Here's a question I got from my commercial lending folks regarding HMDA reportable business purpose loans:

Scenario: Commercial borrower applies for $300K loan to expand business. We underwrite and say, "We'll do it, but we want a personal guarantee from you for $300K and we want a lien on your primary residence." Borrower says, "OK, but I've already got a $50K 2nd on my house; do you want to be in third position?" We say, "OK, we'll increase your loan to $350K and pay off your existing 2nd, but now we want a personal guarantee for $350K." Borrower says, "OK."

Under the wonderful new definition of refi, this sounds like a HMDA reportable refi to me.

Here's the wrinkle: When we go to closing, we secure the $350K personal guarantee against the property, rather than the loan itself.

Because the loan itself is not directly collateralized by a lien on a dwelling, does this transaction now fall out of the new definition of refi and no longer become HMDA reportable? Or is this my commercial lending people splitting hairs again? (Nobody can split hairs like a commercial lender trying to avoid a consumer reg!)

I note that the reg says "both the existing OBLIGATION and the new OBLIGATION are secured by liens on dwellings." Obviously, a personal guarantee is one type of "obligation" and the reg does not appear to differentiate between types of obligations, so I say we're still stuck with HMDA.

Any thoughts? Thanks everyone.

That sounds like a question for the HMDA Help Line! And an answer that I would like to know, so I'm sending an e-mail to them with this question.

Hope it's okay that I took most of your question verbatim.

Okay I have a response from the HMDA Helpline.

The question is being referred to the attorneys at the Federal Reserve. Onward and upward!

Please keep us informed on this one because I'm having a hard time understanding why this would be HMDA reportable - thanks.

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Please keep us informed on this one because I'm having a hard time understanding why this would be HMDA reportable - thanks.

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You're having trouble understanding because IT MAKES NO SENSE for these loans to be HMDA-ble.

It's the Law of Unintended Consequences in action here. The previous definitions of a refinance were cumbersome and open to too many interpretations. The FRB wanted to make one simple, concise rule on exactly WHAT is a refinance.

Unfortunately they did not consider the fact that BUSINESS loans are also secured by dwellings, which is the same thing that happened when they wrote the rules for CRA Data reporting.

And rather than carve out a small exception for business loans, it seems that they would prefer to stay with their "simple" definitions because they don't believe it will affect very many loans.

So we end up with the possibility that we will have SMALL BUSINESS LOANS, that are as CRA as CRA can get, and yet we will NOT be able to report them on our CRA register, but we WILL have to report them on our HMDA register even though the loans have everything to do with a business and NOTHING to do with the purchase, improvement, repair, or maintenance of a dwelling.

Don't forget, this would affect your SBA and commercial DECLINES, INCOMPLETES, and APPROVED NOT ACCEPTED as well IF the contemplated transaction would have involved a "refinance" of a dwelling.

It is - insanely insane.

Ooh - One other thought that I had on this subject, if the FRB decides that a Personaly Guaranty secured by DOT that refinances a dwelling will be reportable, then we have the possibility of DOUBLE COUNTING on CRA and HMDA.

The Call Report rules look for the direct (and not indirect) collateral for classification. So if I have a small business loan secured by a UCC filing on equipment that also has a personal guaranty secured by a Deed on the owner's home, and we paid off a previous lien with this loan in order to have the Guaranty security in a better lien position, then the loan would reportable on both CRA and HMDA.

That's another issue the Fed needs to consider. I'll keep you folks informed on what happens. I may need to write a letter outlining all of these issues. IF that happens, do I have any volunteers to help?

I'll volunteer - I'm not in compliance but this is just getting wackier every day.

Did you ever get this clarified with HMDA? I believe we are talking about the same scenario at our bank too. Commercial loan secured by business assets and personal guaranty. The personal guaranty specifically lists personal residence as collateral. However, the personal residence mortgage is NOT listed as collateral on the face of the note - only on the guaranty. So how deep does the definition of refinance go before it's not HMDA reportable? Thank for your help.

See new HMDA Q & A:

"Refinancing---guaranty secured by dwelling. If an obligation secured by a dwelling is satisfied and replaced by an obligation in which a guaranty of the credit obligation is secured by a dwelling but the new credit obligation is not secured by a dwelling, is the transaction reportable under HMDA?"

Answer: No, a transaction is not reportable as a home purchase loan or refinancing unless the credit obligation, itself, is secured by a dwelling. See 203.2(h), 203.2(k)(2) An obligation not secured by a dwelling is reportable as a home improvement loan only if classified by the lender as a home improvement loan. See 203.2(g)(2).

Hope this helps.

Exactly what I was looking for! Thanks!

I think the Q&A may have mixed up the use of the words "guarantee" and "guaranty." If we use your interpretation to reach your conclusion, then the answer to the Q&A is wrong. I think the Q&A meant to address the situation being discussed in this thread and used the wrong term. If the new note is not itself secured by a home it does not meet the definition of refinance. As you state, the business cannot pledge the home as security becuase it has no interest in the home. Therefore, you have a note not secured by home which fails the refinance definition for 2004. I think you can leave this off the LAR in 2004. More thoughts?

Anyone online want to take a look at this one again?

I think what cleared this up for me is that the note (credit obligation) is not directly secured by the dwelling. The note is secured by the personal guaranty which, in addition to all assets, is also secured by a mortgage on a dwelling. If the mortgage were to be listed on the face of the note, then it would obviously be HMDA reportable. That's how I'm looking at it anyway. Please let me know if this is a flawed point of view. Thanks,

Oh H-ll, sounds good to me. I can't even imagine what we would do for HMDA reporting since the times when these Business Loans with Guaranty's secured by a DOT gets re-worked is when the loan has landed on our Special Assets Department.

SAD folks are mean enough without sticking a HMDA form at them, especially if I'm not really sure if and when it would be applicable.

Ok, to get this straight (is it possible the following could occur…)

Business/Commercial customer signs a new note and the note DOES NOT list a (dwelling) mortgage and there is not an IDOT on a dwelling, but simply lists (among other things) a personal guaranty, this is NOT reportable as a HMDA refi. (Not reportable because there is not a direct link to a dwelling for security.)

I asked this question of the HMDA Helpline earlier this month. Specifically, I asked about a personal loan secured by non-rsidential collateral PLUS a DOT on the borrower's home that was taken purely as an "abundance of caution." Along the same line, I asked about business loans with non-residential collateral where the personal guaranty is secured by the individual's home.

Here was the answer I received: "If the abundance of caution includes and is directly secured by the residential property then the loan would be HMDA-reportable. If the abundance of caution does not include a residential property or the residential property is indirectly secured, such as through a personal guaranty, then this instance of abundance of caution would not meet the Reg. C definition of "secured by a dwelling.""

To sum it up, looks like a business loan "indirectly" secured by a guarantor's home is not reportable, but a loan secured by a dwelling taken as an "abuncance of caution" would be considered "directly" secured and would qualify. I'll be interested to see what the Fed attorney's come up with!

Another reason why the phrase "Abundance of Caution" needs to be striken from any lender's vocabulary!

Agreed!!!!!!!!!!!!!

Forgive my ignorance, but could someone please tell me what a DOT is? I keep reading through this thread, but still can't figure it out! Thanks!

I think it's 'Deed of Trust'. Some states record those while others record mortgages.