We have a loan officer who wants to do a loan as a Bridge loan, where we are securing the loan by the property being purchased, and their old residence as "an abundance of caution." The borrowers are currently also renting a different property where they are residing until the purchase is complete. Could this loan be considered a bridge loan and exempt since neither of the properties is their current primary residence?

What is being bridged? Are you lending funds that are needed for the property being purchased that will be recouped when the old residence is sold? That would be a bridge loan.

There could be a valid reason for renting - had to move due to job change prior to sale of old and purchase of new, for example.

Don't let the abundance of caution cloud the analysis. Lenders throw that around regularly and it usually gains them nothing - unless they actually document it and don't need an appraisal.

I'm gonna tag onto this as a relatively new guy with very little experience with "abundance of caution".....how does this work exactly? My understanding of AOC is that if it is a condition of the loan, then it isn't AOC. Is that right? If so, it seems logical to me that the AOC would have to be within the borrower's control. If that's right, why would a borrower volunteer extra collateral? I mean, if the bank is saying..."look, we aren't going to do this loan without the extra piece of collateral"....then that isn't abundance of caution is it? It's a condition of the loan. (I'm not talking about the original poster's scenario...just abundance of caution scenarios in general.)

Abundance of Caution (ABC) loans typically occur when a borrower qualifies for the credit on an unsecured basis, but they want to claim the interest on their taxes, so they offer their house to get the tax break. ABC loans do not require an appraisal; however, the bank must demonstrate that the borrower qualifies for the loan on an unsecured basis.

Loan Officers like to throw ABC around so they can get out of the appraisal requirements, even though in a lot of cases, the loan is not really an ABC loan.

Thanks for the explanation Dani.

and it is sometimes required by the bank...not offered by the customer. The call report instructions give some good info on ABC and qualifications to be truly considered ABC, btw.

So a bank can require it? Is my thought that if a condition of the loan, not ABC incorrect then?

Think of the wording. Abundance of Caution. That is lender derived language...not borrower "offering".

IOW, the loan basically stands on it's own, however...we'd feel better making the loan if we took XYZ as ABC. This is where it gets tricky on truly meeting ABC under call report definitions.

I guess that's where i get hung up....if i'm the borrower and a bank tells me "the loan stands on its own, but we want to take your house as an 'abundance of caution'", can i say "no thanks, just give me the loan that stands on its own"? I should be able to right? Otherwise, it's a condition of the loan, right? Where do i find the call report definitions you refer to?

it's been so long since I studied that, raitchjay. Obtain a copy of your bank's CALL report instructions, your accounting department or CFO should have it...it's probably under the loans secured by RE section.

Thanks RRJ...just something that i can't get to make sense in my head.....

FWIW, call report section instructions are actually fairly interesting.

Abundance of caution comes up primarily in the commercial lending world. It is rarely mentioned when the customer offers collateral. I have seen some banks use the term on strong cash flowing deals where the bank won't lend unsecured.

It is rarely used in the consumer lending world. The appraisal rules differentiate between abundance of caution and a situation such as a customer offering a mortgage for tax reasons.

Call report rules, should you want to peruse them, are available online.

http://www.fdic.gov/regulations/resources/call/index.html#RptInstructions

Thanks Kay.