the payment of mortgage recording taxes. NY Consolidated laws, Tax Law, §255.1.a.i.

per Freddie Mac guidance, a New York CEMA combines into one set of rights and obligations all the promises and agreements stated in existing notes and mortgages secured by the mortgaged premises, including (if new funds are advanced to the borrower at the time of the consolidation) a new note and mortgage. The result is that the borrower has one consolidated loan obligation that is paid in accordance with the terms of the New York CEMA. Freddie Mac, New York Consolidation, Extension, and Modification Agreement.

When further amendments and clarifications were proposed for the revised HMDA reporting rules in 2017, the CFPB noted that the exception for New York CEMAs departs from the general rule that an “extension of credit” is a new debt obligation.

The CFPB further explained that New York CEMAs are to be reported because they present a situation where a new debt obligation is created in substance, if not in form, and that the benefits of requiring such transactions to be reported justify the burden of doing so. 82 Federal Register 19142, 19150 (April 25, 2017).

The official commentary to Regulation C indicates that, under the revised HMDA reporting rules, a New York CEMA could be reportable as a home improvement loan, home purchase loan, or refinancing, depending upon the manner in which the extension of credit was used:

  • A “home improvement loan” is a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of repairing, rehabilitating, remodeling, or improving a dwelling or the real property on which the dwelling is located. A New York CEMA is a home improvement loan if any of the loan’s funds are for home improvement purposes. 12 CFR §1003.2(i); Official Interpretations, 1003.2(i) – 1.
  • A “home purchase loan” is a closed-end mortgage loan or an open-end line of credit that is for the purpose, in whole or in part, of purchasing a dwelling. An assumption is a home purchase loan when an institution enters into a written agreement accepting a new borrower as the obligor on an existing obligation to finance the new borrower’s purchase of the dwelling securing the existing obligation, if the resulting obligation is a closed-end mortgage loan or an open-end line of credit. A transaction in which borrower B finances the purchase of borrower A’s dwelling by assuming borrower A’s existing debt obligation and that is completed as a New York CEMA, is an assumption and a home purchase loan. 12 CFR §1003.2(j); Official Interpretations, 1003.2(j) – 5.
  • A “refinancing” occurs when, based on the parties’ contract and applicable law, the original debt obligation secured by a dwelling has been satisfied or replaced by a new debt obligation to the same borrower that is secured by a dwelling. Where a transaction is completed pursuant to a New York CEMA and where, but for this agreement, the transaction would have met the definition of a refinancing, the transaction is considered a refinancing. Official Interpretations, 1003.2(p) – 1,2.

New funds provided in advance of being consolidated into a New York CEMA classified as a supplemental mortgage under section 255 of the New York Tax Law are reported only to such an extent that they form part of the total amount of the reported New York CEMA made during the calendar year. Official Interpretations, 1003.3(c)(13) – 1.

The official commentary also indicates that when a transaction is not a home purchase loan, home improvement loan, or refinancing, a financial institution fulfills the reporting requirements by referring to the loan purpose as “other.” Official Interpretations, 1003.4(a)(3) – 4. While this may be appropriate under certain circumstances for a New York CEMA, the official commentary does not address the question as such.

Therefore, the reported purpose for a New York CEMA on the HMDA LAR is a question of fact. As noted, a New York CEMA will constitute a refinance, provided that the transaction otherwise meets the definition of a refinance. The New York CEMA is considered a modification under the New York Tax Law, meaning that it is not subject to the mortgage recording tax. It has the effect, however, of satisfying and replacing the existing obligation with an obligation that is secured by the same mortgaged premises. This means that if there is an existing obligation, the transaction is with the same borrower who is obligated upon the existing obligation, the collateral is residential in nature, and if the transaction is completed through a New York CEMA, then it should be considered a refinancing for HMDA-reporting purposes.

This entry was posted on Monday, March 4th, 2019 at 6:00 am.

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