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#2097354 - 09/07/16 10:37 PM Cashout to Construct a Dwelling
CRL Offline
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CRL
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Posts: 574
I've just searched and read a bunch of posts on construction/temporary financing, but hope to get clarification on my particular loan:

Loan is for cashout secured by a free and clear NOO SFR. Purpose of cashout is to construct a new SFR that borrower will retain after completion as investment property/rental. Borrower is a builder and real estate investor. Loan is a 3/1 ARM, 30 year term. Borrower stated that loan will be paid off by outside permanent financing on the newly constructed SFR when it's finished and rented.

My thought process is the following:
1. Loan is secured by a dwelling and loan purpose is to construct a dwelling - HMDA reportable - constructing a dwelling is equal to purchasing a dwelling, report the collateral address.
2.. Loan term is 30 years - so while loan purpose is to construct a dwelling, 30 year term does not qualify as temporary financing, so no exemption.

I'm ready to call this a HMDA reportable purchase loan. My only question is COULD this be exempted as construction financing, since the borrower's stated intent is to retain the newly constructed SFR and obtain permanent financing elsewhere that will be used to payoff our loan. But my concern is with the 30 year term of our loan, and the fact that the borrower may later choose to not payoff our loan, after completion of the to be constructed rental property.

Would appreciate confirmation that 1 and 2 above are correct. And opinions on whether construction loan purpose/borrower's statement regarding obtaining take out financing is sufficient to call this exempt as temporary financing (despite the 30 yr loan term and collateral being different from the dwelling being constructed.)

Thank you!

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#2097362 - 09/08/16 01:07 AM Re: Cashout to Construct a Dwelling CRL
David Dickinson Offline
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Central City, NE
I can see why you're confused. You say "Borrower stated that loan will be paid off by outside permanent financing on the newly constructed SFR when it's finished and rented". Therefore, it sounds like you're not providing the perm financing (which is the HMDA reportable phase). You're doing the temporary phase (not HMDA reportable).

So why did the bank make them a 30 year loan if the borrower stated it would be paid off when finished?
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#2097365 - 09/08/16 01:23 AM Re: Cashout to Construct a Dwelling CRL
CRL Offline
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I think the rates were better on our 3/1 ARM. He's a long time great customer, we do have construction loans to him, but this one he requested as cashout on his F&C rental, probably since he's building it to keep rather than sell. Yeah, I know, term not really matching loan purpose. Which is why I'm hesitant to call it a construction loan, as we're handing him a check, he can do with it as he wishes, choose to pay us off when he finishes the other and gets perm financing, or keep the funds for another project.

But I did just re-read BCC's Temporary Financing article, which makes it sound like if loan purpose is construction, it could/should be exempt, regardless of the loan term?
Last edited by CRL; 09/08/16 01:31 AM.
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#2097367 - 09/08/16 01:34 AM Re: Cashout to Construct a Dwelling CRL
David Dickinson Offline
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Central City, NE
I agree this is a non-reportable construction loan. All of your loan documentation supports this. The only thing that is weird is the loan term. Again, I would ask the LO "why did you make them a 30 year loan if this is to be paid off at the completion of construction?"
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#2097368 - 09/08/16 01:44 AM Re: Cashout to Construct a Dwelling CRL
CRL Offline
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Thank you David, so the key here is the borrower telling us he's going to pay off the loan when he finishes construction and gets stabilized rents. So if he requested the same loan with the same collateral and loan purpose, we agreed to fund, and he did not mention that he planned to pay us off, (perhaps he is fine with the terms of our loan as a cashflowing/debt serviced rental and he decides to leave the new property free and clear). So in that case, loan purpose is construction of a dwelling, but we'd call it a purchase for HMDA, correct? Because in that case, there would not be another loan, so HMDA-wise, it's only being reported once?
Last edited by CRL; 09/08/16 01:46 AM.
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#2097524 - 09/08/16 06:22 PM Re: Cashout to Construct a Dwelling CRL
Colorado Girl Offline
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Might you be confusing a statement of the applicant used to report the purpose of the proceeds with the statement of the applicant for payoff resources?
*Paragraph 4(a)(3) 1.Purpose—statement of applicant. An institution may rely on the oral or written statement of an applicant regarding the proposed use of loan proceeds. For example, a lender could use a check-box, or a purpose line, on a loan application to determine whether or not the applicant intends to use loan proceeds for home improvement purposes.*

FAQ's
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).

It doesn't sound like you closed a construction-only loan, nor a loan that was designed to be replaced by permanent financing of a much longer term. I can't see using a temporary financing exemption on this one.

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#2097529 - 09/08/16 06:32 PM Re: Cashout to Construct a Dwelling CRL
CRL Offline
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Posts: 574
I agree that the 30 year term loan we made does not reflect the actual use/purpose/intent of the borrower's plan to payoff with perm financing. But I agree with David that the loan file does support that intent, with a written statement from the borrower that "the loan will be paid off with perm financing after the construction is complete." Your reference to "Paragraph 4(a)(3) 1.Purpose" above is exactly what I was thinking of, and you're right, it clearly states it's about "purpose" not payoff intent.

So I guess I need to decide to "document and support the intent" and not report it, or stick with the fact that a 30 year loan term can't be considered "temporary" and report it.
Last edited by CRL; 09/08/16 06:38 PM.
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