We make short term loans to builders who are purchasing an existing dwelling now that they will eventually either tear down or sub-divided and add another lot to build on. The intent is the loan will be paid off by a construction loan (when permits and plans are finalized.) Should this be HMDA reportable? Since it will not be paid off by a permanent, HMDA reportable loan, I'm unclear if temporary financing exemption applies?

And to further muddy the waters, if it could be HMDA reportable does future intent for the existing dwelling matter? If intent is to tear down and replace with new construction, I think this should be considered temporary financing and not HMDA reportable. But if the builder will sub-divide, and intends to sell off the existing dwelling and solely build on the new lot, I think this is like a "flip" and should be HMDA reportable. But in either case, our loan will still be paid off with a construction loan, builder will be selling or tearing down the existing dwelling only after getting the construction loan.

Ugh. Sorry - I've been trying to write up more detailed HMDA procedures, and I keep coming up with new twists that are way to complicated!

if the builder will sub-divide, and intends to sell off the existing dwelling and solely build on the new lot, I think this is like a "flip" and should be HMDA reportable.

I agree this fits the "splash & dash" scenarios and these loans are reportable regardless of the loan's term.

If their intentions is to raze the existing the dwelling and construct a new one then I would agree these would meet the temporary financing exemption, provided the file is fully documented with the borrower's intention. If the borrower needs to refinance and the dwelling hasn't been razed then I would opine you would have a reportable refinancing at that time.

Thank you Dan. So these are my intended HMDA instructions for these types of short term loans:

1) if borrower intends to subdivide and sell the existing dwelling, this is reportable.
2) if borrower intends to subdivide and retain the existing dwelling by obtaining permanent financing, this not reportable
3) if borrower intends to raze the dwelling, and build a new dwelling, this is not reportable.

So the borrower's stated intention will be the driver on whether or not the short term loan is deemed reportable, or exempt as temporary financing.

This all makes sense, except for the fact that NONE of these actions will occur during the term of the loan. The short term loan is simply allowing the borrower time to purchase the existing dwelling and get plans/permits in place to obtain a construction loan. Only after obtaining the construction loan will the dwelling be sold, razed, or permanently financed. So I can't decide if the intent of what the borrower plans to do with the property matters, or does the fact that the payoff will be from a construction loan (not permanent financing) make these all reportable? Or on the flip side, could this be considered a bridge loan (but again, take out is not from PERMANENT financing?)

http://www.ffiec.gov/hmda/faqreg.htm#loan

Temporary Financing. When is a loan "temporary financing" such that it is exempt from reporting?

Answer: The regulation lists as examples of temporary financing construction loans and bridge loans. See 203.4(d)(3). Construction and bridge loans are illustrative, not exclusive, examples of temporary financing. The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term. A loan is not temporary financing merely because its term is short. For example, a lender may make a loan with a 1-year term to enable an investor to purchase a home, renovate it, and re-sell it before the term expires. Such a loan must be reported as a home purchase loan. See 203.2(h).

Dan, can you point out what part of the above quoted reference from the HDMA FAQs should help me in the decision to report or not report this loan example? I guess I'm missing something... is the following sentence the key: "The examples indicate that financing is temporary if it is designed to be replaced by permanent financing of a much longer term." My short term loan is not for construction and will not be taken out by perm financing, instead will be taken out by a construction loan. So should be considered reportable - since not meeting the above reference "definition" of temporary financing?

Before answering, let me clarify:
You're making a loan to purchase a lot with a dwelling, but the funds will be used to raze the dwelling.
This loan will be rolled into another that is also used to construct a new home.
The construction loan (and original lot/razed home loan) will be then permed out with long term financing.

Is this correct?

Nope, the house will not be razed until our loan is paid off by the construction loan. Our loan is to give the borrower time to get plans/permits approved, so then would qualify for a construction loan. A reminder from my first post, these are loans we make to builders/investors, who are purchasing an existing home, with plans to either raze and rebuild, or subdivide the lot, sell off the existing house and build on the new lot. None of this will occur during the term of our loan, our loan will be paid off with a construction loan to the builder. So during the term of our loan, the house will remain intact, either empty or as a rental.

To circle back, it is common for builders to purchase a lot with an existing dwelling, intending to subdivided it to build on the new lot, and sell off the existing dwelling or raze it and build a new dwelling. Since the HMDA FAQs clarified that "splash and dash" are reportable, if the builder is going to sell off the existing dwelling we would consider that loan in our commercial/builder financing department as HMDA reportable.

But my question remains for the loans described in this post, the existing dwelling being puchased isn't being sold or razed during the term of the loan. The loan will be paid off when the builder obtains a construction loan, and only then will the lot be subdivided and the existing dwelling either razed or sold. Thus my question, to report these short term loans or not. We have in the past, but I've been questioned if that is appropriate or not, since they are usually 1 or 2 year term (usually interest only but regardless due at maturity), and they are being refinanced with a construction loan, so feels more like a temporary not permanent financing.

When it comes to HMDA, you always look at what will happen when your loan proceeds are applied. For instance, if I buy a house, but turn it in to a day care center, it's not a house for HMDA. Therefore, if the borrower plans to purchase the lot with existing building, but then raze the building or not allow someone to live in it, that building is not a "dwelling".

The "splash and dash" example given in the FAQs discusses the purchase of a dwelling that is improved and then sold as a dwelling. That's different than what I describe above and what you've talked about for some of your loans.

But you also say that some of your loans will retain the house and the lots will be subdivided and sold. I agree those are "splash and dash" purchases.

David,
Thank you... I think I can follow that logic, and look to what the ultimate plan of the borrower is, regardless of how our loan will be paid off. The risk is we could report this dwelling/transaction twice, once when he purchases it, and once when we refinance it into a construction loan, if his plan is to ultimately sell the existing dwelling.

I recently had a 1 year construction loan come up - borrower purchased an existing home, a rental, and wanted a 1-year loan to build another home on the lot; it had been split into 2 buildable lots. After construction is complete, long-term financing would then be put into place. The preponderance of value was in the spec home to be built. HMDA or not?

Will the borrower retain the existing dwelling and refi with perm financing, or sell it, and retain only the newly built dwelling on the new lot? My understanding would be if the existing dwelling was retained by the borrower and the loan was paid off with perm financing to the borrower, this would NOT be HMDA reportable. But if he sells the existing dwelling after sub-dividing, then that would count as a flip and would be reportable.