HMDA Reporting and Construction Loans

Issue/Inquiry

The Bank makes construction/permanent loans in which the disclosures for the construction and permanent phases are given at closing, and where the loan converts to permanent financing after the construction phase is complete. Are such loans HMDA-reportable? Would the date of the loan be the original closing date or the conversion date? Would the purpose be “purchase”?

Response Summary

The loan in question is HMDA-reportable, since a construction/permanent loan is a covered loan that is not excluded as temporary financing. The action taken date would either be the closing or conversion date, if both dates occur during the same year, or the closing date, if the closing date and conversion date occur in separate years. The purpose of a construction/permanent loan is reported as a home purchase loan.

Response Detail

The Home Mortgage Disclosure Act (“HMDA”), as implemented by Regulation C, requires a financial institution to collect data regarding applications for covered loans that it receives, covered loans that it originates, and covered loans that it purchases for each calendar year. 12 CFR 1003.4(a).

The term “covered loan” means a closed-end mortgage loan or an open-end line of credit that is not an excluded transaction. Transactions that are excluded from the reporting requirements of Regulation C include temporary financing loans. 12 CFR 1003.2(e);4(c)(3).

A loan or line of credit is considered temporary financing and excluded from HMDA reporting requirements if it is designed to be replaced by separate permanent financing extended by any financial institution to the same borrower at a later time. Official Interpretations, 1003.3(a)(3) – 1.

Ordinarily, construction loans are excluded transactions. However, where there is a commitment to provide permanent financing, the rule is different. The official commentary provides the example of a lender extending credit to finance the construction of a dwelling. The loan will automatically convert to permanent financing extended to the same borrower by the lender once the construction phase is complete. Since the loan is not designed to be replaced by separate permanent financing extended to the same borrower, the official commentary states that the temporary financing exclusion does not apply. Official Interpretations, 1003.3(a)(3) – 1.ii, iv.

In this case, the Bank has extended credit to construct the residence, which will be converted to permanent financing. As such, it is a covered loan that is to be reported, since it is not excluded from the reporting requirements as temporary financing.

With respect to the action taken date reported for a construction/permanent covered loan, the institution reports either the closing or account opening date, or the date that the covered loan converts to the permanent financing. While an institution does not need to choose the same approach for its entire HMDA submission, it should be generally consistent (such as by routinely using one approach within a division of the institution or for a category of covered loans). Notwithstanding this flexibility regarding the use of the closing or account opening date in connection with reporting the date action was taken, the institution must report the origination as occurring in the year in which the origination closes or the account is opened. Official Interpretations, 1003.2(a)(8)(ii) – 2.

This means that if the closing and conversion dates for the loan in question occur in the same year, the Bank can use either the closing or conversion date for the action taken date; however, the Bank should ensure consistency with the date it uses. If the closing date is in one year and the conversion date is in the following year, then it must use the closing date.

A financial institution must also report the purpose of the covered loan; that is, whether it is home purchase loan, home improvement loan, refinancing, or cash-out refinancing, or for a purpose other than home purchase, home improvement, refinancing, or cash-out refinancing. 12 CFR 1003.4(a)(1)(3).

The official commentary indicates that a home purchase loan includes both a combined construction/permanent loan or line of credit, and the separate permanent financing that replaces a construction-only loan or line of credit for the same borrower at a later time. Official Interpretations, 1003.2(j) – 3.

This means that the loan in question will be reported by the Bank as a home purchase loan.

This entry was posted on Monday, June 3rd, 2019 at 6:00 am.