Hello,

This question is in regard of when to show loan purpose as "refi" vs "cash out refi" for our Secondary Market loans.

Some of their loans they (and/or their investor?) classify as a "limited cash out refi". They have stated this is when the customer can get up to $2,000 at closing...sometimes it's as little as $100. I have actually seen some of them where the customer gets -0- back but their forms still call them "limited cash out refis".

I am not too familiar with Secondary Market rules, but for new HMDA, would you report these as "cash out refis" as long as the customer is getting some money back, even if it is a miniscule amount?

There's a lot of "If's / then's" to answer your question. The Commentary to §1003.4(a)(3)#2 gives various scenarios to answer your questions.

The dollar amount back does not matter if the loan otherwise meets the requirements to be classified as a cash out refinance. Review the Commentary.

Okay thank you.

So from reading the commentary on Official Interpretation to 4(a)(3) Comment #2 says we report as a cash-out refi if it is a refi AND we considered it to be a cash-out refi under the investor's guidelines.

As explained by our Secondary Market area, Fannie Mae requires all investors to show "conventional" loans as cash-out refis and to sell it on the SM they have to designate it as such. (Either "cash-out refi", which is >$2K cash out at closing...or "limited cash-out refi" which is all others even if not really getting cash back at closing).

Based off of that, if our SM department is coding (?) their loan as a "limited cash-out refi", even if customer really wouldn't get cash back at closing, then we should code it as such on our HMDA LAR.

Is my understanding correct?

If you call it a cash out refi you report it as a cash out refi. Are you saying that Fannie requires all conventional to be cash out refi? I have heard about classification issues on construction to perm, but not for all conventional.

For the construction to perm, if it was not really treated as a refi by the financial institution, it is a purchase for HMDA. What would be the reason Fannie wants a no cash back to be called cash out refi?

I will confirm with our SM area. I do not understand that world - it's hard enough in my opinion to follow the regulations without adding more rules from different Investors. Thanks!

Here is the response from our Secondary Market area:

You should reiterate that you did not mean that Fannie requires all conventional refi’s to be a cash-out refi.

The reality is that Fannie defines what they want the loan entered into their system (AUS/DU) and how delivered to them or investors that in turn deliver to them.

There are only two options for refinances sold on the secondary market to Fannie:
1) Cash-out: Getting more than $2,000 back at closing, paying off any debt that is not a first mortgage or purchase money second (so you could technically have the borrower bringing $8,000 to closing but if you are paying off credit cards or a second mtg opened after they bought the property you would code as a cash-out).
2) Limited cash out- all other refinances that are not cash-out by definition.


So, it's still not clear to me why some investors require things to be coded as "cash out refi" when customer is not getting any money back at closing, but appears that is their rule (?).

Based off of that though, if they/investor are requiring us to code as cash-out refi or limited cash-out refi (whatever they instruct it to be called), we would need to report on the LAR in 2018 as "cash out refi" right?

On your side note of perm financing of a construction loan...they would code as a 'refi' there too...but all this time we have reported as a 'purchase' for HMDA. Wouldn't we continue that practice for HMDA 2018 (purchase)? In reality, they are paying off a prior lien on the dwelling by the same borrower (paying off a construction loan)...but we have always been told to report for HMDA as purchase.

Have you ever truly seen a 'no cash out' refi?
That would be a refinance that pays off the existing loan amount...period.
The borrower would have to pay for all the costs out of pocket.
We sell everything on secondary and most of the loans I see show the borrower is rolling the costs into the refinance.
If the costs of the loan are all the cash out is for, that's likely a 'limited cash out refinance'.
If the borrower is walking away with a chuck of cash or at closing is paying off existing debt that is not a mortgage on the property, that's a 'cash out' refi.

I will reply in more detail later but re the construction/perm, yes they are purchases for HMDA.

Actually, I have seen no cash out refinances, where the borrower pays costs out of pocket and the prior loan is simply refinanced. At some banks, it is fairly common.

But, if a borrower is walking away with $500 or $1,000 and the financial institution only considers cash outs as ones of $2,000 or more, and does not categorize the loan as a cash out refi, you would report as a straight refi for HMDA starting in 2018.

Yes I have seen where the customer brings cash to closing and does not receive cash back, example when paying costs in cash. Most of the time they are financing their fees but I have seen many where they do not get any cash out.

In addition to the perm financing of a construction loan question, now I am wondering how you would report for HMDA when it is being called a "refi" in the Secondary Market but is not a refi at all (we have maybe 1 a month this way). This is when the loan is truly a home equity loan, but Secondary Market calls all of those "refis" even though no prior mortgage is being paid off.
Secondary Market is so frustrating and confusing to me.

So in your examples above, are you going to report your "limited cash out refis" as 'cash out refis' or just 'refis' for HMDA?

Those transactions that are not refinances under the HMDA definition (no prior dwelling secured loan being paid off) will be "Other" for HMDA once we get to 2018. They are not reportable now. Many called them refinances, even though they are not.

Whether you will call limited cash out refinances "cash outs" for HMDA really will vary at each institution. It depends upon your rules.

One bank might class loans as cash outs if the cash out is any amount, another may only class as cash out if the amount exceeds $2,000 and yet a third might use $5,000.

For those selling to Fannie and Freddie and other common investors, you will see more consistency. Portfolio loans will not be as consistent.

Reviving this topic. For refinances that are considered "limited cash-out refinance" under Fannie Mae, do we consider them cash out refinances for HMDA purposes even though there is no cash back in the transaction even to cover closing costs (strictly refinancing the principal balance of the loan)? Or would we consider these refinances under HMDA?

Refinances.
It doesn't matter what FNMA calls them.
Example: FNMA calls the take-out of a construction loan a refinance. Reg C says it's a purchase and you must report it as such.
Look at your refinances with the Reg C eye. Is the borrower refinancing their mortgage with or without rolling costs in or ar they refinancing their mortgage and paying off credit cards, etc. If it's the latter, it's a cash-out refinance.

Our Secondary Market defined limited cash out as any cash back to the customer at closing under $2K.
These would not be reported 'cash out refi' for HMDA on our LAR.
Since the SM does not have a very good application form (the 1003; and what I mean by that is that SM typically calls things a purchase or a refi, even if neither of those are actually a TRUE loan purpose)...we created a separate form that is required to be completed by the LO or processors called a "purpose of refi certificate" and they have to narrow it down as to what exactly is happening. We rely on that for our HMDA reporting (after a period of double-checking them on these to make sure they're being completed correctly...).

Just keep in mind that if you don't price or treat your cash-out refi's any differently than a straight refi, you aren't ever going to use the "cash out refinancing" purpose.

^^^ that's a good point! Yes, our in-house loans don't treat them differently so we never use 'cash out refi' purpose for in-house loans. Only our secondary market does that due to investors.

Thanks everyone for their input.

For secondary market loans, would you consider a refinance with $1,000 out to pay off credit cards a refinance or a cash-out refinance? Or is that up to the bank to decide?

Is the product considered a cash-out product by the investor?

The investor is Fannie Mae so I would say yes the product is technically considered a limited cash out refinance product by the investor but Fannie Mae differentiates between a cash out refinance and a limited cash out refinance for pricing purposes. Maybe my question should be would it be reasonable to code a Fannie Mae limited cash out refinance as a refinance for HMDA purposes and code a Fannie Mae cash out refinance as a cash out refinance for HMDA purposes?

FNMA - borrower gets cash for any purpose beyond refinancing the current mortgage = cash out refinance.

But I'm curious why you phrase the question the way you did, J Compliance. "For secondary market loans' is really no different from in-house loans, imho. I wouldn't apply different definitions for Reg C/HMDA based on whether it's secondary market or not. We're a FNMA shop so we do all loans to the same standard whether we will sell or portfolio them. That way if we ever need to sell a seasoned in-house loan, it meets secondary standards too. And it makes reporting on the LAR consistent throughout.

Truffle Royale - For in-house loans we don't treat cash out vs. non-cash out any differently so our in-house loans will always be refinances. Do you consider "cash out" for closing costs as cash out refinance?

Yeah there are soooo many differences in underwriting alone in-house versus secondary market at our bank. Some fields are completed differently for separate divisions (as allowed by the Reg). Trust me when I say it's easier this way for us. Otherwise, we wouldn't need our in-house division for mortgage loans if we did all our underwriting the same.

Do you consider "cash out" for closing costs as cash out refinance?
no

I stick to KISS and get as many fields treated the same as possible.
First it's easier for reporting.
Second, I don't have to sit with examiners trying to explain (and justify) every variation.
As long as you have it all documented as to what, when and why, you should be fine.

From my experience, this is rare for most shops as most have different standards for in-house and those sold on the secondary market. That said, I have been saying for some time that determining the purpose would be much easier if the bank would adopt the same product standards for cash-out for their in-house loans as they do for those they sell on the secondary market.

Going to revive this one more time. Thought I had this straight but after reading more in detail...maybe not.

The question I have pertains to in-house loans. We may identify an in-house refinance as cash-out on the application and use an internal purpose code that also states cash-out refinance. However, there is no difference in pricing, underwriting, terms, etc for an in-house cash-out refinance vs a no cash-out refi.

As I read the interpretation to 1003.4(a)(3) - comment 2(iii) it states 3 things. The first - assume a financial institution does not distinguish between a cash-out refinancing and a refinancing under its own guidelines. Does distinguish mean in the pricing, terms, underwriting or simply in the classification of the purpose on the application and/or core system(as we are doing)? The second - and sets the terms of all refinancings without regard to the amount of cash received by the borrower at closing or account opening. All our in-house refi's are treated the same regardless of cash-out or not. The third point - AND does not offer loan products under investor guidelines. It seems to me in reading this all 3 conditions must be met to call all our in-house refi's as code 31 for HMDA, but we do offer Freddie Mac loans (although we do not keep those in-house). Does the fact we offer Freddie Mac products cause us to have to differentiate between cash-out refi's and no cash-out refi's for our in-house loans? Or, does the fact that we may call a loan a cash-out refi on the application require us to differentiate between code 31/32 for in-house loans? The regulation seems to focus only on the fact that the products are treated no differently and not necessarily what the purpose on the application says.

@JoeM86, my understanding is that you would NOT code any of your in-house loans as a "cash out refi" - you would just use "refi".

I'm looking at the first part of 3.4(a)(3) OI-2 where it says if you considered it as a cash-out refi "in processing the application or setting the terms (such as the interest rate or origination charges) under its guidelines...". Then it goes in to the examples you cited above.

So the debatable aspect as to what "guidelines" mean...I agree with. But I think you could easily defend to an auditor/examiner that this is in regard to the terms offered to the customer, and that your guidelines don't differentiate such between refi or c/o refi, so you would just report refi regardless of any c/o.

My thoughts would mean nothing to your examiner though, so if you have a way to reach out to your regional examiner, your state banking association's compliance team, and/or your external auditor...then that would be even better (and please share any guidance you receive with us!).

So is the consensus that you can have a refinance with $0 cash to the borrower that is reported as a 32 (provided the investor considers it a limited cash-out)? The reg seems to allow for this but the example (i) in the commentary is a bit different.

FNMA shop here. no/limited cash out is $0 - $2,000 cash back to borrower at closing.
Cash out is anything above $2,000 cash back to borrower at closing.
no cash out and limited cash out are run the same through FNMA DU.

Well, if people are not familiar with the FNMA cash-out classification, it does not have to result in actual cash back to the borrower if they are also refinancing non-purchase money liens.

Thank you! So, to make sure we are all on the same page, there could be an instance of a "32" when there is $0 cash to borrower?

A Financial Institution reports a Covered Loan or an Application as a cash-out Refinancing if it is a Refinancing and the Financial Institution considered it to be a cash-out Refinancing when processing the Application or setting the terms under its or an investor’s guidelines.

So - if the transaction is going to be priced under a FNMA Cash-Out - whether the customer actually gets cash back or not is not really relevant.

The reason I'm questioning this is the regulation doesn't reference a requirement for the borrower to walk away with cash (although maybe common sense would?) -- but the commentary does seem to use it in the example when it states "because of the amount of cash received by the borrower at closing." The scenario of an investor considering a loan a cash-out when it's paying off other loans and the borrower receives $0 at closing doesn't' really fit into that example.

2. Purpose - refinancing and cash-out refinancing. Section 1003.4(a)(3) requires a financial institution to report whether a covered loan is, or an application is for, a refinancing or a cash-out refinancing. A financial institution reports a covered loan or an application as a cash-out refinancing if it is a refinancing as defined by § 1003.2(p) and the institution considered it to be a cash-out refinancing in processing the application or setting the terms (such as the interest rate or origination charges) under its guidelines or an investor's guidelines. For example:
i. Assume a financial institution considers an application for a loan product to be a cash-out refinancing under an investor's guidelines because of the amount of cash received by the borrower at closing or account opening. Assume also that under the investor's guidelines, the applicant qualifies for the loan product and the financial institution approves the application, originates the covered loan, and sets the terms of the covered loan consistent with the loan product. In this example, the financial institution would report the covered loan as a cash-out refinancing for purposes of § 1003.4(a)(3).
ii. Assume a financial institution does not consider an application for a covered loan to be a cash-out refinancing under its own guidelines because the amount of cash received by the borrower does not exceed a certain threshold. Assume also that the institution approves the application, originates the covered loan, and sets the terms of the covered loan consistent with its own guidelines applicable to refinancings other than cash-out refinancings. In this example, the financial institution would report the covered loan as a refinancing for purposes of § 1003.4(a)(3).
iii. Assume a financial institution does not distinguish between a cash-out refinancing and a refinancing under its own guidelines, and sets the terms of all refinancings without regard to the amount of cash received by the borrower at closing or account opening, and does not offer loan products under investor guidelines. In this example, the financial institution reports all covered loans and applications for covered loans that are defined by § 1003.2(p) as refinancings for purposes of § 1003.4(a)(3).

That is because the yahoos that write the regulations really have no idea how things work in the real world. That is just not how FNMA classifies a cash-out versus a limited cash-out refinance. It all comes down to if the terms are different. The reason for that is then you analyze like loans for discrimination and outliers.

It's an example. An example never creates the boundaries of a definition. They are illustrative. It also doesn't make common sense to me that a borrower needs to get cash in hand to be a cash out refi. The borrower is taking "cash out" of their home to pay off other debts in most of these situations.

As Randy's noted multiple times though, it all comes down to terms/pricing.