Is a Loan to Purchase a Property with a Dwelling on it HMDA-Reportable when the Dwelling will be Demolished and a New Dwelling Constructed in its Place?

ISSUE/QUESTION

The Bank asks whether a loan to purchase land with a dwelling on it is HMDA-reportable if the dwelling is to be demolished and a new residential structure is to be built in its place. The proceeds of the loan will be used to purchase the land with the dwelling on it, demolish the dwelling, and construct the new dwelling.

RESPONSE SUMMARY

The Bank must make a determination as to whether the initial purchase is HMDA-reportable. While HMDA does not provide a clear-cut answer, given that its definitions of “home purchase loan” and “dwelling” allow for different interpretations in the absence of any commentary, the better approach is to treat the loan as HMDA-reportable. Even if the Bank determines that the initial purchase is not HMDA-reportable, if the proceeds are also used to construct the new residential structure and are tied to permanent financing, the loan would still be considered HMDA-reportable. Where the HMDA rules are ambiguous, as in this case, the Bank’s reasoning must be fully documented and consistently applied.

RESPONSE DETAIL

The Bank’s Determination

The Bank’s determination in this case of whether or not to report the loan on its HMDA Loan Application Register will have two stages:

1. Determination of whether or not the initial purchase of the property is HMDA-reportable.
2. If the initial purchase is determined not to be HMDA-reportable, the Bank must still report the loan as a “home purchase loan” if the construction phase of the financing is tied to permanent financing.

Initial Purchase

As to the initial purchase, HMDA does not provide a clear-cut answer, given that its definitions of “home purchase loan” and “dwelling” allow for different interpretations in the absence of any commentary.

The regulatory context is found in the definitions of “home purchase loan” and “dwelling.” A “home purchase loan” is a loan secured by and made for the purpose of purchasing a dwelling. A “dwelling” is a residential structure [12 CFR 1003.2(d), (h)]. The Official Commentary does not deal with any examples similar to the case at hand.

An argument can be made that the building has a fixed character as a residential structure, whether or not anyone lives in it. The dwelling necessarily comes with the land being purchased. Whatever the ultimate use the purchaser intends to make of the property, in its initial phase, the loan is for the purchase of a dwelling, and thus it is HMDA-reportable.

An argument can also be made that the loan is being used to purchase land that just happens to have a building on it. The building is not a dwelling because no one will live in it. The purpose of the loan is not to purchase the building, but the land on which a residential structure will be built that will be used as a dwelling. Hence, the loan is not for the purpose of purchasing a dwelling and is not HMDA-reportable [Official Commentary to Part 1003, Home Purchase Loan, 3 and 4].

We believe that the better approach is to treat a purchase-money loan as HMDA-reportable whenever there is a dwelling on it. An important aspect of HMDA reporting is consistency, and following this approach is not only valid in itself, but eliminates the need for making a determination as to the ultimate purpose of the loan, which may introduce inconsistencies into a bank’s reporting.

Construction/Permanent

Whether or not the initial purchase of the property is deemed HMDA-reportable, the use of the proceeds to construct a new residential structure may still make it reportable, if the loan is tied to permanent financing.

Ordinarily, temporary financing is not HMDA-reportable [12 CFR 1003.4(d)(3)]. Where there is a commitment for permanent financing from the same lender, however, it does become HMDA-reportable. In the case of construction/permanent financing, the Staff Commentary says that it would be coded as a home purchase loan. A construction-only loan, however, is considered “temporary financing” and not reported [Commentary, 2(h)-2].  

Thus, if the loan is construction/permanent, it should be reported on the HMDA/LAR with the code for “home purchase.” If permanent financing is not involved, it is temporary financing and not HMDA-reportable.

Consistency

Where the HMDA rules are ambiguous, as in this case, the reasoning of the Bank must be fully documented and consistently applied.

This entry was posted on Friday, January 16th, 2015 at 9:25 pm.