In November 2002 I forwarded a request to the FED to consider - a rule modification in the refinancing of Commercial non-HMDA dwelling-secured loans. Here's my example:

ABC, Inc. is owned jointly by Mr. Apple, Mr. Bee and Mr. Sea. The corporation is approved for a $20MM commercial loan to build a warehouse and manufacturing facility in Monroe, Louisiana. In addition to the property and the new facility, the bank requires each owner to personally guarantee the loan and cross pledge the collateral on their other loans to this one. The cross pledged collateral includes Mr. Bee's personal residence in Florida and three rent houses in California owned by Mr. Sea. Obviously, this loan does not have a HMDA purpose so it is not HMDA reportable.

18 months later the business at ABC, Inc. is booming and another warehouse needs to be constructed. The new request of $1MM is approved and added to the remaining balance of the original $20MM commercial loan. Under the new refinancing rules for HMDA this loan would be HMDA reportable because the bank is refinancing a loan that is secured in some manner by a dwelling. It no longer matters that the original purpose of the loan or the purpose of this renewal has anything to do with HMDA. The only thing that matters is that the refinanced loan has a dwelling securing it.

This is not an extreme case. This happens everyday. HMDA was not designed for this purpose and the data collection processes are totally inadequate. Since the money was used to build a warehouse and manufacturing facility, I use that as the property address? The manufacturing plant could be in a Low-to-Moderate census tract so it would appear that we made a $21MM HMDA purpose loan there. The new rules require us to report the lien position on the dwellings. We may have a 2nd on Mr. Bee's house but a 1st on the rental property. So what do we report? As complex as some commercial credits are it could take days to figure out if a dwelling is actually pledged on the particular commercial loan being renewed. Some loans may be cross pledged while others are not. What do we report for income, the corporation's $175MM in gross revenues?

Operationally, how will we be able to track these non-HMDA purpose re-finances? Suppose things are going badly for ABC, Inc. and Mr. Bee calls his commercial lender asking that the loan be refinanced and the term extended. By reg no application is required for commercial requests this large. The lender may simply review the file and the then decline Mr. Bee by phone, "I am sorry, Mr. Bee. We have reviewed your financials and the Bank is not in a position to re-write your loan at this time." That's it. But under the new HMDA rules that was a declination of a HMDA reportable loan so it must be reported. So in the future how will the commercial loan officer handle such requests? How will we know the request ever happened or a denial resulted?

This will add red tape and completely unnecessary overhead to Commercial loans. Requiring lenders to report all commercial non-HMDA purpose refinances will only make such lending more difficult and costly. The ultimate result will be negative as very large, non-HMDA commercial refinances will overwhelm the true HMDA purpose reporting making the analysis value of the data worthless.

Does this make any sense?

I really think that the idea of "report all refinances secured by a dwelling" works in consumer, but it will fail miserably in the commercial arena. I think if the FED changes the language to "report all consumer refinances secured by a dwelling and all commercial refinances that had an original HMDA purpose" the FFIEC will capture the data they are really striving for without unduly interferring with standard commercial lending in the process.
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Since then I have been unable to get this minor, but significant change made. Thus, to ensure compliance my staff is trying to develop/implement reporting guidelines to for non-HMDA loans in our Commercial and Special Asset divisions. We are doing this knowing that the loans we report under the current guidelines will ultimately corrupt our 2004 HMDA reporting.

I welcome any that will come forward to encourage the FED to correct this commerical loan oversight before January 2004 implementation date.

At a Bankers Compliance Group seminar on Real Estate lending in April this year, the seminar leader stated that the Fed had realized the absurdity of this situation and was issuing a Q&A stating that business purpose loans would not be covered under the Refinancing rule.

I'm not sure that this is accurate Bonnie. I was at the ABA Conference, when Delores Smith (the head of the FRB Compliance) said "regrettably, we were not aware of this". She went on to say that this had gone through a proposal and final stage, so it would be very difficult to change now. She said she would try to see if this could be fixed before 1/1/04, but she didn't couldn't guarantee anything. I would plan on this definition staying and hope that it doesn't.

We asked our FDIC regulator (San Fran) about HMDA vs. CRA filing also. They weren't aware that the FRB has come up with guidelines. They were going to "check and get back to me."

Gee - how about a letter writting campaign to the FRB asking if they intended for the new HMDA regulations to be a bottleneck for small business lending, thereby hindering the economic recovery in this country? Also, did they intend for the HMDA stats to get skewed by small business lending data?

I remember questioning the FRB about this last year. Their response was they didn't think this situation happened very often so it shouldn't be that big of a burden on banks to report. I find it somewhat appalling that the Federal Reserve could be so naive about the lending practices of commercial banks, and even LESS knowledgable about the lending requirements of the SBA.

I think others were similarly shocked because I belive that many people have been pointing out the error of their ways to the FRB. But now we get this mixed message of a "fix" coming out, but then not.

So who's with me on writing some letters?

Part of me agrees with your letter writing campaign, Bonnie. But my evil twin really wants to drown them with the garbage reporting that will occur in 2005. The HMDA data will be completely useless to all. Think of a report with all "N"s in the HOEPA status because Reg. Z doesn't apply to business purpose loans. It might actually make banks that do subprime or high cost lending look better!

I like the letter writing idea. If these loans have to be reported it is going to cause major reporting difficulties, and be a huge cost burden for commercial lenders. Not to mention the way the HMDA data will be skewed. How can they think these types of loans are infrequent? Non- HMDA Commercial loans are very frequently secured by residential real estate and are very frequently refinanced. This needs to be fixed before it goes into effect.

Why not every one just "sign" this thread and forward the thread to them?

Louvera, I completely agree with your evil twin!! Except that we still have to figure out another way to track these HDMA coded loans that are really CRA loans so that we can get credit for them (and have accurate tables) in our next CRA exam. Otherwise, it is going to look as if we got out of the small business, small farm market. Grrrrrrrrrr

At the sake of embarrassing myself, I don’t see where Refinancing brings in business loans (that were never intended to be HMDA reported). Reading Reg C effective 1/1/04 it states that a Refi:

1) For coverage purposes the existing obligation is a HP and the existing obligation and new obligation must be secured by 1st liens on dwellings.

2) For reporting purposes both obligations are required to be secured by liens on dwellings.

No where is a business loan hinted at nor does the Commentary elaborate on this point to include business loans that were/are not remotely HMDA reportable.

Have I missed some document or gov/Fed release that encourages such a broad definition as described at the top of this string?

The problem came about when the FRB tried to simplify the definition for refinance. It used to be you had a qualifying test - i.e. you were supposed to determine that the loan you were refinancing was a purchase (or a prior refinance of purchase) on the property.

The test for deciding what was a refinance vs. what was not was subject to different interpretations, so there was no uniform reporting among lenders.

BUT - in making the definition too simple (i.e. A refinance is anytime your new loan on a 1-4 dwelling replaces an existing loan on a 1-4 dwelling), it inadvertently swept in all of these business purpose loans that normally would not be covered by HMDA.

A classic example of the Law of Unintended Consequences.

Bonnie, you are absolutely correct. I feel the simplification the FED sought in the consumer arena (and what we were buying into) is a step forward. No longer does the branch lender have to wrestle with questions like, "Mr. Jones, when you applied for this Equity Loan 5 years ago do you remember if you used any of this money for home improvement?" Now institutions can simply say, "All consumer loan re-fis are HMDA reportable, period." Training and tracking is much easier and consistent.
But the "unintended circumstances" on the Commercial side are perplexing, especially since the FED has known of this issue for at least 10 months and has remained stoic. If we add purpose back to the Commercial side, Commercial and Small Business Re-fis will continue to be easy to spot. When a Commercial real estate lender at my financial institution re-finances a $500M duplex refurbishment loan, they recognize the HMDA purpose and make certain the transaction is reported, even if they seldom have HMDA loans cross their desks. This reporting/training scenario is manageable and provides the best evidence of commercial HMDA activity.

With a minor wording change we can bring the true spirit of simplification that the FED sought when it rewrote the re-fi rule. Please encourage your contacts with the FED to swiftly act on this oversight, so that we can all focus our efforts on the many other HMDA issues at hand.
Otherwise, add another set of reporting rules to your training agenda that personal experience has shown me is very ill-received in the Commercial arena.

Bumping this back up... is this "Law of Unintended Consequences" still going to be the Law of the HMDA land?

I'm hoping to hear that the Fed revisits this with a "better" clarification.

I assume this is only a concern for cross collateralization where the bank actually files a lien position on the dwelling rather than just including a general spreader clause in its mortgage that says the property secures all other current and future loans to that borrower. There was a thread on this forum linked here that addressed a related issue. I think that thread concluded that the general spreader clause without the actual lien position would not affect CRA small business loan reporting. Similarly, wouldn't this problem with HMDA 2004 on refinances only apply if the cross collateralization involves filing an actual lien position? I know this doesn't eliminate the problem, but it does reduce it.

On the St. Louis Fed's HMDA website the following definition of refinancing is given:

"Refinancing
HMDA reportable refinancings are those in which (1) a new obligation satisfies and replaces an existing home purchase loan by the same borrower, and (2) both the existing and the new loan are secured by a lien on a dwelling. Modification, extension and consolidation agreements (MECAs) are not considered refinancings and should not be reported."

Notice the wording "existing home purchase loan" this is the first place I've seen it defined this way.

Maybe they are considering a revision. In the meantime, we still have to prepare our P&P revisions and our traning materials based on the actual definition in the amendment.

Since we do need to begin preparing to comply with the new reg as it stands now, this raises another question I have: Let's say we have a commercial loan that is being refinanced. The original purpose was to purchase a commercial building. Both the old and new loan are partially secured by a residence, although the primary security is the commercial building. Since this refinancing would now be HMDA reportable under the revised definition of refinancing, which property would be reported to HMDA, the location of the commercial building or the personal residence?

Any thoughts are appreciated!

The HMDA 2004 Training Presentation provided on the FFIEC website gives what seem like conflicting statements to me. Here it is (with bold type added by me.)

Refinancing
What’s new?
§ New definition for reporting purposes
Why?
§ Clearer definition yields more consistent and reliable data

Refinancing, cont.
§ Current definition: New loan that satisfies and replaces existing loan, if
§ Lender determines purpose of existing loan, or
§ Lender relies on applicant’s statement about existing loan, or
§ Existing loan is dwelling secured, or
§ New loan will be dwelling secured

Refinancing, cont.
New definition (for reporting)
§ New loan satisfies and replaces existing loan; and
§ Both existing loan and new loan secured by lien on dwelling

Refinancing, cont.
§ Coverage Test (unchanged)
§ The existing obligation is a home purchase loan(as determined by lender or as stated by applicant), and
§ Both the existing obligation and the new obligation are secured by first liens on dwellings
§ Remember to distinguish definition for reporting from definition for coverage

Refinancing, cont.
§ NO purpose test
§ MECAs (modification, extension, and consolidation agreements) continue to not be reported


The statement that "the existing obligation is a home purchase loan" eases my concerns, but I don't know how to reconcile it with the statement that there is no purpose test.

Also, I don't understand what is meant by the statement, "Remember to distinguish definition for reporting from definition for coverage". Can anyone clarify this?

This thread seems to have died - probably of frustration. But it has been picked up on THIS thread.

The link you provided does not work.

If my question, which follows, is addressed on another forum, please direct me.

Okay, if a business loan, that has a dwelling as part of the collateral, refi’s in 2004 (keeping the dwelling as part of the collateral), it is reported as a refi for HMDA. However, if it were not for the 2004 HMDA refi change, the bank would have listed this as a CRA loan on the CRA LR.

So, since the bank cannot double-count this loan, the HMDA LAR will show the loan as a refi and the CRA LR will just go lacking…

Have I got it right, now?

That's how we see it. Refinanced business loans secured by a dwelling and will go on our HMDA LAR. As such, they are not reportable CRA loans. I do know you can double count a specific type of loan but I cannot think of it off the top of my head.

Okay, I'll try the link again. Click HERE . If I still can't get it, the thread is labeled "HMDA - Refinancing" from 10/14/03.

Regarding William's question. It's true that you wouldn't double count it. However, that type of loan doesn't qualify as a CRA "Small Business" loan anyway. If you were collecting it for CRA it would have to be a "business purpose loan secured by residential real estate".

But what about small farm ? If you refinance a farm purpose loan secured by a dwelling it potentially meets the definition of CRA small farm and HMDA refinance. Which one takes priority?

So far, the only double counting allowed between CRA and HMDA is that a multi-family HMDA loan could also be a CRA community development loan if it meets the community development criteria.

The KC FRB sponsered a HMDA Seminar last week and was asked about 'double counting'. They stated that issue was being debated at the FFIEC but I'm sure she told us to plan on double counting until they had resolved the issue.

How about a $750,000 loan to buy a strip mall that is secured by this property. In addition the borrowers home is taken as an abundance of caution. Am I confused, or would this be reported as SBSF and HMDA in 2004. Only the strip mall would be used for CRA reported and the dwelling for HMDA. Let me know if if am barking up the wrong tree here.