HMDA – New Loan but Different Borrower

Issue/Inquiry

A mortgage loan that was originally in an individual’s name is being satisfied by a loan in the name of a business entity. Would the way in which the loan was reported on the HMDA LAR be affected if the name changed before the closing of the new loan or at closing?

Response Summary

A business or commercial loan can only be reported if it is a home purchase loan, home improvement loan, or refinancing. The timing of the title transfer would affect how it is reported. If it occurred prior to the closing of the new loan, the new loan would not be a refinancing, since the legal entity is different than the individual borrower on the existing obligation. If the transfer occurred at the closing of the new loan and the Bank accepted the legal entity as the new borrower to facilitate the purchase of the property, the new loan would be considered an assumption that would be reported as a home purchase loan.

Response Detail

The time of the transfer could affect how the new loan is reported on the Home Mortgage Disclosure Act (“HMDA”) Loan Application Register (“HMDA LAR”). Regulation C, which implements the HMDA, defines a “covered loan” as a “closed-end mortgage loan or an open-end line of credit that is not an excluded transaction”. 12 CFR 1003.2(e).

The list of excluded transactions includes the following:

A closed-end mortgage loan or open-end line of credit that is or will be made primarily for a business or commercial purpose, unless the closed-end mortgage loan or open-end line of credit is a home improvement loan under 1003.2(i), a home purchase loan under 1003.2(j), or a refinancing under 1003.2(p). 12 CFR 1003.3(c)(10).

Therefore, assuming that the loan in question is a business or commercial loan, it would be considered a covered loan that is reportable on the HMDA LAR only if it is a home improvement loan, home purchase loan, or refinancing.

Regulation C defines a “refinancing” as a “closed-end mortgage loan or an open-end line of credit in which a new, dwelling-secured debt obligation satisfies and replaces an existing, dwelling-secured debt obligation by the same borrower”. The new obligation is not a refinancing unless the same borrower undertakes both the existing and new obligation. 12 CFR 1003.2(p); Official Interpretations, 1003.2(p) – 4.

In this case, if the transfer took place prior to the closing of the new loan, the new loan could not be reported as a refinancing, since the legal entity undertaking the new loan is not the individual borrower obligated on the existing loan.

If the title transfer took place during the closing of the new loan, the new loan might be reportable as a home purchase loan. Regulation C defines a “home purchase loan” as 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”. If 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, it would be considered an assumption and reportable as a home purchase loan. 12 CFR 1003.2(j); Official Interpretations, 1003.2(j) – 5.

 

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