Scenario:

Wealthy attorney purchases a small home (cash) as a real estate investment with the intent of renting it to his faithful handyman and helping him re-establish his credit (recently went through a bad divorce).

Attorney applies for a loan on small home (home equity on free and clear home) secured by both the home and assignment of leases and rents. Co-Borrower on the loan is his handy-man (helping him re-establish credit).

The funds will be used make the loan/rent payment (my belief is the attorney will keep the funds and make the payment).

My feeling is this is not reportable for HMDA as it falls under the "other purpose" (i.e. home equity to pay off credit cards, go on vacation, etc.) because the funds were not used to purchase/refinance/improve a dwelling.

Agree?

Agreed. A better description is he is recouping the funds he used to purchase property. Making a loan to cover payments sounds terrible and likely to raise questions.

If the loan is a line of credit, that does not have to be reported at all, no matter what the purpose, unless your institution makes it a practice to report LOCs

If you do report LOCs, then I agree with you that the purpose of the loan was cash out and it was not a purchase/HI/refi and is therefore not reportable.

Thanks...it's not a LOC, just a plain HE loan. Thankfully, how the payments were intended to be made was no where in the loan file. The situation as it is, that was the reality of it once I read all the notes and my head started to spin.

One of the issues that occurs is that credit underwriting may consider this a "refinance" and use that term in their credit approval. The concept of a "refinance" is different for credit purposes than it is for HMDA purposes. I prefer that underwriting use the term "cash-out on equity" or "equity pull" if there is no existing lien that is being refinanced.

If the funds are not being used to acquire, improve or refinance a dwelling, then the loan is not (currently) HMDA reportable.

However, I think that line of reasoning will be going out the window under the revised HMDA reporting rules.

Just when we start to get comfortable (if that's even possible) with the current rules!

A similar thing comes up with investors such having to report the perm portion of a construction loan as a refinance to the investor but a purchase for HMDA. I have found banks doing this incorrectly and when they dug into their software they found it had the ability to handle both purposes.

Kathleen,
We originate constr-perm loans that are modified at completion and sold to investors. We report HMDA at completion. Should these be reported to HMDA as purchases?

Not Kathleen, but Yes.

If a temporary construction loan is modified into permanent financing the loan is no longer a temporary loan and has not been previously reported, it should be reported as a home purchase loan if it meets Regulation C's definition of home purchase. [HMDA FAQ – PFRB 2nd Quarter 2011]

Thanks David!