HMDA Reporting and Multi-Use Property

Issue/Inquiry

The Bank has a loan to purchase a mixed-use property.  In determining whether such loan is HMDA-reportable, the Bank would typically first use the income test then use the square footage test, if necessary. This particular loan has two retail spaces, one of which is currently leased for $22,920 annual rent and the second of which is vacant but has a proposed annual rent of $69,036. The two apartments each have annual rent of $17,400. As one commercial space is empty, the Bank referred to the square footage test, for which commercial use is 7,663 sq. ft. and residential use is 2,900 sq. ft. The Bank asks whether it should still include the square footage for the vacant commercial space.

Response Summary

The Bank is allowed to use any reasonable standard in determining the primary purpose of a multi-use building, such as income generated or square footage. The standard can be applied on a case-by-case basis. In this instance, the Bank should apply its standard based on the nature or purpose of the spaces, and determine the primary purpose of the building based on what income would be generated if the spaces were used as intended, or what square footage there is devoted to commercial or residential space. If a space is not occupied, the only question as to the income-value assigned to it would be whether the asked-for rent was reasonable or had been determined arbitrarily.

Response Detail

Under the Home Mortgage Disclosure Act, a “home purchase loan” is defined as a dwelling-secured loan used to purchase property primarily for residential purposes.

In determining the primary function of a property, a bank can utilize any reasonable standard, such as the square footage or income generated by a particular use. The appropriate standard to apply can be selected on a case-by-case basis. Official Commentary to Regulation C, ¶1003.2, Home purchase loan, 2.

In this case, the Bank has adopted the standard of first using the income generated and then the square footage, if the income generated does not provide a satisfactory answer. This would appear to be reasonable and in line with the Official Commentary. The question, however, is how it should be applied.

On the face of it, the primary purpose of the property would be commercial under either the income-generated or square footage standard, but this assumes that the standard would be applied to a space on the basis of its essential nature, whether or not it is occupied or producing income. This would seem to be the most reasonable application of the standard, since a space will have a particular quality or purpose, whether or not it is actually being used.

For example, if an apartment building had a small delicatessen on the ground floor and none of the apartments had been rented out yet, would the primary purpose of the building be determined by the delicatessen, which is generating income, or by the apartments, which are not?

Or if the Empire State Building had been renovated and all its commercial space was vacant but there was a small apartment for the janitor, which was occupied and producing income, would a loan to purchase the Empire State Building be properly characterized as a home purchase loan?

The Bank should apply its standard based on the nature or purpose of the spaces, and determine the primary purpose of the building based on what income would be generated, if the spaces were used as intended, or what square footage is devoted to commercial or residential space. If a space is not occupied, the only question as to the income-value assigned to it would be whether the asked-for rent was reasonable or had been determined arbitrarily.

Of course, whenever HMDA does not provide a clear and unambiguous answer to a problem, the Bank must select an approach, have a rationale for it, and apply it consistently.

This entry was posted on Monday, July 13th, 2015 at 2:00 pm.