HMDA and Commercial Loan Refinancing

Issue/Inquiry

The Bank is refinancing a commercial loan secured by the borrower’s residence that was originally used to purchase lawn equipment. The new loan satisfies and replaces the original loan. Is it HMDA-reportable?

Response Summary

A loan that is secured by a dwelling is HMDA-reportable if it satisfies the definition of a refinancing, even though it was for a commercial purpose.

Response Detail

Under Regulation C, which implements the Home Mortgage Disclosure Act (“HMDA”), a “covered loan” is a closed-end mortgage loan or an open-end line of credit that is not considered an excluded transaction.  12 CFR §1003.2(e).

The list of excluded transactions includes a closed-end mortgage loan or an 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).

This means that a business or commercial loan is only considered a covered loan if it is a home improvement loan, a home purchase loan, or a refinancing. In addition, a loan for home improvement, a home purchase, or a refinancing, although used for a business or commercial purpose, is also HMDA-reportable.

A “refinancing” is defined 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. 12 CFR §1003.2(p).

The official commentary states that a refinancing occurs only when the original debt obligation has been satisfied and replaced by a new debt obligation, based on the parties’ contract and applicable law. The comment further specifies that satisfaction of the original lien, as distinct from the debt obligation, is irrelevant in determining whether a refinancing has occurred. A new debt obligation that renews or modifies the terms of, but does not satisfy and replace, an existing debt obligation is not considered a refinancing for the purposes of HMDA. Official Interpretations, 1003.2(p) – 1.

In this case, a loan that was used originally for a commercial purpose, such as the purchase of lawn equipment, is only relevant for HMDA-reporting purposes in that it identifies a category of loans that is not HMDA-reportable unless the loan is for home purchase, home improvement, or a refinancing. A commercial loan secured by a dwelling that is refinanced by a new loan, which is evidenced by a new promissory to the same borrower and satisfies and replaces the original note, is considered a refinancing for the purposes of HMDA, even if it remains secured by the original mortgage. As such, it is HMDA-reportable.

This entry was posted on Monday, August 12th, 2019 at 6:00 am.